market manipulation; share buybacks distorting the markets

For nothing can seem foul to those that win.
William Shakespeare

Market Manipulation: A Persistent Force That Shows No Signs of Stopping.

Updated Aug 5, 2023

Let’s embark on a captivating journey through history, delving into the backdrop of market dynamics. Through compelling real-world examples, we will shed light on the detrimental effects of market manipulation, explicitly focusing on share buybacks and other semi-legal strategies that shadow small investors’ interests. With a keen eye on the present landscape, we will wrap up by sharing our most up-to-date perspectives as of July 31, 2023, on the current state of the market.

Share buybacks, a common practice among corporations, have increasingly been scrutinised for their potential to distort market dynamics and manipulate critical financial metrics. At their core, buybacks involve a company purchasing its shares from the open market, effectively reducing the number of outstanding shares. While this can be a legitimate way for a company to return excess cash to shareholders, it also has the potential to artificially inflate certain financial ratios, such as the Price-to-Earnings (P/E) ratio.

The P/E ratio, a key indicator used by investors to assess a company’s valuation, is calculated by dividing the market value per share by the earnings per share. When a company conducts a buyback, the number of outstanding shares decreases, which can lead to an increase in earnings per share even if the company’s net income remains unchanged. This manipulation can result in an inflated P/E ratio, giving the illusion of a more profitable and valuable company.

This distortion of the market can mislead investors, creating a false perception of a company’s financial health and performance. It also raises ethical questions about the role of corporate executives in potentially using buybacks for personal gain, particularly when their compensation is tied to stock performance. Therefore, while share buybacks can be a useful tool for capital management, their potential for market manipulation and distortion cannot be overlooked.

Share Buybacks: Fueling Market Manipulation and Illusions of Growth

We will employ a historical example to demonstrate how share buybacks contribute to an environment where the primary objective is to manipulate the share price, giving the illusion of company growth, even when, in many instances, the company might be experiencing contraction.

Over the years, we have repeatedly stated (though probably not as much as many would like us to do) that companies use share buybacks to manipulate earnings. In the past, this gambit was not as prevalent as it is today. Currently, companies borrow money in contrast to using the cash they already have to repurchase their shares and use this modern form of alchemy to turn losses into profits or make modest profits appear to be spectacular in nature.

This bull has yet another bullock’s reason to run higher. We are now in the paradigm of lies and deceit. What thrives in such conditions? The truth; come on, you know better than that. The answer is BS, with a capital B. The main thing driving this market higher is pure BS, and BS is based on, alternate reality. The masses do not want to fathom this or refuse to. Given that individuals have an innate capacity to conjure incredible amounts of BS, the driving force behind this market is not going to run out anytime soon.

Massive Share Buybacks: A Form of Market Manipulation.

Last year was, to put it mildly, a huge year regarding share buybacks, with corporations deploying roughly $540 billion (yes, that’s billion of dollars) to repurchase their shares. Now why in the hell would they do this? Money is cheap, and the executive’s compensation is tied to share performance. In the age of lies and deception, the method used is of no consequence. Only the result matters. Therefore, whatever lie has to be told is told to give the impression all is well.

Last year was a massive year for share buybacks; as we stated, $540 billion was used for this purpose.
$141 billion in buybacks were authorised in April of this year, setting yet another record
For 2015, the sums are even more impressive. We are not even halfway through the year, and over 400 billion dollars has already been earmarked for share buybacks. Imagine how much will be spent by the end of this year. Since 2001, only the companies in the S&P 500 have spent over $3.1 trillion on buybacks.

Share Buybacks: Do They Work and Contribute to Market Manipulation?

You bet your bottom dollar it does. Illinois Tool Works (NYSE: ITW) used buybacks to inflate its earnings by 33% per share last year. BBBY (Bed Bath and Beyond) used the same strategy to reverse a 10% drop in profits into a gain of one cent per share. They should now change their name to Bed Bath and Begone.

The situation is so pervasive now that experts estimate over 25% of the S&P 500 have used this strategy to inflate their earnings, which indirectly boosts share prices; a vicious cycle of fraud perpetuating more fraud is brought into existence, all with government approval. These shenanigans are not restricted to small players; big companies like Apple also use this trick. Soon every company that has access to easy money will employ this tactic. When it’s so easy to boost earnings without lifting your finger, there seems to be very little motivation for corporate officers to try to work hard and improve the business.

In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets. Full Story

Stock Market Manipulation: The Primary Driver is Cheap Money.”

And sadly, the average Joe has almost no access to this easy money. However, towards the end of the game, a way will be found to miraculously to lend these chaps massive amounts of money so that the elite players can bail out at the top. After all, someone has to buy all this crap at an inflated price right. Now you understand why the markets are running higher. The feds officially stopped QE, but the corporate world has taken over where the Feds left off, all due to the easy money the Fed is providing them. So forever, QE is still going on. This also explains why share prices continue to trend higher despite an economy with a pathetic growth rate; the latest numbers show that the GDP decreased at an annual rate of 0.2%. I suppose this is better than the original estimate of – 0.7%. Against this backdrop of incredible growth (us being sarcastic), share prices have doubled over the past five years, and so has corporate debt. Coincide, we think not.

We expect corporate debt to soar to levels that will make the current levels appear sane. History repeats itself, for the masses choose to elect fools into positions of power with the expectation that the outcome will be lovely. When things fall apart, they are shocked and wonder why. Perhaps, they should hit an injured toe with a hammer instead of applying a bandage and then marvel at why it hurts ten times more.

The following article provides a concise summary of share buyback fraud.

