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buyback trickery gives false market hope

From Birch Gold Group

Over the past 5 years, companies have dumped over $2.1 trillion into a popular stock-boosting strategy that does nothing to help their businesses, but instead puts the economy in danger. The short-term payoff for using this strategy is huge, and it could be largely responsible for the market rally that we’ve witnessed over the past few years. But, recent news reveals that corporations could be taking it too far — and we all could pay the consequences.

It’s Amazing This Is Even Legal?

Imagine if there were a way for all companies to bolster the price of their own stock and make themselves look more profitable, regardless of how well they’re actually doing. It would make it impossible to know how safe the market really is, right?

Well, there is a way for companies to do that, and it’s called corporate buybacks. Any company can buy as many of their own shares as they want – assuming there are shares available in the market and the business has enough free cash – which means they can bolster their own stock price no matter how tough things get.

But here’s the problem: companies can only prop up their stock with this tactic for so long. And if there’s no real demand for all those shares when they’re forced to stop buying, it can be catastrophic.

Corporate America’s Economic Mirage

The problem of deceitful buybacks wouldn’t be as troubling if they weren’t so common. But using buybacks to artificially inflate stock prices has become the norm, and they’re becoming more popular by the day.

Andrew Snyder writes:

We’ve talked about share buybacks before. Most folks who track such things believe, like us, that the market’s rally has largely been propelled by companies using their cash and fresh debt to buy shares of their company on the open market.

It’s good news for shareholders. Fewer slices of pie means bigger slices for those holding the plate.

But here’s the deal: many companies have gone too far. They’ve gotten greedy.

According to the most recent data, buyback spending has eclipsed earnings for a whopping 137 companies in the S&P 500. In other words, shares of their firms are rising, but not because of a grand business breakthrough.

No, no… it’s a grand illusion. Smoke and mirrors.

The trend isn’t isolated to the U.S. market either. European companies are on a hot buyback streak as well. Bloomberg columnist Lionel Laurent writes:

Europe’s 200 biggest companies splurged $14.6 billion on buybacks last year, according to Bloomberg data. That’s down from $19.7 billion in 2014 and $20.3 billion in 2013, but still a big number. For the first six months of 2016, the figure stands at around $6.3 billion.

Are Buyback Levels Nearing the Danger Zone?

The real question here is, what happens when the buyback gravy train comes to a screeching halt? Eventually, companies will run out of shares to buy or money to buy them with, and when they do, it could pull the rug out from under the whole market.

With the rate of corporate buybacks surging to the highest level in years, it might be wise to start preparing for the worst right now.

One sure-fire way to hedge against a market drop is to secure a healthy chunk of your savings in a real asset that usually thrives during stock market tumbles and permanently holds its tangible value – and gold is an ideal candidate for such a purpose.

  • Blankety-Blank

    It strikes me as bizarre that repurchasing stock is deemed a bad thing. Closely held companies are perhaps in a better position to operate freely than companies forced to respond to numbers of irrational investors. They may even do what is in their long-term best interest rather than feeling obligated to produce short-term earnings to keep shareholders happy while avoiding actions which would benefit the company far more in the long run. This article would seem to be more about hustling people to buy gold than an actual assessment of the nature of stock buyback.

  • digriff

    A whole lot depends on where the money used in buybacks is coming from. If it is in fact corporate profits, then it really is not a huge deal as long as they don’t exhaust their reserves to the point of endangering themselves for future operations or R&D. BUT, I think a lot of the buybacks are done via credit. With the FED holding rates so low, the temptation had to be enormous. SO, if these companies are using debt as a means of doing buybacks then it is as dangerous as it gets.

    The other problem is of course the stock price manipulation that results. When the sheep that comprise the majority of the investors thinks “wow, look at that volume, and the price is going up, I have to buy some of that too”, they are being setup for a major fall. When the buyback party ends they are the ones left with the hangover.

  • Blankety-Blank

    While at one time I might have agreed with you, the new phenomenon of the government bailing out large, failing banks and businesses transfers much of the risk to me, the poor taxpayer, while the big shots get richer and bigger. I suspect that in the end, this will all come to a really bad end, but at the moment, the corporate managers are going to reap a big harvest as their own pay often includes stock options, and their manipulations are driving those values out of sight. Though to be fair, the poor rich folk, to be contradictory, have so much money that they are running out of places to put it, which further drives up the markets through the simple mechanism of supply and demand. Working folk can’t invest much because they don’t have much. But obscenely wealthy are now exponentiating their wealth with special tax treatment and various other obscene and unjust manipulations. So I suppose all of this works synergistically. I wish I had enough to invest. And I wish I could shelter as much of my income from taxes as do the wealthy who run this country …. into the ground. Of course there is still good news. Now that we’ve impoverished huge numbers of families, they’re bringing manufacturing back into the country because people are so desperate that they can be snookered into working for third-world wages. Time to leave. But where to?