Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Stock Buybacks Main Force Driving Bull Market; Rewards Investors and Starves Innovation

Stock-Markets / Stock Markets 2016 Oct 13, 2016 - 05:23 PM GMT

By: Sol_Palha

Stock-Markets

"All the power that we exercise over others depends on the power we exercise over ourselves." ~ Cotvos

Share buybacks are nothing new; they have been around for decades, and in most cases, one would view this type of action under a favourable light. However, for the past few years, companies have used this technique as a ploy to hide stagnating earnings or even falling profits. The idea is very simple, and the rewards are lucrative as most corporate officers have incentive-based rewards. Corporations borrow money for next to nothing and then use this to purchase huge blocks of shares; the number of outstanding shares drops and the EPS magically rises. Each year for the past six years the amount of money allocated towards share buybacks has soared, because as we stated, this is the fastest way to increase EPS without doing a single thing magically.


In the good old days, companies would invest the cash they accumulated or the money they borrowed into activities that would improve the bottom line and not resort to financial gimmickry to create the illusion that all is well.  Instead of investing in their own business, corporations have been funnelling huge amounts of cash towards share buyback programs. Total payouts to shareholders which include dividends and share buybacks have increased at an unbelievable rate of 20% per year for the S&P 500 since 2009. As we stated in 2015, 2015 and now in 2016, this trend is not going to stop. It will continue to gather momentum because it is an easy fix to an otherwise unfixable situation. The economy is in bad shape; if the outlook were bright as the BLS claims corporations would be investing larger amounts in their business and not squandering billions on financial shenanigans.

"We estimate total payouts for the S&P 500 will reach $1 trillion for the first time ever in 2016. This will include approximately $400 billion in dividends and $600 billion in gross share repurchases and will culminate six years of substantial growth in payouts. As recently as 2010, total payouts were just $500 billion per year", stated Jonathan Glionna of Barclays

This shady activity would be okay if corporations were only using cash on hand, but they are not; they are borrowing money to fund these purchases. One day they will have to pay this money back, and as they invested nothing into their business, they might not be in a position to service this increasingly large mountain of debt. However, that is a story for another day. The trend is in full swing and showing no signs of letting up, and as negative rates have yet to hit the US, we can state that we are far from reaching a blow off top. In other words, even thought this mountain of debt looks huge today, it might look tiny and manageable compared to what it is going to look like 3-5 years from today. Take a look at the chart below

S&P500 Dividens and Buybacks

Every single year since 2009, the total money committed to dividends and buybacks has increased, and we believe that they will continue to grow at this crazy clip and could even gather momentum when negative rates finally debut in the U.S. Translation, this bull market is not going to hit a brick wall yet. This market will experience corrections along the way ranging from mild to strong, but each one will prove to be a buying opportunity. The amount of money that will continue to hit this market is going to increase in the years to come and not decrease.

On the psychological front, no bull market has ever ended without mass participation. The masses have not embraced this market and more importantly the sentiment is decidedly negative. Bull markets end on a note of joy and the masses are nowhere close to joyful at present. The latest AAII sentiment survey illustrates that 25% of investors are bullish. Our proprietary anxiety gauge also shows that investors are one step away from the hysteria zone.

Tactical Investor Anxiety Index 

The chart below illustrates how the payout ratios have been skyrocketing over the years and as of late they have been outpacing earnings. Companies have are making up for this shortfall by borrowing money.

Total Paytout Ratio

"Over the last few years payouts have exceeded earnings for the S&P 500, which is rare," Glionna observed. "It almost happened in 2014, when the total payout ratio was 99%. In 2015, it did happen. It will happen again in 2016, based on our estimates, as net income is likely to be less than $900 billion against $1 trillion of dividends and buybacks."

"Prior to 2015, companies in the S&P 500, in aggregate, had paid out more than they earned only six other times during the last 50 years," Glionna said.

Many experts will state that this is unsustainable. If you apply the rules of logic, that assumption would be pretty accurate. However, reality ceased to exist after the Fed decided to knock out any aspect of free market forces. The Feds control this market, and it will crash when the Fed stops supporting it. Chances of that taking place anytime soon are next to zero. You have better odds of finding Gold in your backyard then of the Fed allowing free market forces to exert their effects on this market. As we stated before, corporate debt is to soar to levels that will make those of today appear sane in nature. Easy money is addictive, and the corporate world is addicted to it; they are not going to stop unless someone forces them to stop. This is why the most hated bull market continues to trend higher despite all the evil thoughts thrown in its direction.

Conclusion

The crowd has not embraced this market, and sentiment is extremely negative; history clearly indicates that such developments usually occur during market bottoms and not tops; hence, the market is more likely to trend higher a year from today than it is to crash. The higher it trends, the more volatile the ride is expected to be; experts have been confusing volatility for the commencement of the next bear, and on each occasion, they have had their heads handed to them. Don't fight the Fed or the trend as you are bound to lose. Throw in the corporate world's love for share buybacks, and you have all the ingredients in place for this market to trend a lot higher. All sharp pullbacks have to be seen through a bullish lens; the stronger the deviation, the better the opportunity.

"A ***** has great influence on his own dunghill." ~ Publilius Syrus

by Sol Palha

www.tacticalinvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

© 2016 Copyright Sol Palha- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in