December 2, 2022

Where Have All The Stock Buybacks Gone?

Given the magnitude of the stock markets decline, one would think that there would be major announcements from companies announcing stock buybacks.  I recall after the crash of 1987 when numerous companies announced major stock buyback programs in an attempt to inspire confidence and shore up stock prices.

As reported in Barrons this week,  stock buybacks declined by 90% from last year during the latest 10 day period, this despite the fact that the average stock has declined by around 50%.  So one may certainly be inclined to wonder why corporate America would be heavily buying back their own stock as the market was at all time highs but not now when, arguably, the stock is a better buy due to price declines.  Maybe some shareholder will ask this question of management at the next annual stockholders meeting.  Perhaps a better time to have asked about stock buybacks was when corporate management was spending hundreds of billions to buyback stock when times were good.

I have never been a fan of stock buybacks for these reasons:

– studies have shown that over time, share price performance of companies buying back stock does not exceed those of companies that do not repurchase shares.

-if management cannot intelligently invest funds back into their core business at a greater return than the cost of capital, then they should instead pay dividends to the shareholders, who will at least have something to show for their investment, since as stated above, stock buybacks do not lead to share price gains.   Microsoft was one of the few major corporations that actually paid a substantial dividend  to shareholders a few years back instead of repurchasing stock.

-unless a company is debt free, would it not have been better to have paid down debt instead of dissipating funds buying back stock?   As mentioned in a previous post, GE spent billions on stock buybacks at high prices and now has to borrow money at 10% rates.   I don’t see how this makes sense as a long term strategy.

-how many of the companies buying back stock have their long term compensation plans and bonuses tied to the EPS performance?  Quite a few I would imagine, which makes the decision to buy back stock all the easier since it directly increases management’s pay while the shareholders get nothing.  (Buying back stock decreases the outstanding shares used in computing the earnings per share, so a stock buyback will serve to increase the reported EPS.)

-how hard is it to conceive of the possibility that someday, markets will decline and cash will be dear, so why not pay down debt or simply increase your cash holdings to be used in an opportunistic manner at some point in the future?  Apparently, not too many members of corporate America ever thought about this or else we would now be hearing about a lot of stock buybacks and company buyouts.

-Exxon Mobil has spent billions buying back stock as their oil reserves shrink year after year.  With prices of oil and gas companies selling for a fraction of the price of a year ago, why are they not opportunistically reinvesting in their business by buying cheap oil and gas reserves via cash acquisitions?

-Merrill Lynch announcing a $6 billion stock buyback in 2006 – one for the history books of poor timing and inept management, although it may be topped by Merrill’s prospective owner, Bank of America, who despite needing taxpayers funds from the TARP, decides to invest $7 billion in the China Construction Bank.  I think BAC has a real problem here and the stock price reflects management’s decision making.  BAC’s
“investment” in China, GM executives flying on their plush corporate jet to Washington to beg for taxpayer funds – I think the pattern here is part of the reason for the economic crisis that we are in.

My conclusion is that a shareholder should carefully evaluate an investment in any company engaging in major stock repurchase plans.

Treasury Officials Announce Mortgage Holiday

News Release: Sometime in 2010.

The United States Treasury Secretary is expected to release details today of the Government’s plan to suspend for one year all payments due on mortgages secured by single family residences.  The Government announced that it was taking this action due to unprecedented conditions in the economy and record numbers of mortgage delinquencies.   With close to half of all mortgages in arrears, a jobless rate approaching 20% and retail sales collapsing by double digits for the third consecutive year, the latest government move to boost the economy was applauded by analysts as the best direct method of putting funds in the pocket of cash starved consumers.

Government officials noted that since most of the mortgages affected had already been purchased or guaranteed by the US Government, there would be no direct cost to the taxpayer.  Analysts noted that this latest move was necessary after a long series of loan modifications for many borrowers had failed due to the continued decline in housing prices and incomes.  Brushing aside suggestions that this program was unfair to those who had no mortgage debt, Treasury officials stated that the program was initiated to help those most in need and that those without mortgages might be eligible for funds under the latest rebate stimulus plan.

