Everyone should be extremely skeptical about the meaning of "buying". While selling is selling, buying generally includes, and therefore is completely dominated by, receiving stock compensation. Unless someone is going through all of the Form 4 filings with the SEC and determining the transactions are coded as private transactions from insiders, meaning they actually ponied up their own money for the shares (was it required they buy them for be on the board?), then general "buy" as form 4 filing is pretty much meaningless. Also, the turnover of shares relative to the number constantly held is important. Some insiders might have what look like large holdings, but when you see the shares come that are coming through from compensation that are being dumped in large volumes all the time it can make one wonder if the holdings are just window dressing, and insurance against regulatory actions ("I had so much wealth with the common share holders").
Just look at how they continued to reduce treasury holdings right into the crises. They were talking about complete collapse while shelving monetary policy and changing their approach to legislative. It reminds me of the HFT firms who provide large pools of liquidity, but unplugged their systems during the flash crash.
Dallas Fed President Richard Fisher said Tuesday he wanted the taper to be double the size it was — in other words, $20 billion instead of $10 billion. The Fed is still buying $75 billion worth of Treasurys- and mortgage-backed bonds each month. "But the important thing for me is that the committee began the process of slowing down the ballooning of our balance sheet, which at year-end exceeded $4 trillion. And we began-and I use that word deliberately, for we have more to do on this front-to clarify our intentions for managing the overnight money rate," he said in a speech to the National Association of Corporate Directors. Fisher, who this year is a voting member of the Federal Open Market Committee, stressed he would "not flinch" from continuing to reduce asset purchase even if a stock market correction were to ensue.
After thinking about buybacks, here are some observations.
1. In 2003 companies were given safe harbor from being accused of manipulating their own share prices so long as they had a proper share repurchasing plan. In 2004 they were double the dollar value of 2003, and by 2007 total dollars on repurchases had grown 7 fold to its peak (2012 is still nearly 5 times the 2003 figure).
2. Companies buying back their shares are reducing 3% of their shares outstanding, and it is supposed to be more than 4% reduction next year.
3. There is clear evidence for firm specific seasonality of buybacks. One example: In the fourth quarter, AutoZone (AZO), repurchases more than twice the average of the previous 3 quarters, and they do this every year. This is because the 4th is their highest earning quarter, and they want to finish the year with an EPS growth bang.
4. Be watchful of firms that have large buyback plans, and executive compensation based only on share price and EPS. AutoZone goes on and on about operational efficiency, and new loan facilities for general operations; its completely obvious that most of the debt is for repurchases, and the EPS growth is mostly from those repurchases. They never put it center stage…why?
5. The SEC sees using repurchases to "manipulate" earnings as a violation of the law, while at the same safe harbor can be obtained relating to price manipulation. How they separate the two is baffling; "manipulation" is dangerously vague, and many firms may get aggressive at their own peril.
6. Treasury shares are not the only place shares can go to. A very dubious dark hole on a balance sheet: The SEC interprets the law as shares repurchased do not have to be shown in treasury shares, disclosed on the balance sheet, or earnings statement.
7. From the SEC website, "Rule 13d-1(a): In calculating the number of outstanding shares, shares repurchased by the issuer to fund a stock option plan are not considered to be outstanding even if the shares are not retired or put in treasury. Section 13(d)(4) of the Exchange Act provides that the class of outstanding shares will not include shares "held by or for the account of the issuer".
8. This doesn't only apply to shares repurchased for stock option plans. Here is another from the SEC website:
9. "Shares that an issuer repurchased do not count as outstanding shares, even if the issuer did not retire the shares or account for them as treasury stock. Section 13(d)(4) of the Exchange Act excludes shares "held by or for the account of the issuer or a subsidiary of the issuer" from the class of outstanding shares. [Sep. 14, 2009]"
10. Looking at AutoZone's total share repurchases, it's easy to tease out that they repurchased over 500,000 shares from their stock option programs over the last year. That number is hidden though, because their repurchasing program is so large. The company essentially spent around 250M dollars repurchasing shares from executive compensation. You can't get that number from the balance sheet, income sheet, or other filings (I've looked very hard at this company).
11. It is supposed to be more difficult to re-float shares without notifying shareholders, or getting approval, since NYSE got rid of the "treasury share exclusion". However, if the shares are hidden away in a compensation plan which had been "approved" by shareholders those shares can float. Example next.
12. Again, picking on AZO, because that is who I know well: They have multiple compensation plans and there might be around 26% of their total market cap tucked away in various share programs. You have to look very close in multiple filings over time to get a picture of it.
