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Nah, it's stock buybacks. If the company owns more of their own stock when many individuals have to sell theirs and push the price down, they have more room to deal with rising interest rates that increase the amount of debt they have to pay.
The trading day was filled with ad-hocs about insiders selling shares and institutionals reducing their positions.
I wouldn't be surprised if this trend continues for a while, but right now market and politics are the same and you have no way of knowing what deals are being struck.
What's happening right now is that funds pull out and companies go in in expectation of their debt interest rising. That explains why prices are rising with impending recessions.
http://2oqz471sa19h3vbwa53m33yj-wpengine.netdna-ssl.com/wp-content/uploads/2019/03/stock-buybacks-chart.jpg
Meanwhile, the opposite happens in the bond market:
https://de.tradingeconomics.com/germany/government-bond-yield
If you have loans with variable interest rates, liquidate them ASAP
And I don't know how long these price explosions will last, what is likely is that companies work together with institutionals with government approval (otherwise I believe it wouldn't be legal) in order to have one party sell high, and the other buy low.
Because when the bonds come crashing, they all sit in the same boat.
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United States43197 Posts
A stock buyback reduces cash and equity. This increases the debt to equity ratio of the company because the company’s assets have gone down (cash out). A stock buyback isn’t a way of dealing with increases in the cost of borrowing, it makes the firm more leveraged, not less. If they were concerned about a higher cost of borrowing they would use surplus cash to pay down debt, lowering their interest expense. What they’ve done is essentially the opposite, the interest expense is the same but they now have fewer assets to generate revenues to pay that interest with.
Where are you getting your info from because it’s not from an accountant.
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On October 13 2019 07:33 KwarK wrote:
A stock buyback reduces cash and equity. This increases the debt to equity ratio of the company because the company’s assets have gone down (cash out). A stock buyback isn’t a way of dealing with increases in the cost of borrowing, it makes the firm more leveraged, not less. If they were concerned about a higher cost of borrowing they would use surplus cash to pay down debt, lowering their interest expense. What they’ve done is essentially the opposite, the interest expense is the same but they now have fewer assets to generate revenues to pay that interest with.
Where are you getting your info from because it’s not from an accountant.
It was my personal attempt at putting these two into relation. I was proven wrong when I saw that these are actually being purchased through debt alongside your rebuttal. Thanks for being critical here.
https://www.bloomberg.com/news/articles/2019-08-08/companies-use-borrowed-billions-to-buy-back-stock-not-to-invest
While looking for a possible relation between the two based on a more scientific approach, it was hard finding articles talking specifically about the link between buybacks and debt interest rates. Most of them try to analyze what happens after buybacks spike and what the reasons could be.
Rather, from this source: https://www.twosigma.com/insights/article/share-buybacks-a-brief-investigation/
Conclusion: Contrary to the worst claims about share buybacks, we find little evidence from our large-scale study of individual buyback announcements that they are artificially suppressing market volatility or requiring companies to forgo otherwise profitable investments or take on excess leverage. There is some evidence that share buybacks are announced following a short-term period of stock price declines, which could either represent opportunistic purchasing at an attractive price or an attempt by management to stem the decline.14 However, on the whole, companies that announce share buybacks appear to have stronger-than-average fundamentals and long-term stock performance exceeding the market, with excess profits and cash flows that could reasonably be returned to shareholders.
Our study points towards a noticeable difference in the extent of post buyback announcement price recovery across the pre and post GFC periods. One could think of a few a priori explanations for this difference (that we mention in Section 4); we pose this as an open question to the wider Financial Economics research community and plan to revisit this topic in a future Street View.
I think the bolded is interesting, because it already tells us that most of these buybacks are coming from very strong companies that probably don't have a worry in the world about being indebted.
https://news.tradimo.com/understanding-the-story-of-stock-buybacks/
On the above link, it is shown how insiders on average sell shares following a stock buyback announcement, so the reason might be that they squeeze as much money out as they can before a decline.
There's also this chart that shows how buybacks spike before financial crises.
+ Show Spoiler +
And a quote that is in line with the conclusion from the other research about executives enriching themselves before their company value decreases. The bolded below seems extremely unlikely to me.
That might point to the fact that either companies don’t really know when the time is right to buy their own stock, and are wasting money borrowing it when the interest rates are higher than normal (as we have discussed earlier), or that they simply do not care, as insiders cash out just after buybacks are announced.