In response to questions as to whether or not the Mortgage Holiday Plan might be extended beyond one year, Treasury officials stated that the Government would do everything in its power to assure that affordable housing was available to every citizen and that every measure would be taken to prevent homeowners from losing their homes due to unaffordable payments.

The Treasury Secretary noted that while many sovereign nations had become insolvent due to the ongoing financial crisis, the United States remains “fiscally strong”.

So there you go; congratulations to the Federal Reserve and our fiscally imprudent leaders who have brought this nation to the brink of economic collapse.

    American Express – A Single Digit Stock?

    Despite the horrendous 72% sell off in American Express this year, I would still not be a buyer at the recent price of $19 for the following reasons.

    From my personal experience in the mortgage business, I have seen many people turn to their credit cards once the home equity cash out loans were no longer available to them.  The credit cards were used to maintain a now unsustainable life style or to bridge the gap between income and living expenses.  Now that credit card lines are being reduced or simply maxed out, the last option for many people is now closed.  Since AXP gets around half of their revenue from the fee charged to merchants when a credit card is used, this income is obviously going to see a reduction.

    Moody’s recently cut AXP’s investment grade by one notch to A2 (still very respectable) but the trend is clear.  Moody’s is expecting the recent earnings decline at AXP to continue, especially in view of the broad economic weakness and overleveraged consumer.

    The fact that AXP decided to request $3.5 billion in capital from the Treasury’s TARP fund also raises many red flags – if AXP wasn’t expecting further problems in its basic business they would not be requesting theses funds.  In any event, AXP needs to refinance approximately $24 billion of debt over the next year; if the credit card securitization window remains closed, AXP may be back in line very soon for another TARP injection.

    AXP expanded its business during the peak of the credit boom, expanding their credit card loans by some $26 billion over the past 4 years – an increase of 68%.  Timing is everything and they definitely got this one wrong, possibly by assuming that an overextended credit card customer would simply pay off his unmanageable credit card debt with his next cash out mortgage refinance.  Unfortunately for AXP, the days of constantly borrowing more money to pay off past borrowings has come to a halt.

    Also, extremely unfortunate for AXP is the consumer attitude that debt that cannot be easily paid off should be easily forgiven, either by the company that lent the money or the bankruptcy courts.  If AXP needs proof of this, they can check out the Bank of America, Citibank, JP Morgan etc loan modification programs for mortgages.  At a time when collarteralized debt is being forgiven, unsecured credit card debt will be easily walked away from as well, as evidenced by the 100,000 plus (and increasing) personal bankruptcy filings each month.  Overleveraged consumers forced to borrow for years to bridge the gap between incomes and expenses will no doubt have no trouble being approved for a Chapter 7 debt liquidation instead of the Chapter 13 payment workout resulting in zero recoveries for AXP on outstanding credit card debt.

    If you apply conventional, historical valuation metrics to American Express, the stock looks ridiculously cheap.   Unfortunately, I don’t thinkthe present economic disaster is going to end anytime soon and if that is the case, AXP will be facing a bleak future not only in its future earnings but also in its ability to refinance their 6/1 leveraged balance sheet.

    Some Borrowers Will Need Very Large Loan Modifications

    As discussed in a previous post, Bank of America agreed with the state attorneys general to offer  concessions to 390,000 sub prime and pay option arm borrowers by reducing both the principal owed and/or the interest rate to a level that allows these borrowers to have a an “affordable and sustainable” monthly mortgage payment.   An affordable and sustainable payment was determined to be a mortgage payment (including taxes and insurance) that would not exceed 34% of gross monthly income.   With this agreement apparently setting a standard for future concessions to homeowners, consider some recent mortgage transactions/applications that I have seen.

