Market High On Stock Buybacks And Fed’s Easy Money

Market High On Stock Buybacks And Fed’s Easy Money

$DIA, $SPY, $QQQ, $VXX

S&P indexed companies are buying back stock at a rate not seen since before the Y 2008 financial crisis, that does not mean retail investors should buy the market in here.

Company share buybacks may not help shareholders

“Not all buybacks are created equal, and exhibit A is LPL Financial Holdings, a brokerage and investment advisory firm in Boston,” Morgenson writes. “LPL recently completed a $275 million stock buyback spree that was exceedingly costly, increased the company’s debt and wound up primarily benefiting a powerful insider investor,” , writes Gretchen Morgenson, the Pulitzer Prize-winning financial columnist for the NY-Ts.

The brokerage funded part of the buybacks with borrowed money, which can be a recipe for disaster. Companies that take on too much debt can impair their profitability or even default, which leaves shareholders with worthless stock.

That threat has not stopped companies from buying back stock in droves, especially when C-level executives are given stock-option incentives to boost share prices, she says.

Repurchase authorizations are up 41% through 11 February from the same period last year, according to the data.

In the case of LPL, the buybacks favored such private-equity firms as Hellman & Friedman and TPG Capital, Morgenson says.

“By Dec. 10, LPL said it had completed an accelerated plan, repurchasing $250 million in stock, or 5.6 million shares. Its average cost a share was about $44.50, the company said,” Morgenson writes. “But instead of going into the open market to buy the stock, LPL repurchased 4.3 million shares from TPG, the private equity firm and partial owner. That meant more than three-quarters of LPL’s $250 million buyback spending went to TPG.”

Standard & Poor’s 500 Index companies are poised to buy back as much as $165-B of stock this Quarter, approaching a record reached in Y 2007.

The buying contrasts with the selling by clients of mutual and ETFs (exchange-traded funds), who after pulling $40-B since January are on pace for one of the biggest quarterly withdrawals ever.

Monday the US major stock market indexes finished mixed on the day: DJIA +15.82 at 17229.13, NAS Comp +1.81 at 4750.27, S&P 500 -2.55 at 2019.64

Volume. Trade came in below the recent averages with about 830-M/shares exchanged on the NYSE.

• NAS Comp -5.1% YTD
• Russell 2000 -4.6% YTD
• S&P 500 -1.2% YTD
• DJIA -1.1% YTD

Stay tuned…

Paul Ebeling

HeffX-LTN

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