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Beware the ‘Buyback Economy’

141 points by LarryDarrell 8y ago

jonknee 8y ago
I think this is much ado about nothing. Companies get killed for cutting dividends, so doing buybacks are a good way to create value for shareholders in a manner than can be ramped up and down. It's also more tax efficient (I pay taxes on dividends, but don't pay taxes on owning an ever so slightly larger piece of the company). The author picks on Apple, but doesn't mention that Apple has dramatically increased its headcount and R&D spending all the while buying back stock. The truth is Apple is a mature company that is an incredible money making machine, they literally don't have ways to use the profits to make more successful tech products. What else should they do other than reward shareholders? Anyway, if it turns out when I sell my shares they were bought by the company, guess what I'll do with the proceeds? Either spend it (stimulating the economy) or plow it back into other investments. Buyback money doesn't magically disappear, it just cycles what the capital is being used for.
- asdsa5325 8y ago
  Yep, Apple also has tons of cash reserves, so taking on debt doesn't really matter for them.
  - jonknee 8y ago
    And they were taking on debt as a work around for double taxes on foreign income. At crazy low rates because they are not a credit risk whatsoever. It was basic accounting.
- iaabtpbtpnn 8y ago
  They could fix the damn MBP keyboard...
  - jonknee 8y ago
    Maybe they can buy them back!
- Scoundreller 8y ago
  On the tax side, I enjoy being able to time my gains/losses, instead of paying taxes every year. Also, as a foreigner, I have tax withheld by the IRS on US sourced income, but I do not on capital gains (except through my retirement account due to tax treaties).
- aczerepinski 8y ago
  Buybacks often don't creat value for shareholders though. When a stock is trading for more than its intrinsic value, buybacks destroy value. Buffett/Berkshire is literally the only example I can think of where they only buyback shares when prices drop below a certain threshold. Most companies do it regardless of whether it is creating or destroying value, based only on whether they have cash authorized to spend.
  - slededit 8y ago
    You could argue the market is efficient and therefore always trades at the intrinsic value - on average. This view has more following among economists. Although if your CEO happens to also be the most legendary stock picker of our time then I'd let him time the market.
  - jonknee 8y ago
    Who's to say what the intrinsic value is though? If you have an opinion on that you should be trading on it until the value comes in line and at that point buybacks are fine. Buybacks tend to happen at the worst times (boom years) and cut out in recessions which is counter to what you'd want as an investor. Though if you think of it more as an alternative to special dividends it makes more sense.
    - tptacek 8y ago
      They aren't saying there's a clearly readable intrinsic value for any given company, only that there is some intrinsic value, and that prices can float both below and above it. When they do, buybacks destroy value. Obviously, management will always have some argument to support the higher value implied by a buyback (it could hardly be otherwise, unless you think management could with a straight face argue that they should overpay for their own stock). When they guess wrong --- and they're clearly incentivized to guess high --- they cause problems.
      - skybrian 8y ago
        The thing is, if management is wrong about the price, aren't the shareholders wrong too? It doesn't make sense for shareholders to own stock that they think will go down. If they really think that, they should sell. So shareholders should think the stock is either fairly valued or undervalued, almost by definition. Any shareholders who don't sell during a buyback are compensated by owning a larger share of the company at what should be considered a fair or generous price from their point of view. The place where this breaks down is when you believe a company would have a higher intrinsic value, provided that it has sufficient financing. But this isn't based on the stock price; it's based on your theory of how much money you think the company will need. Also, from a non-shareholder's point of view (say, bondholders), a buyback means the company's ownership changed, it has less cash, and they didn't get anything for it.
- TangoTrotFox 8y ago