13. The IRS recognizes the cost of compensation with the options are actually executed: if a repurchase plan pushes shares high enough over the period of years until the are executed, the company can write up the cost of compensation and recognize the cash flow from taxes in the current period. If you push up the stock price enough, you can recapture all of your executive compensation "costs" (cost of dubious option valuations, see next) in cash flow from taxes in future quarters. In 2011, AZO received 6% of their net profits was equivalently this cash flow.
14. It seems unlikely that any company values their stock options for compensation under the consideration that the company will be buying back half of all outstanding shares over the next 3, 4, or 5 years. Think of the firm which has given the executive suite only two targets, EPS and share price, while authorized a repurchase plan large enough to hit those targets on their own. It is not a stretch of the imagination that regulators could come to the conclusion that companies are understating that they can, and do, affect their share price.
Therefore, the economic benefit of the option award is not only more in dollar value (above the strike) than what was recorded as cost of compensation, but it is more likely to be executed than what was input into option valuations. The result could be seen as an intentional understating of the cost of compensation, while using buybacks to guarantee management targets are hit, options are awarded, and exercised well into the money.
15. Firms that repurchase their shares, as a whole, are outperforming market capitalization indexes partially because when their stock prices increase, the change will be larger than the change in market capitalization by basic math. Look at AZO, which has seen its share price grow over 5 fold, while their market cap little more than doubled over that same time period.
16. Likewise, if demand for some equities is partially, or entirely, being met by issuance of shares, those firms will increase in market cap more than than their share price.
17. Many companies are supplementing, or forgoing on dividend programs with buybacks
18. Following that logic, "Dividend stocks" as an asset class might need a modernization; depending on the truth value of the previous two claims.
19. A company can avoid "diluting operations" by pursuing buybacks; as opposed to the core operation's impact on the bottom line being watered down by chasing capital investments, or acquisitions with decreasing marginal returns. I haven't heard anything about this point of view.
20. Seemingly valid EMH critique: "In the longer run, a relative reduction in reinvestment, new investment forgone, or both, should result in a relative reduction in future returns, which in turn should relatively reduce the value of shares". This is true, if the expectation has to be that the returns foregone are of greater magnitude than the reduction in shares outstanding. It's easy to see that 10% less earnings over 11% less shares is relatively better for the people still holding their shares.
21. Additionally, humans, and many other living creatures, discount the future exponentially, or hyperbolically. We'll discount the potential longer run costs of substantial share repurchases if those repurchases are timely and of a magnitude into the future to negate the discounted opportunity cost.
22. If buybacks are accelerating and are not disclosed until each company's the quarterly reports, how are major indexes keeping up with that data, and why is this not an opportunity to get in front of ETF and other index matching funds (some funds rebalance annually)?
23. The opposite works for loss making firms: A company can give a positive trend in negative EPS simply by floating more shares. -$10 per share turns to -$8 per share simply by floating 25% more shares. Firms like this may appear to be on a positive EPS trend, while doing it a "cheaper" price.
Apple is hardly worth the hair splitting, and here's why: First compare Apple's market capitalization performance to their stock performance. The executive culture there looks like they will be getting paid via stock hold dilution for a long time; considering they are also hoarding incredible amounts of cash from shareholders… that's not a pretty image.
Apple is Hollywood, Google is Silicon Valley. Apple doesn't innovate. They sell the sizzle not the steak. They had an idea (the guts) for a larger phone when everyone was going smaller; creating efficiencies from more integration between software and hardware meant they had a solid 2 year lead for a comparable product. We can romanticize the qualities of manic CEOs, rightfully, but when we do, we lose that these basic plays are what really mattered.
Now its Over. Every idea they've had in the last decade is the same idea in different sizes. Furthermore, as the net gets faster, computational devices will "hollow out". There will be less native software, AND hardware. There is going to be less physical product to compete over/with (per item, not in total). Design will matter more; this part of the story is Apple's bright spot: Lexus not Toyota.
Of course Apple's stock is undervalued. Even if Apple came out with products that doubled their sales, there are diminishing returns in the stock itself. That is the nature of mega-stocks, is it not? The rules of diversification ensure that money managers are unlikely to generate the demand necessary to make them expensive, even when they have substantial growth. Consider the structural problem: If Apple were to run to 1 trillion in the next year (100%), that would be equivalent to nearly 30% of Gross Private Savings, yet their stock would have only doubled. Do you honestly believe it is "likely to very likely" that Apple could triple or quadruple in that time period with that kind of constraint? That would take $500 billion- $1.5 trillion in value from somewhere else; relative undervaluation would become more common amongst other companies. At this point, for a medium term speculator it is probably best to buy a Jan. 2016 $500 call, and sell a $600 call for the same month to fund your venture.