    • Woman wants to refinance her Connecticut home which she bought in early 2006.  The home today would probably sell for no more than $260,000.  Home was purchased for $305,000 with 95% financing; the current interest rate is at 11.625% and she owes $285,000.  The negative equity is only $25,000.  Borrower has a gross monthly income of $3780 per month and her current monthly payment of principal, interest, taxes and insurance is $3682 giving her a debt ratio of 97%.   She is currently in arrears on the mortgage and obviously not capable of making the payment.   In order for her payment to become “affordable and sustainable”  with a 34% debt to income ratio, the lender would have to reduce her loan balance to $158,000 with an interest rate of 1%.

    If the home owner gets this deal, not only would her payment become affordable, she could also sell the house and reap a gain of $102,000.  The applicant’s income is about the same today as it was when she purchased the home, so there was no drastic decline in income.  Obviously, this woman should have never been approved for a mortgage in the first place; both the bank and borrower knew this.

    • A self employed carpenter applied for a mortgage to purchase a home for $185,000.  Applicant has no credit score since he pays for everything “in cash”.  The yearly income reported on his tax return for the past two years averaged $5500.  When I told the applicant that he did not qualify he became indignant and arrogantly proclaimed that his bank told him they would approve him; I wished him good luck.  This guy hasn’t been reading the papers lately but the days of borrowing based on what you say your income is are over.   The applicant understood his situation; his income averages $458 gross per month according to his tax return and the monthly mortgage payment with taxes and insurance would have been at least $1650 per month which he insisted he could afford.  I would say that the IRS should conduct more audits of self employed individuals.
    • Borrower with very good credit and working two jobs has a sub prime mortgage and applies for a lower rate under the FHA mortgage program.   Borrower gets approved with with a debt to income ratio of 56%.  At this point, instead of bringing his lunch to work everyday, he might be better off to stop paying on his mortgage and  ask his bank for a loan modification once he is delinquent.  The interest rate would need to be reduced  from 6.25% to 1% which would put him at the recommended 34% DTI.  Although most loan modifications are currently being offered only to sub prime and pay option arm customers, I am certain that in the name of equitable treatment, the offer will expand to include the multitudes of other borrowers with a debt ratio over 34% .  Why discriminate against better credit borrowers?
    • Borrower with fair credit purchases a home with 100% FHA financing with the help of a down payment assistance program.   Borrowers debt ratio at time of approval was 48%, which is extremely high and not affordable or sustainable for very long.  Why is the FHA approving loans at this ridiculous debt ratio when the state attorneys general are forcing Countrywide to modify loans to a debt ratio of 34%?  I suggest that a state attorney general be named Head Underwriter for the FHA.

    I could go on and on, but one thing is for certain; there are millions of home owners currently in a stressed income situation with negative home equity who would like to refinance but can’t due to low credit scores/lack of home equity or both.   As word spreads of the great deal that Countrywide borrowers got from the recent Bank Of America settlement, there will be many indignant and angry home owners demanding the same treatment.   Can the banking system, already insolvent, handle huge new write downs?

    World Economies Burn, Politicians Debate

    As the world economies implode the presidential candidates debate who is the angrier man; doesn’t seem to be inspiring very much confidence in the marketplace.

    Smaller countries world wide are collapsing – Bulgaria, Estonia, Romania, Turkey – we will find out how interlinked the world really is.  Iceland couldn’t have set itself up better for bankruptcy than if they had deliberately planned it.

    The GAP sales plunge 25% – expect to see massive layoffs as companies dramatically cut costs starting with labor.  Very few businesses can sustain a 25% sales drop without either closing the doors or slashing costs.

    AIG burns through the original $85 billion in Fed funds in a week and comes back for $38 billion more; does anyone believe that they won’t need more?  We may find out what the US Treasury lending limits are before this is over.

    Where is the mighty (mythical?) plunge protection team when you really need them?

    A 20% plunge in stock values over 7 days is a crash.  These types of declines usually do not stop until one day we are lock limit down and the selling burns itself out.

