Dear Diary,
Dow down 116 points yesterday. Why?
Airstrikes against ISIS… Ebola… inversion crackdown… housing slowdown… record stock high prices… Alibaba?
The smart money knows what to do. From Bloomberg:
American companies have seldom spent more money than they are now buying back shares. The same can’t be said for their executives.
A total of 7,181 insiders bought their own stock this year through Sept. 12 and 23,323 sold shares, according to data compiled by Bloomberg and Washington Service. The ratio of buys to sells is near the lowest since 2000.
At the same time, corporate repurchases reached $275 billion in the first half of the year, the second busiest since S&P Dow Jones Indices began tracking the data in 1998.
Share purchases by executives are becoming rarer after seven straight quarters of advances pushed valuations in the Standard & Poor’s 500 Index to a four-year high.
While companies are pouring money into their own stock because they have nothing better to do with it, officers and directors aren’t – and that’s a bearish signal for share prices, said Brad McMillan, chief investment officer at Commonwealth Financial Network.
“It doesn’t say anything very good about the growth prospect for the business,” McMillan, whose firm oversees $86 billion, said in a phone interview on Sept. 18 from Waltham, Massachusetts.
“Who would know the business better than an executive in the middle of it? Even though executives are buying on the corporate level, their hearts are not in it personally.”
Insiders buying stock have dropped 8% from a year ago, poised for the fewest in more than a decade, according to data compiled by Bloomberg and Bethesda, Maryland-based Washington Service. Monsanto Co. and Cisco Systems Inc. are among companies whose executives have done less buying even as corporate repurchases increased.
They say they don’t ring a bell at the top of a market. But we hear alarms going off all over the place.
Corporations are buying back shares with borrowed money… pumping up prices. Then the pumped-up shares are awarded to managers as performance bonuses.
What do the managers do with them? They dump them.
Pump the market with zero-cost credit… Push up share prices, shifting trillions of dollars in wealth to the richest people in the country… Draw more naïve Mom and Pop into the stock market…
Homage to Poverty
But let us put that to the side and continue with our series on “How to Get Rich.”
We’re still in the first part, titled “Homage to Poverty.”
Yesterday, we pointed out that often a person gets rich and finds he is no longer doing what he likes doing.
We talked about a chef who likes cooking. His restaurant is packed every night. So he opens a chain of restaurants. Now he’s really making money. But he’s no longer cooking.
In other cases, he simply retires… or sells out. Now, it’s even worse. He has nothing to do!
In our case, we have continued working. But our avocations have suffered.
An amateur builder for the last 40 years, we got the most pleasure from scavenging for building materials and creating nice living spaces with little money. We did so because we liked it. But we also had little choice; we had to “make do” with what we could find.
Now, we don’t have to “make do,” so it is hard to justify poking into dumpsters or picking up discarded furniture on the sidewalk. It’s hard to do the work ourselves, too, when we know we can hire a professional who will do it better.
We still build things… but some of the fun has gone out of it.
A few years ago, for example, we decided to build a gypsy wagon. They are delightful and fanciful antique versions of today’s Winnebago.
Built of wood, which you can decorate as elaborately as you want, they are fun to look at. And they can be very charming and comfortable inside, depending on how much work you put into them.
You use one in your garden as an ornament… or put it to work as an office or a guest bedroom.
I found an abandoned hay wagon to use as the foundation. But before I started work, the question inevitably came up: Why not just buy one instead?
But buying one would have deprived us of the pleasure of building it. So we went ahead and built it ourselves (we got the children to help). And we’re glad we did.
Still, without necessity driving us onward, we felt a little frivolous. It was just a hobby.
Money frees you from the need to do anything. But when you ditch Mother Necessity you become an orphan. You are alone in the world… with no one to tell you to get up in the morning, stand up straight and polish your shoes.
Pretty soon, you can look like a homeless person.
When you have no one to answer to but yourself, your boss can be a moron. Then you can slip into the existential abyss. When you don’t have to do anything, it can feel as though you have done nothing worth doing. Life can see pointless and empty.
Then what?
You can make a life out of being wealthy. You can hang out with other rich people… buy a big house in Aspen… give money to the arts and charities… and eventually blow your brains out.
Aspen has a suicide rate four times the national average.
Regards,
Bill
The Problem with Share Buybacks
Share buybacks are nothing if not controversial.
When a company buys back its shares, it reduces the number of shares outstanding. This increases the company’s per-share earnings.
Earnings per share go up… The value of each share increases… Share prices rise…
What could be wrong with this picture?
Nothing – except that spending money on share buybacks steals from the future to reward investors today.
When a corporation buys back its shares – using either earnings or borrowed funds – by definition it isn’t using that money to invest in the future growth of its business.
US corporations have spent $500 billion in the past year on share buybacks – a multiple of what they spent on R&D and other capital investments.
This sets up a strange contradiction…
On the one hand, share prices rise. On the other, the rise in buybacks is a sign that corporations are unable to earn back their cost of capital by investing in future growth. Even at today’s ultra-low interest rates.
There’s another puzzling element, too – one that Bill refers to above.
Managers are happy to splurge with company money on buybacks at today’s elevated valuations. But they balk at buying company shares for their own portfolios…
Still, share buybacks make the present seem rosy… even if they mean the future looks bleak.