Could explain better why I saw so many insider sales lately rather than assuming they're playing price ping-pong with institutionals.
Additionally, another question that I can think of is: What happens to company debt if their creditors default? Let's say you had a debt with Lehmans before they failed, did it get erased? That'd add another layer to buybacks of the sort "we won't have to pay it back anyways" if there is another banking or sovereign debt crisis.
Oh and another reason I could think of is that it makes a takeover less likely when stock prices go down. The legendary VW short squeeze happened during the 2008 crisis IIRC. I'd expect big companies to go on a hunt for profitable competitors during a stock market decline.
My conclusion: Executives enrich themselves among a bunch of other reasons before the ship sinks and the broader public will pay for it, because it's all fueled by swathes of federal debt/money.
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United States43197 Posts
You're still not thinking about leverage correctly. Companies exploit leverage to allocate a disproportionate proportion of their profits to equity by essentially playing arbitrage between the fixed cost of capital from debt and the internal ROI. This yields a greater ROE from the same ROA. There is an inevitable cap on ROA as A increases, companies cannot achieve the same rate of return on an infinite amount of assets, diminishing returns applies. Therefore the desired capital structure and degree of leverage cannot always be maintained by issuing new bonds, reductions in equity must also be performed once a company reaches a certain size. A stock buyback is simply that, a way of adjusting their capital structure in line with their strategic goals, risk tolerance, and desired capital makeup without issuing new bonds.
It comes down to WACC.
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United States43197 Posts
Or to put it another way, sometimes the implicit cost of equity capital is greater than the cost of debt capital and therefore, assuming no new investment needs, it makes more sense to pay down equity than to pay down debt.
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On October 13 2019 09:13 KwarK wrote:
You're still not thinking about leverage correctly. Companies exploit leverage to allocate a disproportionate proportion of their profits to equity by essentially playing arbitrage between the fixed cost of capital from debt and the internal ROI. This yields a greater ROE from the same ROA. There is an inevitable cap on ROA as A increases, companies cannot achieve the same rate of return on an infinite amount of assets, diminishing returns applies. Therefore the desired capital structure and degree of leverage cannot always be maintained by issuing new bonds, reductions in equity must also be performed once a company reaches a certain size. A stock buyback is simply that, a way of adjusting their capital structure in line with their strategic goals, risk tolerance, and desired capital makeup without issuing new bonds.
It comes down to WACC.
But are stock buybacks the only way to allocate their leveraged profits to equity, and what does it mean if it becomes the main instrument? I believe my argumentation was focused on the latter, no argument there with how the balance sheet magic works there, you seem to know more about it than me.
And just to make sure I get it correctly, you're explaining how they use an excess in equity to reduce their assets while the liabilities increase to adjust the rate of returns?
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United States43197 Posts
On October 13 2019 09:25 Vivax wrote:Show nested quote +On October 13 2019 09:13 KwarK wrote:
You're still not thinking about leverage correctly. Companies exploit leverage to allocate a disproportionate proportion of their profits to equity by essentially playing arbitrage between the fixed cost of capital from debt and the internal ROI. This yields a greater ROE from the same ROA. There is an inevitable cap on ROA as A increases, companies cannot achieve the same rate of return on an infinite amount of assets, diminishing returns applies. Therefore the desired capital structure and degree of leverage cannot always be maintained by issuing new bonds, reductions in equity must also be performed once a company reaches a certain size. A stock buyback is simply that, a way of adjusting their capital structure in line with their strategic goals, risk tolerance, and desired capital makeup without issuing new bonds.
It comes down to WACC. But are stock buybacks the only way to allocate their leveraged profits to equity, and what does it mean if it becomes the main instrument? I believe my argumentation was focused on the latter, no argument there with how the balance sheet magic works there, you seem to know more about it than me. And just to make sure I get it correctly, you're explaining how they use an excess in net equity to reduce their assets while the borrowed capital increases to adjust the rate of returns?
Let’s say you want to have 2 debt per equity. You have a great year and you have a bunch of earnings rolling back into equity. That reduces the ratio below 2:1. You can either increase debt or reduce equity to get back to 2:1. The only way to reduce equity is to return cash to the owners through a dividend or a stock buyback.
