Share buyback Scam; A trend that’s gaining momentum
Robin Hood robbed the rich to help the poor; in the modern-day version the Rich rob both Robin Hood and the poor to become even richer. The rich in this case are the greedy corporations and the officers that run the show behind the scenes. In this lazy world, the only thing that matters is money and how to make as much of it as fast as possible. Hence, the best way to boost earnings without doing anything is to buy back boatloads of shares and in doing so artificially increase profits. It is a perfect scam.
Companies in the S&P 500 Index are poised to purchase over $165 billion of stock this quarter, bringing us dangerously close to taking out the 2007 record. While Mutual funds and the masses are selling the corporate world is buying, proving that the dumb money is not in the know, even though their actions are based on valid data.
Logic does not drive the markets; it’s emotions that are the main driving force behind the markets. $40 billion flowed out the markets via mutual fund sales or individual redemptions, but the corporate world more than covered that slack. One could call this is a positive divergence as the business world pumped this money into stocks when the markets were tanking, and the masses fled for the exits.
Share buyback Scam and why this record binge could continue
Central bankers worldwide are embracing negative interest rates, and we all know that low rates favour speculation Look at what the current low rate environment has led to; imagine what will happen in the U.S if rates turn negative. We suspect an all-out feeding frenzy will take place. The corporate world will rush in and borrow even more money; the masses will jump into stocks as it will look like earnings are rising, and everyone will have fun until the bottom drops out. The bottom always drops out, but it’s the average Joe that is left holding the can. Nothing has changed, and nothing will change going forward.
“Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins, director of equity research at Wilmington Trust Co., which oversees about $70 billion. “Over time, you come to the realisation, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’
Share buyback programs are going to gain traction
Companies in the S&P 500 are also flush with cash, so they can borrow the money in the open markets or use some fo the cash they have been hoarding to fund share buyback programs. According to Bloomberg, Non-Financial Companies in the SP500 had over $900 billion in cash at the end of 2015. We are sure this figure is now close to $ 1 trillion.
Hedge funds and mutual funds that have had a hard time making money over the past few years (especially for the past few years) have been net sellers. Mass psychology states the masses that always get fried and compared to corporations that are buying back their shares, mutual funds, and Hedge funds are sardines.
“Corporate buybacks are the sole demand for corporate equities in this market,” David Kostin, the chief U.S. equity strategist at Goldman Sachs Group Inc., said in Feb. 23 Bloomberg Television interview. “It’s been a very challenging market this year regarding some of the macro rotations, concerns about China and oil, which have encouraged fund managers to reduce their exposure.”
Our response is so what. Mass psychology focuses on the obvious fact; this behaviour is going to continue for some time to come. Nothing is going to stop it short of rates rising, and that will never happen. The second option is for Congress to pass new laws making Share buybacks illegal and that will never happen because Congress is the head of Crime Inc; they are in on the action and profiting handsomely.
Game Plan
Use strong pullbacks to open new positions in strong companies. Compile a list before the markets pullback so that when they do you are ready to act.
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