Five years after the official end of the Great Recession, corporate profits are soaring, and the stock market is experiencing remarkable growth. However, the benefits of this economic recovery are not reaching most Americans. The top 0.1% of income recipients, mainly comprising high-ranking corporate executives, are capturing almost all the income gains, while regular Americans are facing disappearing good jobs and encountering insecure and underpaid employment opportunities. Despite robust corporate profitability, the broader economy is not experiencing widespread prosperity.

The main culprit for this disparity is the allocation of corporate profits to stock buybacks. A study of 449 companies in the S&P 500 index, publicly listed between 2003 and 2012, reveals that these companies used a substantial 54% of their earnings, amounting to $2.4 trillion, to buy back their own stock, mostly through open market purchases. Additionally, 37% of their earnings were allocated to dividends. This left very little room for investments in productive capabilities or higher employee wages. As a result, the benefits of corporate profitability are concentrated at the top, while the majority of workers are left with limited improvements in their economic situations.

Surging Buyback Wave: The Phenomenon That’s Taking Over Corporate America

In fact, even shareholders—the presumed beneficiaries of all the corporate prosperity—are becoming concerned. Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, expressed his apprehensions in an open letter to corporate America in March. He voiced worry over the trend of many companies avoiding investments in the future growth of their businesses in the aftermath of the financial crisis. Instead, numerous companies have cut capital expenditure and increased debt to enhance dividends and engage in share buybacks. This has raised concerns among shareholders who see a potential lack of long-term vision and investment in the growth of these companies. Full story

Reflections on Market Manipulation: Parting Thoughts on a Complex Issue

The excerpt from a relatively recent update sent out to subscribers summarises our overall outlook.

When you think logically or use old parameters to gauge this market, every bone in your body probably screams out that this market should crash and burn. That is true, but what is also true is that as nothing is real, logic has no place when it comes to the illusory. How can you use logic (which is based on using true and compelling data) to judge an event that is false in nature? Every statistic imaginable has been, is being or will be manipulated to satisfy whatever picture the manipulators want the masses to believe in. It takes two to tango, one to cry and three to have a party. Thus the crowd is as complicit in this game as are the manipulators. The most likely outcome is that the markets will trade higher than anyone expects as long as the trend remains up. Market Update May 31, 2015

We know that the nature of genius is to provide idiots with ideas twenty years later.
Louis Aragon

August 2019 Update on Market Manipulation

Since 2003, we have not found one piece of financially related news from Mass media that could have been used to help any investor in the long run. Mass media outlets seem to take delight in stampeding the masses at precisely the worst time and pushing them into the Euphoric camp when the smart thing to do was bailout. A simple winning strategy is to buy when the masses are stampeding and the trend is up and vice versa.

This bull market is unlike any other; before 2009, one could have relied on extensive technical studies to more or less call the top of a market give or take a few months; after 2009, the game plan changed and 99% of these traders/experts failed to factor this into the equation. Technical analysis as a standalone tool would not work as well as did before 2009 and in many cases would lead to a faulty conclusion. Long story short, there are still too many people pessimistic (experts, your average Joes and everything in between) and until they start to embrace this market, most pullbacks ranging from mild to wild will falsely be mistaken for the big one. Market Update Feb 28, 2019

Unravelling Market Manipulation: Anomalies in Sentiment Analysis

July 31, 2023 Update

In 2020, amidst the market crash, we observed an unusual pattern that suggested market manipulation. The bullish sentiment, far from reaching a euphoric peak, remained below 50 before the crash. This abnormality led us to adopt a cautious stance, despite the technical overselling of markets.

However, traditional psychological indicators functioned as expected. Bearish sentiment skyrocketed to 55 within weeks, fear was evident in anxiety metrics, and rare positive divergences were observed on monthly charts. With the trend indicator pointing upwards and other factors signalling a buy, we seized this opportunity with conviction.

The Role of Mass Psychology in Market Manipulation

Our focus on Mass Psychology is not without reason. However, for a period of 19 months, the data behaved abnormally, reinforcing our suspicion of market manipulation. Resorting to speculation in such a scenario would have been a gamble, a surefire path to long-term failure. Discipline and patience would have been compromised had we not adapted to the changing landscape.

Our assertion that the 2020 crash was engineered is further supported by the manipulation of sentiment data. Interestingly, this manipulation was unidirectional until recently. Throughout 2022 and a significant part of 2023, there were no substantial and enduring swings in bearish or bullish data.

The Absence of Key Indicators in 2022 and 2023

Despite the compelling factors that prompted us to buy during the COVID Crash, none of these indicators were present in 2022 and 2023. Even the MOAB signal, which has always triggered a full buy past the 96 mark, remained stuck at 98, an unprecedented occurrence.

The Impact of Interest Rates on Market Manipulation

One crucial factor to consider is the influence of interest rates on the markets. The effects of interest rate changes can impact the economy from 6 to 24 months. For instance, the last comparable rate hiking cycle began in June 2004 and ended in June 2006, with interest rates rising by 425 basis points. The effects started to show in December 2007, when the markets peaked, but the crisis erupted in 2008 and ended in 2009.

In the past 16 months, rates have risen by over 525 basis points, the highest level since 2001. From a long-term perspective, this is a concerning trend, but we will delve deeper into this later.

As bearish sentiment rises, we will adopt a more aggressive stance. This will involve a higher entry range, increased lot sizes to 1/3 to 1/4, and the issuance of more plays. It’s important to note that the Federal Reserve’s primary function involves manipulating (oops, I meant managing) interest rates to influence economic conditions, including fostering boom and bust cycles.

Conclusion: Adapting to Normalizing Sentiment Data

Supportive psychological data have always backed our bold and daring approach. We are prepared to maintain this stance as sentiment data begins to normalise. However, a rise in bearish sentiment is necessary to restore balance.

originally published Sep 9, 2016, and updated April 2023

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