market manipulation; share buybacks distorting the markets

market manipulation

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


Market Manipulation; It’s not going to stop

Over the course of 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 what, alternate reality. This is something the masses do not want to fathom or refuse to fathom. 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.

Huge Share buybacks are 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? Well, money is cheap, and the executive’s compensation is tied to share performance. As we are 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.

Does the program work?

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 S&P 500 have used this strategy to inflate their earnings and this indirectly boosts share prices; a vicious cycle of fraud that perpetuated more fraud is brought into existence and all with government approval.  These shenanigans are not restricted to small players; big companies such as Apple are also using 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

The main 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, and this is 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 that has 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 expectations 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 article below summarises the share buyback fraud quite nicely.

Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

The buyback wave has gotten so big,

in fact, that even shareholders—the presumed beneficiaries of all this corporate largesse—are getting worried. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote in an open letter to corporate America in March. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.” Full story

Market manipulation parting thoughts

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

When you think logically and or use old parameters to gauge this market, every single 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

Update Aug 2019 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. In fact, mass media outlets seem to take delight in stampeding the masses at precisely the worst time and pushing them to them into the Euphoric camp when the smart thing to do was to bail out. 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

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Contrarian investing Guidelines for beginners  (August 14)

Market Shenanigans (July 30)

Random Musings; Central Bankers recreating reality (June 10)

Free Markets no longer exist (June 2, 2015)

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