  The reason buybacks are disconcerting (aside from the debt driven buybacks the article focuses on) is precisely because of what you're saying. Buybacks are often a signal that a company has run out of ideas for what to do with with their money, other than what they're already doing. Especially for a tech company, that's a very bad sign. For instance you refer to Apple as a mature company yet the interesting thing is that today they are basically 'the iPhone company' - making the wide majority of their profits from a product type that didn't exist 11 years ago. And this is a typical pattern with tech and electronics. Times and trends change very quickly and the winner tends to be the company that's on top of the change. If Apple doesn't manage to move beyond the iPhone they will stagnate (which is arguably already happening) and inevitably decline.
- gaius 8y ago
  they literally don't have ways to use the profits to make more successful tech products And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly. If they are really bereft of ideas, spending a few billion on fixing bugs (instead of the animated poop icon) might keep them occupied until inspiration strikes
  - compcoffee 8y ago
    >And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly. But these are subjective measures (to which I happen to agree with you). It's not as if they aren't investing in their products.
useful 8y ago
Weren't loans taken out as a way to avoid taxes pre-2018? You could have profits stored offshore tax-free and take a loan out in the US that generated money for your US operation without incurring taxes. These loans are very low interest rates and companies still don't have incentives to pay them off.
burlesona 8y ago
Apple - and much of the hugely profitable tech sector - is probably a bad example to pick on. It’s worth noting, though, that the corporate leverage the author is concerned about is widespread among all business sectors. Personally I worry a bit that we’ve run into a sort of soft ceiling on the economy where the biggest moneymakers are causing creative destruction via software (Intuit to Accountants, Uber to Cab Drivers, etc) but that we aren’t seeing the kind of widespread real economic growth (ie productivity gains) with these shifts that historically accompanied waves of industrialization. The pie isn’t growing as much as certain players are finding ways to expand their slices of it at the expense of others. Perhaps the above is true, perhaps not, I don’t know. But it seems to me that the entire system we have is predicated on steady macroeconomic “growth” to function. In one way or another we all depend on the stock market to climb about 10% a year so we can retire some day and have savings to live off of, etc. And when that growth isn’t happening via the old mechanism of expanding industry with solid jobs and wage growth, then Wall Street and the White House resort to tricks (new financing mechanisms, tax cuts, spending, etc) to keep the machine running. The sense I get is that since about 2000 we’ve just been playing different games to try and get the old mojo back, and that the nature of such games is to work for a bit and then collapse due to unsustainability. Maybe that’s just my tinfoil hat coming out, I hope I’m wrong.
- Clubber 8y ago
  That's one of the primary reasons we haven't really cut back on military spending since the end of WWII. WWII military spending got us out of the depression, no one knows what will happen if we suddenly or gradually stopped. Considering that, we've been playing some sort of game since at least WWII and probably since FDR got elected.
  - allcentury 8y ago
    I think that's mysnomer https://www.forbes.com/sites/peterferrara/2013/11/30/the-great-depression-was-ended-by-the-end-of-world-war-ii-not-the-start-of-it/ https://www.forbes.com/sites/peterferrara/2013/11/30/the-gre...
    - 8y ago
acover 8y ago
How do bond ETFs work? I thought with stock ETFs they were convertible when you had a large number. This would keep the etf price in line with it's underlying assets. The issue with bond ETFs is I don't think the underlying bond is exchange traded. How would the conversion work? I ask because this article has reminded me that I should probably diversify away from bond ETFs into GICs
- mabbo 8y ago
  My understanding is that there are markets where bonds can be bought and sold. An ETF of bonds is just a large fund holding a set of bonds and trying to keep track of their current value. Since you know what the return on the bond is, at what price, interest rate and time, you can very easily assess the current value of a bond, especially compared to what you might make if you just bought GICs at the current rate. An interest rate hike today lowers the sell price of bonds purchased at yesterday's rate.
  - acover 8y ago
    I think the market is still brokers talking. There is no centralized exchange. https://www.quora.com/Why-isn’t-there-a-bond-exchange-equivalent-to-the-NYSE https://www.quora.com/Why-isn’t-there-a-bond-exchange-equiva...
- dboreham 8y ago
  A bond ETF doesn't hold all the underlying bonds. Someone picks a subset and hopes they track the index.
