So, I've been trying to figure out why the stock market rallied so much this year, and I'm pretty sure it's because of this:
Don't bother clicking on the link, the only important line is: "in 2017, S&P 500 companies will spend $780 billion on buybacks — a new record." I was looking at some companies that have purchased back as much as 14% of their own company in the last few years.
Now, if this was just companies taking their profits to effectively shrink ownership size, I wouldn't see a problem with this, but the problem is that most of these companies are borrowing crazy amounts of money (well beyond their profits) just to buy back stocks. I started anecdotally going through many of the companies in the S&P 500, and I found that this is crazy common.
Effectively, these companies are cannibalizing themselves to prop up their stock values. The buying frenzy we have been seeing all year is not stock holders. It's the actual companies themselves. As their debt increases and their assets to debt decreases, they not only increase their cost of running their business, they also reduce their credit-worthiness.
This a new kind of asset bubble, and I think it'll be the next one to pop. In 2017 alone, companies will have bought back more of themselves then in all the years from 1900-2000 combined.
What I can't figure out is what a crash from this would look like. It seems like it would take a crash in the bond market where all these companies suddenly can't get money anymore, and they can't afford to refinance their bonds when they mature leading to mass defaulting as these companies crumble under their debt loads that were self imposed just to up the stock price. Companies might re-issue stock to raise money, but the credit concerns will cause a huge sharp crash in the stock price. This will probably lead to new SEC rules regarding when companies can buy back their own stock, but, in the mean time, what is safe from this?
Submitted December 14, 2017 at 11:52AM by SvenTropics http://ift.tt/2Ap06IC
