Down goes the Dow

Thank you I am glad I am not alone refuted these incorrect statements. As far as what is inside the numbers, at the last peak of 2007 corporate debt stood at a record of $11 Trillion, today it stands at $14 Trillion, most of the $3 Trillion increase is in stock buy backs.

Ghost of Igloi wrote:

most of the $3 Trillion increase is in stock buy backs.

is this true? link?

Lots of weeping and gnashing of teeth here over corporate debt. I have no problem with investors considering debt, but they also need to take into account the interest rate on the debt and what the borrowed monies are used for. Given the low rates, this may not be the problem some of you suggest it is. I continue to maintain that borrowing at these rates combined with the current nonexistent inflation is good business.

Big Dog Investments wrote:

Lots of weeping and gnashing of teeth here over corporate debt. I have no problem with investors considering debt, but they also need to take into account the interest rate on the debt and what the borrowed monies are used for. Given the low rates, this may not be the problem some of you suggest it is. I continue to maintain that borrowing at these rates combined with the current nonexistent inflation is good business.

I agree with you

the focus on buybacks is telling, I think - many people have a mindset that none of this is real - that any economic expansion is due to accounting tricks and smoke and mirrors - and they focus on buybacks as one of the prime examples of that trickery.

borrow money, buy shares, see stock go up...it seems like snake oil to people predisposed to bearishness and suspicion.

here's one of the top quants in the business, jim o'shaughnessy, talking about how the shares of companies with large dividends + large buybacks tend to out perform:

So he found that share buybacks are not a gimick, but tend to indicate a good stock to buy:

Investment manager Jim O'Shaughnessy, author of "What Works on Wall Street," did a comprehensive review of this metric. He ran a study between 1927 and 2013 and found that investing in stocks with the highest levels of this "hidden yield" grew a $10,000 investment to $33 million -- an average return of 9.8% per year after inflation.

Over the same period, a $10,000 investment in a broad market index returned just $5.5 million, or an average annual return of 7.5%. That's a difference of $27.5 million.

The only real difference between the two results was a focus on shareholder yield.

Shareholder yield is the combination of a stock's dividend yield and its buyback yield. As I said, many investors focus on dividends, but they often overlook the important buyback yield.

http://www.nasdaq.com/article/the-275-million-difference-hidden-yields-could-have-on-your-portfolio-cm453566

This buyback issue is a sticky wicket.

Nowhere have I seen a comprehensive analysis of the amount of cash vs the amount of credit used to effect buybacks among, say, SP500's.

From an economic perspective, buybacks are lame, indicating that a business can't do anything better with the money--i.e. can't generate any better return with it by doing something else like investing in productive capacity, etc..

OTOH from a business perspective they can make sense, to not only drive up the share price now, but to RETAIN in the system, value that currently exists. It is often overlooked that investments come with risk, for example a business drills a new well, and all of a sudden oil falls to a value so low that operation of the well is a net cost, the business loses money on the investment.

Buybacks instead of investment are generally seen as a leading indicator of tough economic conditions, WHETHER THEY ARE MADE WITH CASH OR WITH LOW-INTEREST LOANS. Just like their functional equivalent, an increased dividend.

well... now we have above average investment AND (probably) above average amounts of buybacks. So how can that be bad?

Companies are putting money to work building their businesses and giving cash back to shareholders in the tax free form of buybacks. I don't see a problem.

“During the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks… Why did the investing public turn its attention from dividends, from asset values, and from average earnings to transfer it almost exclusively to the earnings trend, i.e. to the changes in earnings expected in the future? The answer was, first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.

“Along with this idea as to what constituted the basis for common-stock selection emerged a companion theory that common stocks represented the most profitable and therefore the most desirable media for long-term investment. This gospel was based on a certain amount of research, showing that diversified lists of common stocks had regularly increased in value over stated intervals of time for many years past.

“These statements sound innocent and plausible. Yet they concealed two theoretical weaknesses that could and did result in untold mischief. The first of these defects was that they abolished the fundamental distinctions between investment and speculation. The second was that they ignored the price of a stock in determining whether or not it was a desirable purchase.

“The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory led directly to this thesis… An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.”

Benjamin Graham & David L. Dodd, Security Analysis, 1934

you seriously see a similarity between 1929 and 2015? really?

I worry for you, my pixelated runner co-leaguer

Hey, GoI, do you have that link agip asked for at the top of the page, or should we assume everything you write is bullshit?

Did I say it was 1929? No, i was quoting Graham and Dodd who are considered the the founders of modern security analysis. No need to worry about me, I would be more concerned about my portfolio if you invest as you comment on this post. Just keep buying your attractively valued stocks, especially concentrated on companies with large buybacks. Or pick-up some Shake Shack, down in the aftermarket, and trading at a 309 PE. Perhaps Pfizer is more your liking, they have purchased 20% of their float. Greater fool theory always prevails.

Good night.

At least my posts have substance and I can do it without using profanity. Grow up junior.

The problem is that its not a trick. It's just roughly the same thing displayed in a different way. Everyone ignored that Apple had $130b in cash and no debt when valuing the company. They were trading at an insane P\E for awhile when you accounted for the cash. Something around 6 when the price was so low. People like high EPS growth and hate cash in the bank....bit illogical. I'd rather cash in the bank then stock buybacks.

After several debt offerings to finance stock buybacks, Apple now has $39 Billion in debt on it's balance sheet.

Ghost of Igloi wrote:

After several debt offerings to finance stock buybacks, Apple now has $39 Billion in debt on it's balance sheet.

That's about 5% of the corporation's value. We should all be so fiscally sound.

Just ordered 40 shares of DXD with my "play around fund" lol.

http://oi61.tinypic.com/ftf2hy.jpg

jamin you should use imgur.com

Better looking website

Ghost of Igloi wrote:

http://davidstockmanscontracorner.com/thanks-for-the-corporate-bond-bubble-fed/

At least my posts have substance and I can do it without using profanity. Grow up junior.

wull...of GOI is trying to prove that "most of the $3 Trillion increase (in corporate debt) is in stock buy backs"

here is is source, from the stockman article:

"Here are the baleful facts. Total corporate and non-corporate business debt outstanding has been on a tear since the pre-crisis peak in late 2007. At that time, business credit outstanding totaled $11 trillion—–a figure which has now ballooned to $14 trillion. So despite the propaganda about a healthy post-crisis deleveraging, its been full steam ahead with debt issuance in the business sector.

But the overwhelming share of that $3 trillion has gone into financial engineering including trillions of stock buybacks during the last six years. By contrast, business CapEx has been tepid at best, and a downright disaster in reality."

Obviously a few problems here, putting aside complaints about stockman as a source. mainly:

1) stockman fudges - he says the new debt has been used for multiple purposes, buybacks being only one. So it doesn't really show anything - it could be 1% buybacks and 99% LBOs for all we know - so igloi shouldn't claim this to mean anything re; buybacks

2) stockman doesn't show any sources - no footnote, no graph, no nothing. Just a blank statement. I don't think this sort of thing can be used as evidence. Stockman can say anything - unless he backs it up with a source, it's not evidence.

Money is a fungible asset. As such, it does make too much sense to talk about whether the additional debt has been used for buy-backs or for other purposes.

Still, one item that might help with overall perspective is to compare the overall dollars put into buy-backs vs the $3 T in increased debt.