  - acover 8y ago
    That can't be right. Vanguard lists the bonds that are in the ETF.
    - tripletao 8y ago
      It is right. Most bond ETFs (and some stock ETFs) buy only a statistical sample of the index, not the whole thing. It usually works fine. > For bond index ETFs, the sheer number of issues in their target indexes and the illiquid nature of many of these issues make full replication of the benchmarks prohibitive. Instead, most bond index ETFs replicate their benchmarks through a sampling approach. > Managers create samples that aim to match the fundamental characteristics of the bond indexes across such areas as: [...] https://advisors.vanguard.com/VGApp/iip/site/advisor/etfcenter/article/ETF_HowETFIndexed https://advisors.vanguard.com/VGApp/iip/site/advisor/etfcent...
baybal2 8y ago
Stupid move - tax cut was a perfect moment to reduce your debts. These guys did the opposite
- bokstavkjeks 8y ago
  Debt can be a strategic tool for a company. They want to maintain a certain debt-to-equity ratio as eliminating debt would probably be more expensive in the long run than maintaining that ratio. The ratio is, of course, not set in stone and is rather industry specific. The short, sweet, and overly simplified version is that debt provides tax shields and liquidity now. $100 now can be worth more than $120 in five years, so most companies are okay with a certain amount of debt.
  - baybal2 8y ago
    But not now. Find a major company that is not critically overleveraged thanks to near net negative interest rates few years ago. Now there is a chance that effective rates will go all the way to eighties era numbers next decade, and the next debt crisis may also be close.
bb88 8y ago
Mods, title should reflect the actual title of the piece: "Beware the 'mother of all credit bubbles.'"
mathattack 8y ago
When companies cease to have productive things to do with money, it’s time to return it to shareholders who can invest it elsewhere. In principle this is the natural way of the word. This is complicated by tax laws which allow companies to write off debt. This helps create lower risk debt capital but increases the risk of the remaining equity. Not the end of the world. Just invest in both. I’m somewhat concerned by companies borrowing too much and dying, but creative destruction helps new entrants.
rectang 8y ago
Since buybacks increase concentration of ownership, do they tend to combat the short-termism of uninvolved, absentee shareholders? Or is there no consistent pattern?
ggg9990 8y ago
Crazy to think that just $210 billion can buy you 480 companies in the S&P 500. China could easily do that.
- tedsanders 8y ago
  It can't. $210 billion can buy you any one of 480 companies in the S&P 500. Buying all of the S&P 500 would take roughly $24 trillion. The article's wording on that point was very ambiguous and misleading. I had the same reaction! :)
  - ggg9990 8y ago
    Ah ok. Makes more sense.
methodover 8y ago
> least a third of the shares are being repurchased with borrowed money What?! That is insane. Right? Like I know I’m just a lowly programmer who doesn’t know jack all about finance, but I thought the whole point of a buy back was that your public company was flush with cash and instead of spending it on capital expenses (am I using that word right? I mean things that grow the business, like say, Facebook buying Instagram) you spent it on buying stock from shareholders. What the heck is the point of a buy back purchase with debt?! I really don’t understand. If the article explains it and I missed it, it would be awesome to have it pointed out.
- iamforreal 8y ago
  I'm extra confused because I thought in some sense stock was the collateral (or at least a component of collateral) for said debt.
- marticode 8y ago
  Sometimes the company can make better use of it's existing capital by using debt (especially when debt is cheap as it is now). This means it has more capital than needed - so it returns that capital to shareholders using buybacks and finances itself through issuing debt.
- roenxi 8y ago
  For the record, I also think it is an insane practice and would personally take the buyback as an opportunity to sell. That being said, here is a view from which it might make sense: 0) Assume that there is an optimum debt/equity ratio for a company (no idea how it shakes out in practice, but there is probably some rule or theory that suggests an optimum debt level, like the Kelly Criterion suggests an optimum quantity to risk compared to available capital). 1) The accountants have calculated that due to the difference between your return on capital and the market interest rate, you should have borrowings equal to 20% of your shareholders equity. 2) The company's shareholder equity grows organically because it is doing well. 3) The company wants a higher debt/capital ratio, and investors are demanding some profit be returned to them, so borrow the dividend money directly and gives it out as a share buyback, optimising the debt/equity ratio at the same time. This is an administratively neat way of getting the money for the buyback together in one place. There is a fuzzy spot in the argument in that you are returning money to investors at the same time as your return on capital is better than the market, but stranger decisions get made. CEOs and investors don't complain about high stock prices.