Despite the TV poli-drama, a $2 billion loss carries absolutely no significance to JPM Chase given the size of its asset base. It could be looked at as a rounding error.
Kindly advise Uncle Howie that he is more than welcome back from his Lakers odyssey now that the Knicks have suddenly become relevant again. The modern NBA is a two-star game in a five-player sport. The Knicks now have their two stars, all of which now puts Mike D'Antoni on the hot seat as his Croesus roster just ran him out of excuses.
Howard "Uncle Howie" Eisenberg responds:
People forget about how great Billups is. He was the heart of the Pistons teams that got to the NBA and Eastern finals annually and then lifted the Nuggets from mediocrity (even with Carmello) to the West finals. He is a 90% foul shooter, superior 3-point shooter and great in the clutch. The Knicks are a 3 star team! They should be competitive with anyone– except the Brooklyn Nets who will augment Laker castoffs Farmar and Sasha with all of their #1 draft picks and the rubles of their Russian owner.
August 16, 2010 | 2 Comments
Excuse me, but I have to butt in here.
I would like to clarify that "congressional acts" have been restrictive on the money supply. Read the first two sections here on excess reserves .
All the new debt issued by .gov is counter productive to QE, proportionally.
The Fed is far from running out of ammunition. One example is that a change to this act, in the wiki article, could remove the incentive for banks to store excess reserves at the fed. This would likely force this $800 billion into other assets.
On the subject of being optimistic I would like to remind anyone to study the important components of any decent growth model (the importance of the idea that is total factor productivity from the Cobb-Douglas function, the Solow model, the Romer model). For the very long run, the Principle of Transition Dynamics can provide a patient simpleton with riches. Generally speaking the fastest growing nations will be those with the lowest per capita GDP relative to their ability to acquire capital, investment, institutional reforms, and education. That has been true for a very long time, probably all of human history, and I can find no reason that it will not continue.
It is commonly stated that China has been the wealthiest country for 15 of the last 18 centuries. According to the McKinsey Quarterly, Africa (yes Africa), will have the largest labor force in the world by 2030. Vietnam and many South Asians are reforming. Vietnam's average age is under 25 years old, 28% percent of the population is urban, and they are urbanizing at over 3% a year. They are not alone in these very attractive demographics. Indonesia is arguably more promising in the near term. There is an inconceivable amount to be optimistic about. Would anyone here honestly claim that there has been more at any other point in history to look forward to? The World can and will grow without the United States; our humble pie has been baked and now lies in wait for us on the table.
If we must dwell on the what we are doing to ourselves in the U.S., I would like to point out that our unemployment rate at this trough is still better than that of France or Canada at their peaks. Those are two of the premier developed nations of the world.
Ken Drees comments:
If the incentive to park funds is removed, then a flood of available funds will be gushing into the hands of the public at most likely very low rates due to excess supply. And where does hot money go first–especially if business and housing are still on their collective backs? Stocks! So really why worry about deflation at all when it's obvious that a waiting flood behind a dam could at any time be let go.
You also seem to have optimism about large demographic countries and how our high unemployment mark is much better in respect to other countries. In contrast to this last night on Covuto, Donald Trump was most vocal about taxing chinese goods to the moon and taking all that revenue and paying off the deficit. He cited unfair business practices etc. Cavuto said "trade war," Trump said, "we need to get our best business people into positions of authority in regards to china trade policy and effect a hardline approach– after all the USA built them up to what they are now through buying their goods."
As one who, for a while, based all my market hypotheses on the importance of humor, I could go off for a very long time about it. Specifically related to stocks there is a relationship. However, I think that the study of birds is important to understanding humor (one subject of which I had desired to submit here some time back but immediately lost all my data, models, photos, video, and writings (and my dogs) when my girlfriend discovered my heart was for another girl).
Birds preferring groups, like pigeons, exhibit a useful behavior that I believe is a pointer to the origins of laughter. When observing pigeons for an extended period of time you will notice a repeating pattern. Typically when feeding on the ground, for instance, one pigeon will scare from a sudden movement of another and take flight. Most of the time all frantically join in flight and fly in circles a few times surveying the area for any real threat, and make their way back to where they were. They will do this over and over unless the threat is real, or the incentive for returning has been removed. They become more comfortable with a location with this process. Too much comfort and they start to just merely jump in the air and float back down, because after all, the place is safe. Is this “trusting the comedian”?
