There’s a small cause-and-effect mystery in the interaction between share prices and share buybacks. On the one hand, when a company buys back stock, that should make the remaining shares more valuable, on reasoning both fundamental-ish (EPS is up!) and technical-ish (more buyers than sellers!). On the other hand, issuers seem to view their own shares as Veblen goods: the higher the price, the more they want to buy.1 So it’s a little hard to know whether the market is reaching record highs (in part) because companies are spending record amounts of money buying back their stock, or vice versa. The first explanation mostly makes sense, and the second mostly doesn’t, which is a good argument for the second being right.

The first explanation is more popular though. Today the Journal noted that “U.S. companies are showering investors with a record windfall in the form of dividends and share buybacks, helping to propel the stock market’s rally,” and FT Alphaville and others have been talking about de-equitization, as well as the declining attractiveness of listed public equity. So have I, come to think of it.

One possibly relevant question you could ask is: how much is the market shrinking? That seems susceptible to various sorts of answers, as well as various possibly relevant time periods. As it happens, tomorrow marks the four-year anniversary of the market’s hitting a 15-year low, so mazel tov everyone on that. Here’s perhaps a place to start measuring U.S. equity market shrinkage over those four years:

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  • 07 Jan 2013 at 6:08 PM

Banks Lobbying, Capitalizing Like It’s 2007

They may still be too big and fragile, but banks are throwing their considerable weight around and getting their way. Read more »

  • 20 Dec 2012 at 11:01 AM

GM Is Buying Some Stock

One thing to savor about Treasury’s plan to get out of GM is how many corporate-governance hot buttons it gently caresses. “GM will purchase 200 million shares of GM common stock from Treasury at $27.50 per share” translates into news reports as “Treasury is losing a bazillion dollars,” since after all Treasury paid rather more than $27.50 per share originally, but there are other ways to look at it. One is that Treasury seems to have agreed a deal with GM after the 12/18 close at $27.50 for a stock that had closed at $25.49 and hasn’t touched $27 in ten months; i.e. GM overpaid for stock from a favored/nudgy insider by $400mm. Normally, privately negotiated buybacks from favored shareholders at a premium to market prices are criticized. Normally, privately negotiated buybacks from nudgy, “ooh-don’t-buy-a-corporate-jet” activist shareholders are called greenmail.

That doesn’t mean such buybacks aren’t market-pleasing, by the way. Much like Buffett’s recent slightly-above-market buyback, GM’s above-market buyback seems to have boosted the stock. Delightfully part of the boost is accounting-related. From the Journal: Read more »

A thing I used to do was go to companies and try to convince them to do various exotic flavors of share repurchase. This is in outline a thing that all bankers try to do – go to companies and (1) try to get them to do things and (2) if that’s going well, upsell to exotic flavors of those things – but the share repurchase angle is a challenging one because companies are universally and irremediably bad at share repurchase and everyone knows it. There are so many studies and they all basically say “you are dopes, stop buying back shares, you always buy at peaks and then sell at troughs, please for the love of God stop.” This is not really surprising: executives are by nature confident types, for one thing, so it’s a rare CEO who declines to buy his own stock on the grounds that it’s overpriced; for another, buyers buy things when they have lots of cash and feel rich, and shares are cheap when the issuer is running out of money and feels poor, so when the buyer and the issuer are the same you’ve sort of autocorrelated yourself into shittiness.*

Or so I thought. There is however an alternative explanation for why companies buy back shares that I have been giggling over for the last hour, and it is: because their managers are actually good at market timing and are sneakily insider trading for their own account through the corporation. Or so says Harvard Law professor Jesse Fried: Read more »