Are Buybacks Keeping the Bull Market Alive?

By www.ProfitableInvestingTips.com

The bull market has had a historic run. And,
even as it ages and becomes more volatile,
the S&P 500 has still not had the substantial
correction that has been predicted by many.
http://profitableinvestingtips.com/stock-investing-tips/are-buybacks-keeping-the-bull-market-alive

One factor that keeps stock prices from falling
too far is stock buybacks.

We are wondering, are buybacks keeping the
bull market alive? And, what else are they
doing?

Stock Buybacks

Just a couple of months ago Forbes wrote
about stock buybacks by Apple and other
companies.

The article is informative and helps shed light
on one of the reasons that the market and
especially the FANG stocks have not had a
significant correction.

Stock buybacks were outlawed until 1982,
when the SEC changed its rules to allow
companies to repurchase shares on the open
market, although doing so can artificially
boost the stock price.

CEOs and other corporate executives benefit
the most from this behavior because their
compensation, unlike that of rank-and-file
workers, is closely tied to stock performance.

Between 2015 and 2017, U.S. publicly traded
companies across all industries spent three-
fifths of their profits on buybacks.

The low-wage restaurant, retail, and food
manufacturing industries spent 137%, 79%,
and 58%, respectively.

The restaurant industry borrowed money or
used cash on its balance sheet to exceed the
amount of its bottom line.

The argument that Forbes makes is that
money which could have gone to higher
wages or other employee benefits has gone to
propping up stock prices.

This disproportionately benefits upper levels
of management.

Our take on the practice is that buybacks are
keeping the bull market alive by artificially
inflating stock prices.

Stock Price versus Market Cap

When the market would normally take the
price of a stock downward, stock buybacks
prop up the stock price.

However, this practice reduces the number of
shares of stock available.

Thus, if a company buys back 10% of its shares
in order to increase the stock price by 9%, the
market capitalization of the company, its total
worth, is unchanged.

If the company buys back 10% of its shares
just to keep the stock price the same, the
market cap of the company falls by 10%.

If you have kept your shares in that company
you now own a larger proportion of a
company that is worth less than before.

Stock buybacks are a common tactic used by
old and successful companies with lots of cash
that are now failing as their business plans
become dated or simply because the economy
is taking a downturn.

Buybacks and the Economy

The Forbes article goes on to note that when
companies use buybacks to prop up stock
prices and compensation for upper
management the same buybacks rob workers
of the pay increases or bonuses that
otherwise would funnel into the economy and
help everyone.

How Long Can Buybacks Prop Up
a Stock Price?

Buybacks will continue so long as a company
has the cash or credit to buy back its own
stocks.

How long that lasts is also determined by the
needs of the company to simply run its
business.

As profits sag, a company will eventually need
to use its resources to run the business and
not prop up the stock price.

At that time one might expect a more
substantial correction than might normally
have happened because the market forces
poised to take the stock price down will be
unopposed by the artificial action of buying
back stocks.

In other words, we might expect a stock to
crash instead of correct when it has been
supported artificially by buybacks for an
extended period.

Investors who are now leaving various stocks
are likely looking at intrinsic stock value and
not stock price to make their decisions.

Bad Technicals

Market Watch adds to the concern about a
pending market correction or worse with an
article about damage done to the stock
market in recent weeks.

Acampora said he believed that the entire
stock market itself would go into a bear
market and said the current dynamic in the
market was eerily similar to the stock-market
crash of 1987, when the Dow slide a historic
22.6% in a single day on Oct. 19 of that year.

When we see the market fall on day and
recover the next, one might think that solid
long term investors are stepping in to take
advantage of lower prices.

However, it would appear that companies are
using the downturns to buy back stocks at a
lower price and especially to prop up the stock
price.

In this sense it would appear that buybacks
are truly keeping the bull market alive and the
time will come when sellers overwhelm the
ability of the Apples of the world to buy back
and prop up stock prices.

Are Buybacks Keeping the Bull Market Alive?

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Are Buybacks Keeping the Bull Market Alive?