I was fortunate enough to be a few feet away from a large group in a park observing this "panic-exertion-calm" cycle as a hawk dove in on us. They were in the air before I even knew what was going on compressing the air around me with their flapping wings. Though I could tell it was different that time. After flapping full speed away over the lake in front of me they made lighting fast cut back. The hawk joined their flock, closing in on one. As fast as they flipped back towards me they reversed back to other direction, no circle here, and flew full speed out of sight. The hawk's target escaped by diving towards to the lake below while the group faked the move and continued away from me. Needless to say they never came back. It wasn't "funny" in the bird's equivalence of the word. I think this may point to the origins of laughter, and may explain its contagious attribute.
As a group creature a large portion of this animal's logic is based on the behavior of those around it. It makes up for what it lacks mentally by grouping. I think this is how they continually rationalize the safety of a location. Instead of incorporating many variables they merely use this “panic exertion calm” pattern as a way of giving them a feeling for the place.
People have a more complex method as we deal with many complex issues. Our intricate social experience necessitates the ability to chuckle off something that threatens our understanding of reality, an understanding we need to act out our roles daily. If someone jumps out and scares us we don't run around for five minutes to get over it, though if it’s scary enough we will. Laughter assists us in rejecting the negative association with the person scaring us and our environment. We logically understand we are safe, but chemically our brains are telling us we are in danger. Laughter gives us the chemical correction we need. If we don't, then an unhealthy sense of anxiety may develop and negatively affect our risk taking abilities (like going to the basement at night).
Many theorists on laughter believe that laughter is largely an ego driven behavior, many times used to assert our superiority over someone else's subhuman mishaps. Surely this occurs, but I believe that this is mostly using laughter to assert the status about ourselves to ourselves. It is one that the most insecure engage in: standing around making fun of people. Even this exposes the real purpose of laughter. This is a tool used to protect the whole person (which includes our sense of physical safety) and their social group. Here it is used in an attempt by someone to protect their own identity from incorporating characteristics of the people they make fun of (real or imagined). They neurologically reject the information (clothing, hairstyle, whatever) being presented to them. Teenagers are the best at this, and they are also the most insecure. They wield this tool cruelly because their self-identity is so fragile. Is a young up trending stock with many volatile swings insecure, but does that mean it is developing properly? I believe this is partly why teenagers and children laugh so much more. They are chemically rejecting certain behaviors or notions while having a good time with the exploration of their logical boundaries (small children).
The relationship of flocking birds returning to a location, laughter being used as a sentinel for what we incorporate as normal behavior for ourselves, social group, and society, and stocks is this: They are all based around a relatively trusted position and threats to that position. The structures of our personalities are obviously not fixed on a Cartesian plane, but they are still a mostly fixed structure at any point in time. Humor or laughter is an agent of plasticity. It seeks to maintain the status quo. It keeps the entropy of the social environment from making us gray. It preserves our direction. It doesn’t mean we whole heartedly reject the information per se. Laughter helps us induce a different view or information while safely maintaining our status quo. This is important. Our trajectory is determined in a symbiotic relationship between the short and long term. What we reject in laughter this time we may embrace the next. A dying rally can look like this.
Stocks have positions and direction of course. There are many ways to measure this. That brings up another subject entirely that I will avoid here as this already much longer than I had hoped. In equities most people are long so a sell off is generally a negative experience to a person holding, and possibly scary. Will the selloff be juxtaposition to the trend? Will it be a joke that only a few “get” at first? Then the understanding spreads to a wall of laughter across the audience? Conversely, will it be swift and unanimous?
Humor has a range of plasticity, or it is the range of which the plasticity occurs. A joke may be so far outside of the range that our logic can simply deal with it by becoming offended or simply recognize it as too much like our reality in a way that is simply not funny. Our social structures of the mind can deal with this incoming, unfunny, proposition. It did not get inside us and cause a problem with differentiation. We can reject it without exerting the correcting laugh that aids our logic in rejecting the small juxtapositions or subtle misunderstandings.
So like jokes, maybe there are ranges in stocks too which are digestible? Maybe it depends on the counter velocity and range relative to the longer trajectory? Maybe there is an escape velocity? Something that ensures it escapes from the constructs which laughter could heal. Escapes to a range where a different response would be needed; a sell off that actually needs to be sold into. Maybe at that point the rally, instead of the sell off is the joke; the frame of reference; the direction in need of preservation. Careful you don’t end up like those pigeons; too comfortable pecking at my seed while the hawk dives in.
What companies do people like? What will they decide is playing a good prank after a selloff occurs? Will a selloff and recovery reinforce their sense of safety or leave it weakened? Likewise for the “over rally”. How will that change the ranges you buy and sell? I dedicated much time building and studying various algorithms around this. It was worth it, though the fruit does not hang low and may not be plentiful if you lack resources as I do.
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