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On October 13 2019 09:33 KwarK wrote:Show nested quote +On October 13 2019 09:25 Vivax wrote:On October 13 2019 09:13 KwarK wrote:
You're still not thinking about leverage correctly. Companies exploit leverage to allocate a disproportionate proportion of their profits to equity by essentially playing arbitrage between the fixed cost of capital from debt and the internal ROI. This yields a greater ROE from the same ROA. There is an inevitable cap on ROA as A increases, companies cannot achieve the same rate of return on an infinite amount of assets, diminishing returns applies. Therefore the desired capital structure and degree of leverage cannot always be maintained by issuing new bonds, reductions in equity must also be performed once a company reaches a certain size. A stock buyback is simply that, a way of adjusting their capital structure in line with their strategic goals, risk tolerance, and desired capital makeup without issuing new bonds.
It comes down to WACC. But are stock buybacks the only way to allocate their leveraged profits to equity, and what does it mean if it becomes the main instrument? I believe my argumentation was focused on the latter, no argument there with how the balance sheet magic works there, you seem to know more about it than me. And just to make sure I get it correctly, you're explaining how they use an excess in net equity to reduce their assets while the borrowed capital increases to adjust the rate of returns? Let’s say you want to have 2 debt per equity. You have a great year and you have a bunch of earnings rolling back into equity. That reduces the ratio below 2:1. You can either increase debt or reduce equity to get back to 2:1. The only way to reduce equity is to return cash to the owners through a dividend or a stock buyback.
So aren't they currently increasing debt and reducing assets and equity at the same time according to bloomberg if they buyback on credit?
That kind of seems contradictory to the either/or.
And it speaks for an expected reduced ROI if that's the move instead of increasing the assets ie investing.
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United States43197 Posts
On October 13 2019 09:48 Vivax wrote:Show nested quote +On October 13 2019 09:33 KwarK wrote:On October 13 2019 09:25 Vivax wrote:On October 13 2019 09:13 KwarK wrote:
You're still not thinking about leverage correctly. Companies exploit leverage to allocate a disproportionate proportion of their profits to equity by essentially playing arbitrage between the fixed cost of capital from debt and the internal ROI. This yields a greater ROE from the same ROA. There is an inevitable cap on ROA as A increases, companies cannot achieve the same rate of return on an infinite amount of assets, diminishing returns applies. Therefore the desired capital structure and degree of leverage cannot always be maintained by issuing new bonds, reductions in equity must also be performed once a company reaches a certain size. A stock buyback is simply that, a way of adjusting their capital structure in line with their strategic goals, risk tolerance, and desired capital makeup without issuing new bonds.
It comes down to WACC. But are stock buybacks the only way to allocate their leveraged profits to equity, and what does it mean if it becomes the main instrument? I believe my argumentation was focused on the latter, no argument there with how the balance sheet magic works there, you seem to know more about it than me. And just to make sure I get it correctly, you're explaining how they use an excess in net equity to reduce their assets while the borrowed capital increases to adjust the rate of returns? Let’s say you want to have 2 debt per equity. You have a great year and you have a bunch of earnings rolling back into equity. That reduces the ratio below 2:1. You can either increase debt or reduce equity to get back to 2:1. The only way to reduce equity is to return cash to the owners through a dividend or a stock buyback. So aren't they currently increasing debt and reducing assets and equity at the same time according to bloomberg if they buyback on credit? That kind of seems contradictory to the either/or. And it speaks for an expected reduced ROI if that's the move instead of increasing the assets ie investing.
Again you have it backwards. ROI goes down as size goes up. The investors expect a minimum ROI which they do not expect to be able to get if they increase in size any further. By reducing the size of the investment they increase the return on investment because investment is the denominator.
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Sorry, was supposed to say reduced returns, not ROI.
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United States43197 Posts
Once you think of it in terms of implicit cost of equity it makes sense. You wouldn't ask why a company sitting on too much cash paid down interest bearing debt, it would just make sense for them to do so. This is the same thing, they're paying out earnings hungry partners.
