Buybacks

Bert Dohmen makes a good point:

Investors ask, why has the stock market risen for five years when the economy is in stagnation, there is no real sign of a sustainable economic rebound, more and more regulations are being piled onto businesses that force them to cut costs by reducing staff, taxes are rising sharply, etc., retailers are struggling, and homebuyers still have trouble getting a mortgage.

Here is the answer: the only big buyer of stocks the past five years has been companies buying back their own shares in stock buybacks. Apple alone has just increased its buyback to an astonishing $130 billion. Imagine the losses the company will have on that when the stock nosedives during the next bear market! That puny dividend won’t mean a thing.

It’s estimated that close to $1 TRILLION in buybacks have occurred each year since the crash. Almost every other class of traditional stock buyers have been net sellers, over five years, such as individuals, pension plans, governmental plans, etc.

Buybacks reduce the number of shares outstanding and thus increase the earnings per share (EPS), which then increase the stock price. The greatest beneficiaries are top management, who have big stock options. It’s “financial engineering.” Universities now even offer MBAs in financial engineering. Interesting.

We ask what will happen to the stock market when these buybacks are reduced or when the selling of stocks by traditional stock investors like endowment plans overwhelms the buybacks? We believe this could lead to an avalanche effect; suddenly all the buybacks would cease, as managements wouldn’t want to add to the losses. The fear of losing their jobs would exceed their desire to enhance their stock options.

However, when he goes on to say “imagine the losses… ” his brain is out of gear. When a company buys back stock, it is simply retired, reducing the number of shares outstanding. There is no possible loss on the stock as it no longer exists…

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