tedsanders 8y ago
My thoughts on the content of the article: (1) According to Ray Dalio's theory of long-term credit cycles, we should be healthiest in the decade after a credit crunch. (2) When the article says that Apple could use its $210B to buy the bottom 480 companies of the S&P 500, it means any one of the bottom 480 companies. As worded, that sentence is ambiguous at best and deceptive at worst. (3) I don't understand the author's point that companies with the most buybacks saw their value go down the most. Like, isn't that exactly what you would expect? If Apples gives $210B to shareholders, now Apple is worth $210B less. (4) No evidence is given for the claim that all of these companies intended to use their buybacks to prop up their stock price. I doubt any evidence exists. Quite possibly, crummy companies like Sears are buying back stock because returning money to shareholders is better than building new Sears stores. (5) Does it really matter that much if claims on companies' future profits are shifting from risky equity to risky bonds? I honestly don't know. (6) The article argues that the rise of bond ETFs over the past decade ($15B to $300B, 20x) shows the rise of bonds. But, honestly, most of that comes from the rise of ETFs, not the rise of bonds. Over the same time period, the total ETF market, which is mostly equities, grew from $700B in 2008 to $4,600B in 2017. (7) A lot these 'one decade ago' statistics are hard to interpret, since one of the endpoints was in the middle of a terrible financial crisis. (8) The numbers on household credit card debt seem very tragic. I wish I understood more how people use credit cards.
- jnbiche 8y ago
  > I wish I understood more how people use credit cards. I'll give you the low-down: many Americans don't make enough money to save up money for medical emergencies, and other emergencies, so when one of those happens, they reach for their credit card. Yes, it's a bad idea, but when they're a few months out of the hospital, possibly still sick, then it's easy to panic when getting repeated calls from debt collectors and pull out their credit cards. Same thing happens with auto repairs and house repairs. And many such incidental expenses. As a software developer making over $100,000/year, the instinct of many people here on HN is to say, "why the hell don't they save more?". But when you're making $30,000/year and raising a couple of kids, it's really not possible to save money in most cities and their suburbs. Sure, they could save up more money with that income in a cheap rural area or small town, but then there's no jobs. Saving up enough money for medical and other emergencies is much harder to do for the average lower- to lower-middle class American that many people on HN might realize.
fierro 8y ago
Can someone give a concise ELI5 summary of this? I lack some of the context tomfukly understand this article
wfbarks 8y ago
Household debt is not at record highs... Auto Loans and Student Loans are getting more problematic, but no reason to go all chicken little. Tend to agree generally that we are approaching the apex of the cycle, and that share buybacks may be creating a sort of short term thermal.
- vivafrance 8y ago
  > Household debt is not at record highs Ummm, yes it is: https://www.cnbc.com/2018/02/13/total-us-household-debt-soars-to-record-above-13-trillion.html https://www.cnbc.com/2018/02/13/total-us-household-debt-soar...
  - wfbarks 8y ago
    Meh... You have your facts and I have mine... https://fred.stlouisfed.org/series/TDSP https://fred.stlouisfed.org/series/TDSP and https://fred.stlouisfed.org/series/HDTGPDUSQ163N https://fred.stlouisfed.org/series/HDTGPDUSQ163N
    - vivafrance 8y ago
      Your facts are measuring something different. The first measures the service payments. The second measures debt to gdp. Talk about moving the goal post.
aurelien 8y ago
Sound like this website make so much pornshit on your privacy that GRPD does not let you access to it. It should be a fucking communist stuff that spy american pure people.
test6554 8y ago
When you know you are near the edge of another economic cycle, why not focus in short-term decisions? Large capital expenditures just before a recession doesn’t really make much sense. Better to board up the windows than expand in this context.

