Corporate Buybacks Set Records.
Corporations are repurchasing their own stocks in the open market at record levels. An illuminating chart from a recent research piece by Yardeni Research called “Stock Market Indicators: S & P 500 Buybacks & Dividends” is presented below. (https://www.yardeni.com/pub/buybackdiv.pdf).
The figures in these charts indicate a couple of very key takeaways:
- Corporations are horrendous market timers. They are substantial BUYERS at market tops but NOT at lows. The current period appears similar to the spike in purchasing in 2007. In fact, many companies had to SELL stock at or near the 2009 lows simply to recapitalize.
- Stock repurchase activity has, for the first time, EXCEEDED $1 Trillion for the trailing 12 months. The last two quarters annualize to $1.2 Trillion.
- Based on their track record, corporate executives are signaling a MAJOR TOP.
Stock Repurchases Were Illegal Until 1982.
Stock Buybacks, considered “stock manipulation”, were illegal until 1982. This practice has many critics today, including politicians and the SEC because the potential for abuse and self-dealing is extraordinary.
Since 2009, more than $4 Trillion has been spent on repurchases, but RECENT activity has raised serious concerns. The same group of executives who authorize these buybacks are also typically substantial shareholders. Management compensation is heavily weighted by STOCK performance rather than OPERATIONS, thus the temptation to pump up the stock is just too tough to pass up. (https://seekingalpha.com/article/4150964-share-buybacks-market-manipulation-must-banned).
The obvious conflict of interest becomes very troubling when senior executive insiders are SELLERS at the same time the CORPORATION is a BUYER. When Companies repurchase shares they deplete CASH, therefore may inflict substantial HARM to the Company’s credit quality and Creditors. General Electric dissipated BILLIONS repurchasing its own stock at MULTIPLES of its current value and is now at risk of downgrade or bankruptcy (https://www.zerohedge.com/news/2018-11-28/general-motors-and-general-electric-highlight-ponzi-scheme-us-economy).
Insiders Are Much Better Timers With Their Own Funds.
Corporate insiders, typically Boards of Directors and C-level management, are required to disclose their personal purchases or sales of their employer’s shares to the SEC. These transactions number hundreds per week.
Theoretically, management should have the BEST and most recent information as to their company’s prospects. A few analysts aggregate insider sales vs purchases as an indication of overall value and market timing.
The analysis in this chart is the work of Ned Davis Research (http://www.ndr.com), an elite and highly regarded firm.
The graphs are hardly compelling. Insiders are almost always NET SELLERS. This has nothing to do with any opinion on the company but rather personal liquidity needs.
Many insiders sell a certain number of shares every quarter regardless of price and those sales are not separated out.
Nonetheless, insider trading activity CAN be useful if activity CHANGES. For example, if management begins buying shares for their own accounts.
Recent Insider Selling Is Also At Record Levels.
Insider selling has picked up substantially in 2018. During September, insider sales were thought to be nearly $6 Billion, the most for that month in a decade. August also set a record for that month with $10.3 Billion of stock sold. (https://www.cbsnews.com/news/insider-stock-sales-by-company-executives-soar-to-a-record-pace/).
According to Bank of America, Corporations were the ONLY net buyers of stock in 2018. Hedge Funds and other Institutions were net sellers! The chart below is courtesy of Zero Hedge. (https://www.zerohedge.com/news/2018-07-22/firms-buy-back-shares-record-amounts-look-who-was-selling).
Netflix (NFLX) is an especially alarming example. The cluster of insider sells right near Netflix’ all- time highs are no coincidence. NFLX is currently trading at $280.
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