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On October 13 2019 07:33 KwarK wrote:
A stock buyback reduces cash and equity. This increases the debt to equity ratio of the company because the company’s assets have gone down (cash out). A stock buyback isn’t a way of dealing with increases in the cost of borrowing, it makes the firm more leveraged, not less. If they were concerned about a higher cost of borrowing they would use surplus cash to pay down debt, lowering their interest expense. What they’ve done is essentially the opposite, the interest expense is the same but they now have fewer assets to generate revenues to pay that interest with.
Where are you getting your info from because it’s not from an accountant.
This is kinda interesting and thx for posting this. I had not looked at it from this angle yet.
The massive buybacks from past few years can be seen as cashing in on the low interest rates. It is the low interest rates that did allow for these buybacks, the remaining assets could be leveraged more thx to the low interest rates.
This makes the whole system extremely vulnerable to rising interest rates (which is something I personally do not expect to happen btw,but its something to keep in mind).
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Keep an eye on the dollar guys. Dollar is devaluing but gold isn't rising and that means there's something weird going on. They should be inversely correlated.
I don't know what it means for stocks. What I know that T-Bill-Holders will tank and US-traded-stocks should in theory go up barring systemic risks from T-Bills. If interest rates remains low while dollar goes down, the debt burden becomes less.
It's probably a bit more complex than I can pack into two sentences. I'd speculate on precious metals that aren't as vital for central banks as gold.
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I sold my whole DJI + SP 500 portfolio today, up 13% since March.
I have a gut feeling we're in for times of turmoil, hoping to buy back at a dip of <25k Dow, or wait out the impending recession, I know it's against the thinking of most people here.
Still kicking myself for not going big on Amd, that being an industry I know plenty about. Just need to look for the right opportunity now.
What are your guys' opinions about the market at the moment, any specific industries or economic regions that are looking promising? I'm trying the best I can to avoid any financial news
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SP 500 is up 23 % YTD
good luck waiting it out
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United States43197 Posts
On November 05 2019 11:37 FiWiFaKi wrote:
I sold my whole DJI + SP 500 portfolio today, up 13% since March.
I have a gut feeling we're in for times of turmoil, hoping to buy back at a dip of <25k Dow, or wait out the impending recession, I know it's against the thinking of most people here.
Still kicking myself for not going big on Amd, that being an industry I know plenty about. Just need to look for the right opportunity now.
What are your guys' opinions about the market at the moment, any specific industries or economic regions that are looking promising? I'm trying the best I can to avoid any financial news
I got burned doing this 2 months ago.
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On November 05 2019 11:37 FiWiFaKi wrote:
I sold my whole DJI + SP 500 portfolio today, up 13% since March.
I have a gut feeling we're in for times of turmoil, hoping to buy back at a dip of <25k Dow, or wait out the impending recession, I know it's against the thinking of most people here.
Still kicking myself for not going big on Amd, that being an industry I know plenty about. Just need to look for the right opportunity now.
What are your guys' opinions about the market at the moment, any specific industries or economic regions that are looking promising? I'm trying the best I can to avoid any financial news
Gold mining.A good large gold miner like AngloGold Ashanti.
Possibly fake meat producers although they may not fare well during the recession, due to the cost to produce it right now.But I still think it will be a growth sector long term, it's a trend that will not go away.
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Portfolio currently: Energy, one solar manufacturer, platin mines, gold mines, tobacco, one digital payment firm.
Several different mining firms with a small position each because it isn't an easy to understand sector. Among the gold miners only polymetal and agnico went green, so that's where I put more if needed.
In summary: Betting on gold price up along with other metals, energy prices up (oil will get there), consumer prices up. What I have shouldn't get hit that hard during a market decline, just the mines credit risk worries me. Mining becomes increasingly costly, but many of them make use of the high gold price to deleverage and reduce the exposure to bond market problems which are imo the biggest threat.
My opinion is: Look at govt. bonds first, then the stock market. I watch the japanese ones especially because they seem to be a wild ride right now and they're the first to have started QE.
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I wouldn't feel happy with the ethical problems of putting my money into tobacco.
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On October 09 2019 06:53 BerserkSword wrote:Show nested quote +On October 08 2019 18:38 Vivax wrote:
Switched to long before Powells speech for the new QE rally before Trump sends it all to hell during negotiations probably lol. You still long? I got me some Nov 22 Calls for DIA lmao
selling all my DIA calls today
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EPT![[image loading]](https://news.tradimo.com/wp-content/uploads/2019/07/bbcs.jpg)