141 points by LarryDarrell 8y ago

I think this is much ado about nothing. Companies get killed for cutting dividends, so doing buybacks are a good way to create value for shareholders in a manner than can be ramped up and down. It's also more tax efficient (I pay taxes on dividends, but don't pay taxes on owning an ever so slightly larger piece of the company). The author picks on Apple, but doesn't mention that Apple has dramatically increased its headcount and R&D spending all the while buying back stock. The truth is Apple is a mature company that is an incredible money making machine, they literally don't have ways to use the profits to make more successful tech products. What else should they do other than reward shareholders? Anyway, if it turns out when I sell my shares they were bought by the company, guess what I'll do with the proceeds? Either spend it (stimulating the economy) or plow it back into other investments. Buyback money doesn't magically disappear, it just cycles what the capital is being used for.

asdsa5325 8y ago
Yep, Apple also has tons of cash reserves, so taking on debt doesn't really matter for them.
- jonknee 8y ago
  And they were taking on debt as a work around for double taxes on foreign income. At crazy low rates because they are not a credit risk whatsoever. It was basic accounting.
iaabtpbtpnn 8y ago
They could fix the damn MBP keyboard...
- jonknee 8y ago
  Maybe they can buy them back!
Scoundreller 8y ago
On the tax side, I enjoy being able to time my gains/losses, instead of paying taxes every year. Also, as a foreigner, I have tax withheld by the IRS on US sourced income, but I do not on capital gains (except through my retirement account due to tax treaties).
aczerepinski 8y ago
Buybacks often don't creat value for shareholders though. When a stock is trading for more than its intrinsic value, buybacks destroy value. Buffett/Berkshire is literally the only example I can think of where they only buyback shares when prices drop below a certain threshold. Most companies do it regardless of whether it is creating or destroying value, based only on whether they have cash authorized to spend.
- slededit 8y ago
  You could argue the market is efficient and therefore always trades at the intrinsic value - on average. This view has more following among economists. Although if your CEO happens to also be the most legendary stock picker of our time then I'd let him time the market.
- jonknee 8y ago
  Who's to say what the intrinsic value is though? If you have an opinion on that you should be trading on it until the value comes in line and at that point buybacks are fine. Buybacks tend to happen at the worst times (boom years) and cut out in recessions which is counter to what you'd want as an investor. Though if you think of it more as an alternative to special dividends it makes more sense.
  - tptacek 8y ago
    They aren't saying there's a clearly readable intrinsic value for any given company, only that there is some intrinsic value, and that prices can float both below and above it. When they do, buybacks destroy value. Obviously, management will always have some argument to support the higher value implied by a buyback (it could hardly be otherwise, unless you think management could with a straight face argue that they should overpay for their own stock). When they guess wrong --- and they're clearly incentivized to guess high --- they cause problems.
    - skybrian 8y ago
      The thing is, if management is wrong about the price, aren't the shareholders wrong too? It doesn't make sense for shareholders to own stock that they think will go down. If they really think that, they should sell. So shareholders should think the stock is either fairly valued or undervalued, almost by definition. Any shareholders who don't sell during a buyback are compensated by owning a larger share of the company at what should be considered a fair or generous price from their point of view. The place where this breaks down is when you believe a company would have a higher intrinsic value, provided that it has sufficient financing. But this isn't based on the stock price; it's based on your theory of how much money you think the company will need. Also, from a non-shareholder's point of view (say, bondholders), a buyback means the company's ownership changed, it has less cash, and they didn't get anything for it.
TangoTrotFox 8y ago
The reason buybacks are disconcerting (aside from the debt driven buybacks the article focuses on) is precisely because of what you're saying. Buybacks are often a signal that a company has run out of ideas for what to do with with their money, other than what they're already doing. Especially for a tech company, that's a very bad sign. For instance you refer to Apple as a mature company yet the interesting thing is that today they are basically 'the iPhone company' - making the wide majority of their profits from a product type that didn't exist 11 years ago. And this is a typical pattern with tech and electronics. Times and trends change very quickly and the winner tends to be the company that's on top of the change. If Apple doesn't manage to move beyond the iPhone they will stagnate (which is arguably already happening) and inevitably decline.
gaius 8y ago
they literally don't have ways to use the profits to make more successful tech products And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly. If they are really bereft of ideas, spending a few billion on fixing bugs (instead of the animated poop icon) might keep them occupied until inspiration strikes
- compcoffee 8y ago
  >And yet they haven’t updated their pro line since 2012. And the quality of OSX is slipping badly. But these are subjective measures (to which I happen to agree with you). It's not as if they aren't investing in their products.