    On the bright side, if you have any spending money left after the Crash of 2008, a vacation to the Caribbean is getting cheaper by the day: A Silver Lining for Vacationers in the Caribbean

    “Investment Time Bomb, Mega Catastrophic Risk”

    I have often noted that predictions made early eventually turn out to be the most accurate, but oft most forgotten since it is yesterday’s news.  Perhaps the real nightmare now upon us is the one predicted by Warren Buffet in March 2003, as well as in earlier interviews, in which he prophetically stated that:

    “The rapidly growing trade in derivatives poses a “mega-catastrophic risk” for the economy…

    Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers … which can trigger serious systemic problems”

    Mr Buffet explained the risks of derivatives after buying a reinsurance company with a small portfolio of derivatives. These positions were gradually sold off  for a big loss “in a leisurely way in a benign market”.

    In May 2007 Mr Buffet again spoke of the extreme risks to the global financial system saying:

    “that excessive borrowing by traders, investors and corporations will eventually lead to significant dislocation in the financial markets.”

    Mr Buffet’s dire predictions are not to be taken lightly and,  unfortunately, now appear to be occurring.   A default chain of these insanely devised and leveraged products could cause extremely significant and long lasting damage to the world economy, probably beyond the immediate ability of the world’s central banks to contain.  The collapse of Lehman, a very big player in derivatives, has some wondering if the unwinding of their contracts is the trip point for the “mega catastrophe” and the cause of the current credit crisis.  The Federal Reserve and Treasury Department apparently did not see the risk when they let Lehman go under.

    Since these derivatives (specifically the CDS) are essentially a zero sum game for the parties involved (one player’s loss is equal to another player’s gain), and given the potential catastrophe we face, the government should consider a mandated freeze on the contractual obligations involved by all the counter parties in the derivatives market and then allow them to be unwound in a controlled manner.  Hopefully, at the level of power that matters, this situation is being urgently reviewed.

    Fortune – The $55 Trillion Time Bomb

    What has Bernanke learned?

    The Wall Street Journal reports on the lessons that Chairman Bernanke,  a student of the last depression, learned from his textbooks and  studies in school.   According to the Chairman, “The experience of the Depression helped forge a consensus that the government bears the important responsibility of trying to stabilize the economy and the financial system, as well as of assisting people affected by economic downturns”.

    This theory no doubt has been the impetus behind the efforts to provide massive amounts of liquidity and loans not only to the banking industry but also to scores of non banking related entities as well.  These operations have been criticized for their apparent ineffectiveness so far but I have no doubt that eventually,  the Federal Reserve will succeed in “stabilizing” the banks and the economy by providing oceans of credit in such great quantity  that only the most ridiculously inept companies won’t survive.  If you have an inquisitive mind, however, and analyze why we are in a financial crisis, one might conclude that it was brought forth by excessive credit creation and leverage on a scale never seen before by the same government entity now attempting to save us.  The great credit bubble did not start overnight- it began in the 1980’s and has grown exponentially ever since, propelled in large part by the Federal Reserve, which reacted to every mini crisis of the past two decades by simply providing more credit at lower rates.  Every event that might have caused a ripple in the economy was papered over with more credit instead of letting the creative destruction forces  of a capitalist system purge itself of poorly run,  financially reckless companies.  A recession, which is the mechanism by which excesses are cured and capital allocated more wisely next time, was viewed with horror and an end of the world event.

    So here we are today, again, apparently left with no options to save the system, except by increasing the leverage again.   Will it work one last time or will our lust to borrow in excess once again this time be tempered by the reluctance of our foreign creditors?  My vote is that since we cannot apply fiscal discipline on ourselves, let us hope that China, Japan and the rest of the future bag-men for our treasury paper will limit our attempts at financial self destruction.

    IOU’S Pile Up – Taxpayers Refuse to Pay

    Forbes Magazine had a great article by William Baldwin explaining the addiction to debt by everyone from the Federal Government on down to Joe Sixpack. Politicians get elected by handing out entitlements that the “future generation” has to pay for, therefore, no new taxes need be imposed and the voters are kept happy; Joe Sixpack can buy his house with no money down and instead of saving for a downpayment can buy the new plasma TV and jet off to Cancun for the weekend; the ultra rich hedge fund operators and bankers can leverage up 40 to 1 and exponentially increase their net worth. Up until now this has worked like magic and no one, except for a few fiscal conservatives, worried about the mountains of debt building up at every level of society. As is the case with most trends that go to unimaginable extremes, all of a sudden it does matter in a very big way. Properly enough, the ones who incurred the most debt are now suddenly suffering the most from hedge fund managers facing liquidations requests and job loss to Joe Sixpack receiving his default notice to towns, cities and states suddenly facing massive deficits as the great credit machine implodes.

