Stock Prices Are Surging Because Corporations Are Spending More Money On Stock Buybacks Than Anything Else Share
By Michael Snyder
TheEconomicCollapseBlog.com
September 21, 2018
The primary reason why stock prices have been soaring in recent months is because corporations have been buying back their own stock at an unprecedented pace. In fact, the pace of stock buybacks is nearly double what it was at this time last year. According to Goldman Sachs, S&P 500 companies spent 384 billion dollars buying back stock during the first half of 2018. That is an absolutely astounding number. And in many cases, corporations are going deep into debt in order to do this. Of course this is going to push up stock prices, but corporate America will not be able to inflate this bubble indefinitely. At some point a credit crunch will come, and the pace of stock buybacks will fall precipitously.
Prior to 1982, corporations were not permitted to go into the market and buy back stock.
The reason for this is obvious – stock buybacks are a really easy way for corporations to manipulate stock prices.
But these days it is expected that most large corporations will engage in this practice. Large stockholders love to see the price of the stock go up, and they are never going to complain when smaller shareholders are bought out and their share of the company is increased. And corporate executives love buybacks because so much of their compensation often involves stock options or bonuses related to key metrics such as earnings per share.
So in the end, stock buybacks are often all about greed. It is a way to funnel money to those at the very top of the pyramid, and those stock market gains are taxed at capital gains rates which are much lower than the rates on normal income.
Normally, you would expect successful companies to invest most of their available cash back into operations so that they can make even more money in the future. And for 19 of the past 20 years, corporations have spent more on capital investments than anything else. But now, share buybacks have actually surpassed capital spending. The following comes from CNN…
But that doesn’t mean companies aren’t spending on job-creating investments, like new equipment, research projects and factories. Business spending is up 19% — it’s just that buybacks are growing much faster.
In fact, Goldman Sachs said that buybacks are garnering the largest share of cash spending by S&P 500 firms. It’s a milestone because capital spending had represented the single largest use of cash by corporations in 19 of the past 20 years.
And this trend seems to be accelerating during the second half of 2018. It is being projected that firms will spend more than 600 billion dollars on stock buybacks during the second half of this year, and that will bring the grand total for 2018 to more than a trillion dollars…
And the trend may not be done yet. Goldman Sachs predicted that share buyback authorizations among all US companies in all of 2018 will surpass $1 trillion for the first time ever.
Wow.
Wouldn’t it be nice if we had more than a trillion dollars that we could put toward reducing the national debt?
This is the reason why stocks hit another new all-time record high this week. Stock buybacks have reached absolutely insane levels, and what we are witnessing is essentially a giant orgy of greed.
To give you some perspective, the previous annual record for stock buybacks was just 589 billion dollars in 2007.
This year, we may come close to doubling the previous record.
And let us not forget that the year after 2007 was the worst financial crisis since the Great Depression.
So what corporations are the worst offenders? Here is more from CNN…
Apple (AAPL) alone spent a whopping $45 billion on buybacks during the first half of 2018, triple what it did during the same time period last year, the firm said. That included a record-shattering sum during the first quarter.
Amgen (AMGN), Cisco (CSCO), AbbVie (ABBV) and Oracle (ORCL) have also showered investors with big boosts to their buyback programs.
The Rest…HERE