useful 8y ago

Weren't loans taken out as a way to avoid taxes pre-2018? You could have profits stored offshore tax-free and take a loan out in the US that generated money for your US operation without incurring taxes. These loans are very low interest rates and companies still don't have incentives to pay them off.

burlesona 8y ago

Apple - and much of the hugely profitable tech sector - is probably a bad example to pick on. It’s worth noting, though, that the corporate leverage the author is concerned about is widespread among all business sectors. Personally I worry a bit that we’ve run into a sort of soft ceiling on the economy where the biggest moneymakers are causing creative destruction via software (Intuit to Accountants, Uber to Cab Drivers, etc) but that we aren’t seeing the kind of widespread real economic growth (ie productivity gains) with these shifts that historically accompanied waves of industrialization. The pie isn’t growing as much as certain players are finding ways to expand their slices of it at the expense of others. Perhaps the above is true, perhaps not, I don’t know. But it seems to me that the entire system we have is predicated on steady macroeconomic “growth” to function. In one way or another we all depend on the stock market to climb about 10% a year so we can retire some day and have savings to live off of, etc. And when that growth isn’t happening via the old mechanism of expanding industry with solid jobs and wage growth, then Wall Street and the White House resort to tricks (new financing mechanisms, tax cuts, spending, etc) to keep the machine running. The sense I get is that since about 2000 we’ve just been playing different games to try and get the old mojo back, and that the nature of such games is to work for a bit and then collapse due to unsustainability. Maybe that’s just my tinfoil hat coming out, I hope I’m wrong.

Clubber 8y ago
That's one of the primary reasons we haven't really cut back on military spending since the end of WWII. WWII military spending got us out of the depression, no one knows what will happen if we suddenly or gradually stopped. Considering that, we've been playing some sort of game since at least WWII and probably since FDR got elected.
- allcentury 8y ago
  I think that's mysnomer https://www.forbes.com/sites/peterferrara/2013/11/30/the-great-depression-was-ended-by-the-end-of-world-war-ii-not-the-start-of-it/ https://www.forbes.com/sites/peterferrara/2013/11/30/the-gre...
  - 8y ago

acover 8y ago

How do bond ETFs work? I thought with stock ETFs they were convertible when you had a large number. This would keep the etf price in line with it's underlying assets. The issue with bond ETFs is I don't think the underlying bond is exchange traded. How would the conversion work? I ask because this article has reminded me that I should probably diversify away from bond ETFs into GICs

mabbo 8y ago
My understanding is that there are markets where bonds can be bought and sold. An ETF of bonds is just a large fund holding a set of bonds and trying to keep track of their current value. Since you know what the return on the bond is, at what price, interest rate and time, you can very easily assess the current value of a bond, especially compared to what you might make if you just bought GICs at the current rate. An interest rate hike today lowers the sell price of bonds purchased at yesterday's rate.
- acover 8y ago
  I think the market is still brokers talking. There is no centralized exchange. https://www.quora.com/Why-isn’t-there-a-bond-exchange-equivalent-to-the-NYSE https://www.quora.com/Why-isn’t-there-a-bond-exchange-equiva...
dboreham 8y ago
A bond ETF doesn't hold all the underlying bonds. Someone picks a subset and hopes they track the index.
- acover 8y ago
  That can't be right. Vanguard lists the bonds that are in the ETF.
  - tripletao 8y ago
    It is right. Most bond ETFs (and some stock ETFs) buy only a statistical sample of the index, not the whole thing. It usually works fine. > For bond index ETFs, the sheer number of issues in their target indexes and the illiquid nature of many of these issues make full replication of the benchmarks prohibitive. Instead, most bond index ETFs replicate their benchmarks through a sampling approach. > Managers create samples that aim to match the fundamental characteristics of the bond indexes across such areas as: [...] https://advisors.vanguard.com/VGApp/iip/site/advisor/etfcenter/article/ETF_HowETFIndexed https://advisors.vanguard.com/VGApp/iip/site/advisor/etfcent...

