I thought tear-ups were supposed to reduce the notional monster. (At least that was the hope when I edited RISK magazine 15 years ago….) If tear-ups have been happening in the background, the rate of new contract generation has been truly obscene.
Another interesting missive from Wolf. Will it take another three-plus years for the market to crash?
In recent years, market participants have forgotten the lessons of the crash and have re-learned the lesson of the bull market: just buy the effing dip.
Serial blunders in the structure of retirement vehicles, especially Social Security, explained. A long post on Naked Capitalism, well worth reading – including the comments. From the embedded interview of Michael Hudson:
The Federal Reserve has just published statistics saying the average American family, 55 and 60 years old, only has about $14,000 worth of savings. This isn’t nearly enough to retire on. There’s also been a vast looting of pension funds, largely by Wall Street. That’s why the investment banks have had to pay tens of billions of dollars of penalties for cheating pension funds and other investors. The current risk-free rate of return is 0.1% on government bonds, so the pension funds don’t have enough money to pay pensions at the rate that their junk economics advisors forecast. The money that people thought was going to be available for their retirement, all of a sudden isn’t. The pretense is that nobody could have forecast this!
There are so many corporate pension funds that are going bankrupt that the Pension Benefit Guarantee Corporation doesn’t have enough money to bail them out. The PBGC is in deficit. If you’re going to be a corporate raider, if you’re going to be a Governor Romney or whatever and you take over a company, you do what Sam Zell did with the Chicago Tribune: You loot the pension fund, you empty it out to pay the bondholders that have lent you the money to buy out the company. You then tell the workers, “I’m sorry there is nothing there. It’s wiped out.” Half of the employee stock ownership programs go bankrupt. That was already a critique made in the 1950s and ‘60s.
How long will “magical thinking” sustain the rally? No way to say. But when the gears are reversed, it could get ugly…. From Wolf Street:
“There are a million reasons why multiple compression hasn’t started yet, including the scorched-earth monetary policies by central banks around the world and the hope for miracles during the Trump administration.”
Share buybacks, market meth since the financial crisis, have cratered. Wolf Richter highlights just how far corporate America has pulled in its horns:
Share buybacks in the third quarter plunged 28% year-over-year, to $115.6 billion, the biggest year-over-year dive since Q3 2009, according to FactSet. It was the second quarter in a row of declines, from the glorious Q1 this year, when buybacks had reached $168 billion, behind only Q3 2007 before it all came apart.
From that great Q1 2016 to Q3, buybacks plunged 31%, or by $52 billion.
“Only” 362 of the S&P 500 companies bought back shares in Q3, the second lowest number in three years, with Q2 having been the lowest number (blue line in the chart below).
However, the third quarter has historically produced the most buybacks as companies are feverishly trying to put some lip gloss on their annual earnings per share. But not this time.
Share buybacks can be seriously value-destructive, since companies, especially buyback titans in the tech sector like Apple and Microsoft, risk buying shares at prices that are overvalued because of technicals – specifically, shrinking floats – rather than fundamentals.
Several things could be driving this.
Companies might have simply realized that their valuations are not justified by their earnings growth, and so leveraging themselves to the gills to purchase shares has become increasingly bad policy. Since management compensation is typically tied to the earnings per share growth that buybacks goose, this seems unlikely – it would run against human (or at least C-Suite) nature.
Management may be girding for tougher times ahead, protecting their cash flows from rising rates.
Management might have one eye on Trump’s plan to provide a tax “holiday” to allow them to repatriate their overseas cash without paying the full corporate tax on it, and once that happens, they may fire up the buyback machines again.
Nonetheless, the buyback stats – especially given that they fly in the face of management incentives – should be sobering for those who see Dow 20,000 as merely another signpost on the relentless upward march of share valuations.
Even with the buybacks, the S&P 500’s earnings per share has fallen sharply since hitting its historic high of 107.61 in September 2014. It was 87.17 at mid-year 2016, a level not seen since February 2011, according to multipl.com.
Along with investors who could soon endure unpleasant mean reversions in their stock portfolios, the valuation boom has been bad for start-ups trying to get out of the gate. The amount raised via IPOs has fallen sharply in the last two years. Again, from Richter:
Last year, the number of US-listed IPOs had plunged 38% to 170, according to Renaissance Capital. In terms of dollars, only $28.7 billion was raised, down 48% from 2014. By that measure, according to Thomson Reuters, it was the “worst year since 2009.”
But that’s like so 2015.
In 2016, only $24 billion was raised in US-listed IPOs, according to Dealogic – the worst year since 2003. Even during the Financial Crisis, IPOs raised more money than in 2016: $30 billion in 2008 and $27 billion in 2009.
He considers that this may be due, in part, to the outsized valuations of start-ups, and the unfortunate habit that “unicorns” – start-ups with valuations over $1 billion – have of imploding.
Technicals might trump (sorry…) fundamentals for a while longer, but given the new administration’s apparent glee in creating uncertainty, it seems a bad long-term bet. If Trump pushes through a capital gains tax cut, vertiginous investors might reach for their ripcords.