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The App That Democratized Trading Is Now Worth $5B

The App That Democratized Trading Is Now Worth $5B

Investors and customers have rallied…

Markets Slide Sideways As Trade War Fears Linger

Markets Slide Sideways As Trade War Fears Linger

Despite technology stocks hitting new…

Market Shenanigans

For nothing can seem foul to those that win. ~ William Shakespeare

Over the course of the years, we have repeatedly stated (though probably not as much as many would like us to do) that companies use share buybacks to manipulate earnings. In the past, this gambit was not as prevalent as it is today. Currently, companies borrow money in contrast to using the cash they already have to repurchase their shares and use this modern form of alchemy to turn losses into profits or make moderate profits appear to be spectacular in nature. This bull has yet another bullock's reason to run higher. We are now in the paradigm of lies and deceit. What thrives in such conditions? The truth; come on you know better than that. The answer is BS, with a capital B. The main thing driving this market higher is pure BS and BS is based on what, alternate reality. This is something the masses do not want to fathom or refuse to fathom. Given that, individuals have an innate capacity to conjure incredible amounts of BS, the driving force behind this market is not going to run out anytime soon.

Last year was to put it mildly a colossal year in terms of share buy backs, with corporations deploying roughly $540 billion (yes, that's billion of dollars) to repurchase their shares. Now why in the hell would they do this? Well, money is cheap and executive's compensation is tied to share performance. As we are in the age of lies and deception, the method used is of no consequence, only the result matters. Therefore, whatever lie has to be told is told in order to give the impression all is well.

  1. Last year was a massive year for share buybacks; as we stated $540 billion was used for this purpose.

  2. $141 billion in buybacks were authorized in April of this year setting yet another record

  3. For 2015, the sums are even more interesting. We are not even half way through the year, and over 400 billion dollars has already been earmarked for share buybacks. Imagine how much will be spent by the end of this year. Since 2001, only the companies in the S&P 500 have spent over $3.1 trillion on buybacks.

Does the program work? You bet your bottom dollar it does. I llinois Tool Works (NYSE: ITW) used buybacks to inflate its earnings by 33% per share last year. BBBY (Bed Bath and Beyond) used the same strategy to reverse a 10% drop in profits into a gain of one cent per share. They should now change their name to Bed Bath and Begone.

The situation is so pervasive now, that experts estimate over 25% of S&P 500 have used this strategy to inflate their earnings and this indirectly inflates share prices, which gives them even more impetus to perform the same dirty deeds repeatedly. These shenanigans are not restricted to small players; big companies such as Apple are also using this trick. Soon every company that has access to easy money will employ this tactic. Hey, why spend time trying to improve business, if you can just borrow the money and give the impression that business is booming, even though profitability might actually be declining.

In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company's shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets. Full Story

The main driver is cheap money, and sadly the average Joe has almost no access to this easy money. However, towards the end of the game, a way will be found to miraculously lend these chaps huge amounts of money so that the elite players can bail out at the top. After all, someone has to buy all this crap at an inflated price right. Now you understand why the markets are running higher. The feds officially stopped QE, but the corporate world has taken over where the Feds left off, and this is all due to the easy money the Fed is providing them. So forever, QE is still going on. This also explains why share prices continue to trend higher despite an economy that has a pathetic growth rate; the latest numbers show that the GDP decreased at an annual rate of 0.2%. I suppose this is better than the original estimate of - 0.7%. Against this backdrop of wonderful growth (us being sarcastic), share prices have doubled over the past five years and so has corporate debt. Coincide, we think not.

We expect corporate debt to soar to levels that will make the current levels appear sane. History repeats itself for the masses elect fools into positions of power with the expectations that the outcome will be lovely, when things fall apart, they are shocked and wonder why. Perhaps, they should hit an injured toe with a hammer instead of applying a bandage, and then marvel at why it hurts ten times more.

The article below summarizes the share buyback fraud quite nicely.

Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients--which include most of the highest-ranking corporate executives--reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings--a total of $2.4 trillion--to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

The buyback wave has gotten so big, in fact, that even shareholders--the presumed beneficiaries of all this corporate largesse--are getting worried. "It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies," Laurence Fink, the chairman and CEO of BlackRock, the world's largest asset manager, wrote in an open letter to corporate America in March. "Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks." Full story


The excerpt from a fairly recent update sent out to subscribers, succulently summarizes our overall outlook..

When you think logically and or use old parameters to gauge this market, every single bone in your body probably screams out that this market should crash and burn. That is true, but what is also true is that as nothing is real, logic has no place when it comes to the illusory. How can you use logic (which is based on using real and compelling data) to judge an event that is illusory in nature? Every statistic imaginable has been, is being or will be manipulated to satisfy whatever picture the manipulators want the masses to believe in. It takes two to tango, one to cry and three to have a party, thus the crowd is as complicit in this game as are the manipulators. The most likely outcome is that the markets will trade higher than anyone expects as long as the trend remains up. Market Update May 31, 2015

Our trend indicator is still bullish, thus we have to view all pullbacks as buying opportunities, even though our guts might feel otherwise.

We know that the nature of genius is to provide idiots with ideas twenty years later. ~ Louis Aragon


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