baybal2 8y ago

Stupid move - tax cut was a perfect moment to reduce your debts. These guys did the opposite

bokstavkjeks 8y ago
Debt can be a strategic tool for a company. They want to maintain a certain debt-to-equity ratio as eliminating debt would probably be more expensive in the long run than maintaining that ratio. The ratio is, of course, not set in stone and is rather industry specific. The short, sweet, and overly simplified version is that debt provides tax shields and liquidity now. $100 now can be worth more than $120 in five years, so most companies are okay with a certain amount of debt.
- baybal2 8y ago
  But not now. Find a major company that is not critically overleveraged thanks to near net negative interest rates few years ago. Now there is a chance that effective rates will go all the way to eighties era numbers next decade, and the next debt crisis may also be close.

bb88 8y ago

Mods, title should reflect the actual title of the piece: "Beware the 'mother of all credit bubbles.'"

mathattack 8y ago

When companies cease to have productive things to do with money, it’s time to return it to shareholders who can invest it elsewhere. In principle this is the natural way of the word. This is complicated by tax laws which allow companies to write off debt. This helps create lower risk debt capital but increases the risk of the remaining equity. Not the end of the world. Just invest in both. I’m somewhat concerned by companies borrowing too much and dying, but creative destruction helps new entrants.

rectang 8y ago

Since buybacks increase concentration of ownership, do they tend to combat the short-termism of uninvolved, absentee shareholders? Or is there no consistent pattern?

ggg9990 8y ago

Crazy to think that just $210 billion can buy you 480 companies in the S&P 500. China could easily do that.

tedsanders 8y ago
It can't. $210 billion can buy you any one of 480 companies in the S&P 500. Buying all of the S&P 500 would take roughly $24 trillion. The article's wording on that point was very ambiguous and misleading. I had the same reaction! :)
- ggg9990 8y ago
  Ah ok. Makes more sense.

methodover 8y ago

> least a third of the shares are being repurchased with borrowed money What?! That is insane. Right? Like I know I’m just a lowly programmer who doesn’t know jack all about finance, but I thought the whole point of a buy back was that your public company was flush with cash and instead of spending it on capital expenses (am I using that word right? I mean things that grow the business, like say, Facebook buying Instagram) you spent it on buying stock from shareholders. What the heck is the point of a buy back purchase with debt?! I really don’t understand. If the article explains it and I missed it, it would be awesome to have it pointed out.

iamforreal 8y ago
I'm extra confused because I thought in some sense stock was the collateral (or at least a component of collateral) for said debt.
marticode 8y ago
Sometimes the company can make better use of it's existing capital by using debt (especially when debt is cheap as it is now). This means it has more capital than needed - so it returns that capital to shareholders using buybacks and finances itself through issuing debt.
roenxi 8y ago
For the record, I also think it is an insane practice and would personally take the buyback as an opportunity to sell. That being said, here is a view from which it might make sense: 0) Assume that there is an optimum debt/equity ratio for a company (no idea how it shakes out in practice, but there is probably some rule or theory that suggests an optimum debt level, like the Kelly Criterion suggests an optimum quantity to risk compared to available capital). 1) The accountants have calculated that due to the difference between your return on capital and the market interest rate, you should have borrowings equal to 20% of your shareholders equity. 2) The company's shareholder equity grows organically because it is doing well. 3) The company wants a higher debt/capital ratio, and investors are demanding some profit be returned to them, so borrow the dividend money directly and gives it out as a share buyback, optimising the debt/equity ratio at the same time. This is an administratively neat way of getting the money for the buyback together in one place. There is a fuzzy spot in the argument in that you are returning money to investors at the same time as your return on capital is better than the market, but stranger decisions get made. CEOs and investors don't complain about high stock prices.

