Stock Buybacks Hit Record

in #economy6 years ago


Source: zerohedge.com

As noted in the title, stock buybacks hit all time record. Those of you whom don't know what a stock buyback is might consider this a 'so what' reaction. I will go over what a stock buyback is and how it affects the share price below. JPMorgan predicted that buybacks this year would hit $842 billion, the numbers indicate that this may have been a conservative estimate as they hit $680 billion in the first half of 2018.

From the chart, you can see that since 2008 the buybacks have been on a up sloping climb. This can be analogous to the years prior to 2008 starting about 2003. The severe decline in 2008 was due to the financial crisis. I believe that in 2008 the first salvo was fired to the financial system due to the trend of offshoring the US manufacturing base and relying on a ponzi scheme of derivatives to shore up the US financial system. For those whom may understand accounting terminology, IMO, derivatives are analogous to contra assets.

Buybacks have been employed to maintain or push up the stock values. To elaborate, stock prices are dependent on supply and demand. In this case, supply is mostly fixed as companies have a set amount of shares floating or outstanding. There maybe a situation where a company has floated another issue but this is the exception. Demand is based on how many shares of a company the pool of investors are trying to buy. A basic tenet of economics is that when supply is constant and demand increases, price will increase. A buyback is when a company actively enters the market to place buy orders of its own shares. The market sees this as the same as anonymous investors buying share which will cause the demand to rise as well the price.


Source: zerohedge.com

The charade has been played since the US administration began to outsourced its manufacturing base. By this act, they eliminated the major source of the US's economic engine. This was exacerbated by clueless US consumers buying foreign made products because they were cheaper. On the US's last attempt to stabilize the stock market, companies have bought back their own shares funded by the government's zero percent loans.

This kept stock prices at their all time highs prompting traders to not flee the market, even though the stock technicals indicated that there was no viable way for the company to earn a profit. As an example, a company like Google has no physical assets to produce a product which will result in sales but the shares at selling a P/E multiple of about 60.

Several financial pundits have been predicting a major fall in the stock market, I tend to agree as the bulk of the listed companies have no viable means to generate an income.

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