Tuesday, October 14, 2014

Buybacks Are Back in the News (excerpt)

Yesterday’s print version of the FT included an article titled, “Buybacks: Money Well Spent?” It makes the same argument that I have been making for the past few years: The Fed’s ultra-easy monetary policies, including NZIRP and QE, have given a tremendous incentive for companies to issue cheap debt to buy expensive stock. This has “diverted corporate cash from creating jobs and investment,” according to the FT story.

Let’s quickly review the data on this. S&P 500 buybacks have totaled $2.0 trillion from Q1-2009 through Q2-2014. Over the same period, net issuance of nonfinancial corporate bonds totaled $1.2 trillion. Operating profits of the S&P 500 companies totaled $4.4 trillion since Q2-2009. So S&P 500 buybacks amounted to 45% of their profits since Q2-2009, and over 50% during the first half of this year. In current dollars, capital spending in the GDP accounts increased from $1.64 trillion (saar) during Q2-2009 to $2.19 trillion during Q2-2014.

Today's Morning Briefing: Running Out of Ammo? (1) Global slowdown front-page news. (2) Litany of woes. (3) From “shock and awe” to “Aw, shucks!” (4) Divided we fall. (5) G20 have no plan. (6) Abe sees downside of yen’s downside. (7) Fed’s Fischer leaning towards “none and done.” (8) Lagarde’s plea. (9) Unintended consequences of ultra-easy money include buybacks. (10) China isn’t tanking just yet. (11) S&P 500 forward revenues at record high. (12) S&P 500 forward earnings stalling at record high. (More for subscribers.)

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