    Debt to GDP

    Here’s where it gets really interesting as the bills come due and the debts can’t be rolled over. Governments cannot cut back due to the nature of democracy; no will vote for someone who tells us what we need to hear – that the bills are due and we now have two options – drastically cut government services or dramatically raise taxes to pay for our past purchases. The option previously used on every occasion was to simply borrow more to pay the bills but, as we saw today, when you can’t borrow more it gets very ugly, very quickly.

    Ironically, a few pages after the article by William Baldwin on out of control debt levels, we have the “Taxed to the Max” comment about a ballot initiative that will be voted on in Massachusetts which would eliminate the state income, wage and capital gain taxes which currently brings in the State of Mass over $12 billion a year. After a decade of stagnant wages, increased cost of living and maxed out credit cards it is going to be political suicide to convince the taxpayer that he needs to start paying on the mountains of debt that have piled up. How this problem is ultimately resolved will profoundly affect all of us for many years and there is no easy way out. How many people will accept a much lower standard of living and higher taxes to bring our debts in line with our ability to repay? I fear that as usual, the politicians will take the easy way out and try to continue to borrow until they can’t. The real big question is, short of simply printing the money, do we still have the ability to borrow and roll over our debts?

    Taxed to the Max
    Massachusetts is often referred to as “Taxachusetts” because the state’s taxes are so high. Now the Committee for Small Government wants to change that image by pushing legislation called the Small Government Act, which Bay Staters will vote on in November. The legislation repeals the state income, wage and capital gains taxes. That’s a $12.5 billion state revenue cut–with no other revenue to replace it. That reduction would force state legislators to seriously rethink their financial priorities. But it would also leave that money in the hands of families, where it will surely be better spent. Bostonians were once brave enough to tell England–and the world–that taxes were too high. Now let’s see if they have the courage to tell their own legislators.
    –Merrill Matthews, Institute for Policy Innovation

    What Does This Man Do All Day???

    What's an economy?

    The Wall Street Journal reports today that the President expressed surprise that the bailout bill did not pass. Earlier in the day, White House spokesman Tony Fratto had predicted that the vote would pass. One has to wonder what kind of indifferent involvement there was by the White House if they had no idea how many members of their own party were not going to go along with the President’s plea to pass the bail out bill.

    Someone not familiar with the structure of our government and reading the financial press for the past year, could easily be pardoned for assuming that our country was being ruled by Ben Bernanke and Henry Paulson, whose decision making powers seem to be unlimited yet still have had no ability to forestall the deepening loss of confidence and the rapidly escalating meltdown of the world financial system. Is it possible that the President did not want to get engaged, believing that his Treasury Secretary and the Federal Reserve would solve all our financial problems in short time? I think the more likely answer is that President Bush never had and still has no comprehension of the magnitude and dangers of the financial crisis that has been unfolding in ever more frightening ways over the past two years. Apparently aroused from his slumber a week ago by dire forecasts of an imminent meltdown, he gave a national speech that was so dumbed down and ineffective, you have to wonder what audience he thought he was speaking to. Obviously, the President wasn’t even able to convince members of his own party, that the bailout made sense and could never overcome the popular notion that the bailout was simply another handout to Wall Street.

    My own perception is that even if the bailout is passed, it will not accomplish what the powers to be were expecting. Confidence worldwide has been shattered by huge losses on virtually every asset class. The perception that loss avoidance is better than taking any risk for a gain will remain with us for some time, especially with the daily collapse of large institutions. Few saw this collapse coming and none know how it will ultimately end.