Stock Share Buybacks Now Bought Out

By David Haggith – Re-Blogged From Great Depression Blog

I have pointed out in previous articles how most of the growth in stocks over the past few years has been due to stock share buybacks. Without this hideous (and at one time illegal) practice, there would have been no bull market over the last few years.

That’s right. Research from no other place than Wall Street, itself, indicates that almost all of the returns since 2009 have been due to stock share buybacks!

Liz Ann Sonders, chief investment strategist and perma-bull at Charles Schwab, recently acknowledged that “… there has not been a dollar added to the U.S. stock market since the end of the financial crisis by retail investors and pension funds….” Since every buyer has a seller (and vice versa), what group or groups had enough of a buying presence to push the S&P 500 14.2% off of the February closing lows? Corporations. (Seeking Alpha)

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Stock Buy Backs Are Nay Votes

cropped-bob-shapiro.jpg   By Bob Shapiro

Stock prices change minute to minute based on investor perceptions and emotion. Investors compare the current price with current – and expected – earnings.

Over the longer term, it is earnings which will determine the trend of a stock’s price history. You would (correctly) expect that if Company A’s earnings rose by 25% a year for 10 years, while earnings for Company B fell by 25% a year, that the price of Company A stock would have gone up dramatically, while the stock of Company B would have fallen drastically.

One metric that investors use to compare the stock of different businesses is the PE Ratio – a simple division of the Price by the Earnings per Share (usually for the last 12 months). As optimistic investors put more money into a particular stock, the price goes up, and with it the PE Ratio also goes up.

Optimism implies that investors expect the future prospects for a business to be good. If business really is going to be good, you would expect the managers to try to put more capital to work. The business can get this capital in several ways.

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