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Coroorate buy backs have been the major catalyst for the market

2,284 Views | 17 Replies | Last: 5 yr ago by Cyp0111
GenericAggie
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AG

What happens when interest rates climb and corporations stop or slow buying back their own stock? Both will happen but when?

https://apple.news/A-xDIfQjlTdu2muQWDiQhwg
GenericAggie
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AG
Meant to add, my wife worked for a small institutional trading firm in Dallas. After the 2008 crash, the volume of trades decreased by 90% and never recovered. They did corporate purchases but not a focus of theirs.

The next few years will be interesting. Will corporations continue to buy back their stock?
O'Doyle Rules
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AG
I brought up this point on this board about a month back. The consensus on here is that buybacks are "good for the investor" and execs can do whatever they want with their extra capital. Its very short sighted thinking once the market corrects. All you have to do is pull up a GDP to debt graph since 08 and you'll see we havent deleveraged at all. We can't out grow our debt. The stock market is full of hot hot air. Most people dont want to know that...they want to think the stock market is fundamentally sound...rainbows and unicorns...DOW to 35k sky is the limit etc etc. 2007 all over again.
chris1515
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AG
Stock buybacks and margin balances at record levels have definitely provided some non-sustainable lift for the market.
AgBank
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AG
Interesting!

Buybacks can be efficient, but research use to show many companies buy at the wrong time. That is pretty old research now.
halfastros81
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AG
Some companies do it as a Way to reward investors without a dividend and when they don't see the economics of reinvesting more capex into their core biz. Personally i'd Rather have a dividend because it's
Long term v. What seems like the temporary impact on stock price of concentration
bmks270
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AG
What story do the corporate earnings tell?

I still think ultimately net income and future income is what gives stocks their value.


https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart
500,000ags
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AG
It is old research, but the bad timing likely correlates with the fact that corporates have the excess cash flow to repurchase shares during growth periods - E.g. the market is trading higher.
pfo
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In the long run stock prices are determined by earnings and stock purchaser's perceptions of future earnings and dividends as discounted by Net Present Value calculations which are a function of interest rates/cost to borrow money. In 2018 the S&P increased in earnings approximately 22% over 2017 driven by tax cuts, regulations cuts and the booming Trump economy. For 2019, S&P earnings are projected to rise 12%. The S&P forward PE is approximately 17. Is that high? Probably a little high but your alternatives are cash which pays about 1%, bonds which pay about 3% and go down in value with each interest rate hike, real estate but that's not cheap and it comes with property taxes, minerals if you can find them, gold which pays nothing and whatever else you can think of.

But if interest rates eventually climb to 10% (nothing anyone expects) then stocks would be ridiculously overpriced. The NPV if their future earnings would be less and risk free 8% plus returns would be an alternative.

Corporate buybacks are good for shareholders because they bring shareholders value without taxation. Are corporate buybacks responsible for higher stock prices in the short term? Partially, yes. The Trump tax discount for repatriation of foreign earnings has brought a lot of cash back to American companies with big international footprints.
ATM9000
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pfo said:

In the long run stock prices are determined by earnings and stock purchaser's perceptions of future earnings and dividends as discounted by Net Present Value calculations which are a function of interest rates/cost to borrow money. In 2018 the S&P increased in earnings approximately 22% over 2017 driven by tax cuts, regulations cuts and the booming Trump economy. For 2019, S&P earnings are projected to rise 12%. The S&P forward PE is approximately 17. Is that high? Probably a little high but your alternatives are cash which pays about 1%, bonds which pay about 3% and go down in value with each interest rate hike, real estate but that's not cheap and it comes with property taxes, minerals if you can find them, gold which pays nothing and whatever else you can think of.

But if interest rates eventually climb to 10% (nothing anyone expects) then stocks would be ridiculously overpriced. The NPV if their future earnings would be less and risk free 8% plus returns would be an alternative.

Corporate buybacks are good for shareholders because they bring shareholders value without taxation. Are corporate buybacks responsible for higher stock prices in the short term? Partially, yes. The Trump tax discount for repatriation of foreign earnings has brought a lot of cash back to American companies with big international footprints.

Been a big fan of the buybacks for my portfolio... but the amount of them relative to capex investment in this rate environment is starting to make me think the market is in for a massive punch in the balls in the near future. I think the recession Texags has been predicting for about 9 years now might take hold in the next 12-24 months.
pfo
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I don't see a recession unless democrats win big in the midterms or the Fed keeps raising interest rates a lot further but I agree that market PE's are going to contract. Going from 22% to 12% earnings and rising interest rates will contract multiples. I'm expecting the correction to continue but will put cash to work if the market gets hit another 8-9% or so. I hope the Fed doesn't kill our economy! I'm not so sure they won't.
ATM9000
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AG
pfo said:

I don't see a recession unless democrats win big in the midterms or the Fed keeps raising interest rates a lot further but I agree that market PE's are going to contract. Going from 22% to 12% earnings and rising interest rates will contract multiples. I'm expecting the correction to continue but will put cash to work if the market gets hit another 8-9% or so. I hope the Fed doesn't kill our economy! I'm not so sure they won't.

Jerome Powell is absolutely nuts to monkey around with the Feds balance sheet at the same time he is intending to push rates up... but everything he's signaling combined with how companies reacted to the tax cuts all signal a an end to the current credit cycle and a recession very soon on the horizon. You won't like to hear this, but whatever happens in a few weeks will have little impact on those facts.
AgBank
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He is sort of just adhering to the game plan that he inherited, for the most part.

I have been suspicious that he is playing with the yield curve. Call me paranoid.
Cyp0111
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This cycle is more centered around debt vs corporates
Aston04
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AG
Even worse- Years ago I worked for a publically traded company that borrowed money to issue a one-time dividend. That really pissed me off. Made no sense for the long term health of the business (or stock valuation).
leoj
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Will be interesting to see the studies and analysis of these post tax reform buybacks and capex that will come out in the coming years, that's for sure
Scientific
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AG
pfo said:

I hope the Fed doesn't kill our economy! I'm not so sure they won't.

I hear different opinions on the fed. It sounds like it's damned if they do damned if they don't. If emerging markets crash, the fed won't have room to ease rates. At some point they were going to be raised.
ATM9000
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AG
Scientific said:

pfo said:

I hope the Fed doesn't kill our economy! I'm not so sure they won't.

I hear different opinions on the fed. It sounds like it's damned if they do damned if they don't. If emerging markets crash, the fed won't have room to ease rates. At some point they were going to be raised.


The Fed at the very least absolutely needs to reduce its balance sheet. I have no issues with what the feds are doing. I just think they should be doing them in sequence not at the same time. I suspect the market is spooked by their strategy and that's why you didn't see incredible capex spend off the tax cuts.
Cyp0111
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And bc assets are tremendously expensive
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