buybacks credit S&P 500

It’s ‘Grotesque’! Of Buybacks And Leverage

"...it’s not like you have to dig deep to find a problem."

"...it’s not like you have to dig deep to find a problem."
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2 comments on “It’s ‘Grotesque’! Of Buybacks And Leverage

  1. The research quoted here merely supports earlier research dating back into the early 1960s. One of my PhD advisors wrote his own dissertation on the subject back then and came to the same conclusion presented here, backbacks are essentially a net zero. The thing I can’t quite get in today’s buyback culture is why these silly corporations are buying their stocks at the top of the market. The logic forty years ago was that when stocks were cheap companies would buy them back at less than their intrinsic value and effectively reap a gain. The fact that such a gain is rarely realized seemed to be immaterial. One of the effects in the current buyback culture is the massive reduction in corporate equity they cause. There are now many S&P 500 companies that have balance sheets with little or even negative shareholders equity. Repurchased stock retained by the firm as treasury stock must be subtracted from equity on the books. If any of that stock is retired, equity is permanently reduced. Both actions have the effect of causing dramatically increased leverage ratios. At some point when firms like Colgate-Palmolive and Kimberly Clark, for example, show up with negative, credit rating agencies like S&P are going to have to start recognizing that with liabilities nearly as large or even larger than the firm’s assets, they are no longer strong credits. As H has pointed out repeatedly, BOJ’s massive equity buying has created some very weird consequences for liquidity for some Japanese stocks. Similarly, massive buybacks for some companies have created a circumstance that sure looks like a technical bankruptcy duck. I don’t yet have numbers on this phenomenon, but at the current pace of buybacks it could become serious. Remember, debts can’t be paid back out of a company’s market value. Actual balance sheet money is required.

  2. It’s all very sad. It’s yet another consequence of the persistent availability of ultra cheap debt. Right now it’s being blatantly and flagrantly abused. We are in June now, and I frankly don’t see anything in the way of true motivation by our monetary policy regulators to motivate a burn off debt. (Ie, a persistent normalization of interest rates).

    It’s a perpetual procrastination exercise on the part of politicians, fiscal managers, and monetary policy regulators to avoid the unthinkable: a large leverage based correction in equity valuations. I don’t even see the Fed as truly being vigilant at this point in normalizing the balance sheet and FFR for the long term, because the repercussions of such actions would be so painful for equity markets and the economy as a whole, and their political independence is being infringed upon by outside interest. It’s sad, but we are falling into the very same trap that Japan finds itself in now.

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