tedsanders 8y ago

My thoughts on the content of the article: (1) According to Ray Dalio's theory of long-term credit cycles, we should be healthiest in the decade after a credit crunch. (2) When the article says that Apple could use its $210B to buy the bottom 480 companies of the S&P 500, it means any one of the bottom 480 companies. As worded, that sentence is ambiguous at best and deceptive at worst. (3) I don't understand the author's point that companies with the most buybacks saw their value go down the most. Like, isn't that exactly what you would expect? If Apples gives $210B to shareholders, now Apple is worth $210B less. (4) No evidence is given for the claim that all of these companies intended to use their buybacks to prop up their stock price. I doubt any evidence exists. Quite possibly, crummy companies like Sears are buying back stock because returning money to shareholders is better than building new Sears stores. (5) Does it really matter that much if claims on companies' future profits are shifting from risky equity to risky bonds? I honestly don't know. (6) The article argues that the rise of bond ETFs over the past decade ($15B to $300B, 20x) shows the rise of bonds. But, honestly, most of that comes from the rise of ETFs, not the rise of bonds. Over the same time period, the total ETF market, which is mostly equities, grew from $700B in 2008 to $4,600B in 2017. (7) A lot these 'one decade ago' statistics are hard to interpret, since one of the endpoints was in the middle of a terrible financial crisis. (8) The numbers on household credit card debt seem very tragic. I wish I understood more how people use credit cards.

jnbiche 8y ago
> I wish I understood more how people use credit cards. I'll give you the low-down: many Americans don't make enough money to save up money for medical emergencies, and other emergencies, so when one of those happens, they reach for their credit card. Yes, it's a bad idea, but when they're a few months out of the hospital, possibly still sick, then it's easy to panic when getting repeated calls from debt collectors and pull out their credit cards. Same thing happens with auto repairs and house repairs. And many such incidental expenses. As a software developer making over $100,000/year, the instinct of many people here on HN is to say, "why the hell don't they save more?". But when you're making $30,000/year and raising a couple of kids, it's really not possible to save money in most cities and their suburbs. Sure, they could save up more money with that income in a cheap rural area or small town, but then there's no jobs. Saving up enough money for medical and other emergencies is much harder to do for the average lower- to lower-middle class American that many people on HN might realize.

fierro 8y ago

Can someone give a concise ELI5 summary of this? I lack some of the context tomfukly understand this article

wfbarks 8y ago

Household debt is not at record highs... Auto Loans and Student Loans are getting more problematic, but no reason to go all chicken little. Tend to agree generally that we are approaching the apex of the cycle, and that share buybacks may be creating a sort of short term thermal.

vivafrance 8y ago
> Household debt is not at record highs Ummm, yes it is: https://www.cnbc.com/2018/02/13/total-us-household-debt-soars-to-record-above-13-trillion.html https://www.cnbc.com/2018/02/13/total-us-household-debt-soar...
- wfbarks 8y ago
  Meh... You have your facts and I have mine... https://fred.stlouisfed.org/series/TDSP https://fred.stlouisfed.org/series/TDSP and https://fred.stlouisfed.org/series/HDTGPDUSQ163N https://fred.stlouisfed.org/series/HDTGPDUSQ163N
  - vivafrance 8y ago
    Your facts are measuring something different. The first measures the service payments. The second measures debt to gdp. Talk about moving the goal post.

aurelien 8y ago

Sound like this website make so much pornshit on your privacy that GRPD does not let you access to it. It should be a fucking communist stuff that spy american pure people.

test6554 8y ago

When you know you are near the edge of another economic cycle, why not focus in short-term decisions? Large capital expenditures just before a recession doesn’t really make much sense. Better to board up the windows than expand in this context.