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Net share repurchases by nonfinancial nonfarm corporations ran at an annual rate of $554.8 billion, about the same level as in Q1 2006 and more than ten times the level of 2001 and five times the level of 2000, the peak of the Great Bubble.
Reckless corporate behavior continues ...
Amounts paid to exiting shareholders (including holders of executive options and short sellers) exceeded amounts paid equitably to all shareholders as regular dividends by 44%.
Cash dividends plus net stock buybacks were 117% of net profits after taxes.
It would seem that the imperative of keeping stock prices high to give value to stock options now clearly trumps most considerations of investing for the long term in US corporations.
This extreme level of buybacks was financed by issuing bonds, taking on new debt, and by drawing down cash reserves.
While corporate executives were keeping buybacks at record levels, other sectors were significantly easing up on equity purchases:
| Net equity purchases in selected sectors (annual basis) | |||
| Sector | Q1 2006 | Q2 2006 | % Change |
|---|---|---|---|
| Rest of the World | 223.6 | 16.8 | -92% |
| Commercial Banks | 1.9 | -2.9 | n/a |
| Life Insurance Companies | 61.6 | 46.0 | -25% |
| Fed Gov’t Ret. Funds | 8.9 | -3.1 | n/a |
| Mutual Funds | 204.5 | 94.0 | -46% |
| Brokers and Dealers | 31.4 | -34.3 | n/a |
Note: Figures in $ billions, annual rates
It would seem that stock prices in Q2 2006 were sustained mainly by extreme levels of stock repurchases by corporate executives.
Tags: 
Yes indeed! Commonsense would suggest that buybacks would stop in 2000 when they reached the limit set by profits.
But commonsense did not prevail. Instead, corporations began to borrow money heavily from the banks (e.g. Citibank) to keep their stock buyback spree going.
The big banks were extremely unwise in making such non-productive loans, and that is why we now have the worse financial crisis since the Great Depression.
Now we have the following situation:
So, it seems that now we have reached the final blow-out that should have occurred in 2000. Only the consequences now will be far worse.
The facts are simple:
Since the early 1980s, the principal buyers of equities were mutual funds (the common stock legend) and corporations (buybacks to feed stock options). Both of these sources of funds have now dried up and are likely to stay very dry for a long time.
Companies will now have to SELL stocks to raise capital and avoid bankruptcy. Banks are de-leveraging. Asset backed securities are no longer in demand.
It looks to me like we will go back to the 1960s, when instead of the equity market consisting of corporations buying stocks to support executive stock options, they will be selling stock to raise capital.
Investors, no longer believing in the Common Stock Legend, will probably go back to practices of their great-great grandfathers, buying stocks on the basis of dividend yields — which, in those days meant yields about 115% of the yields of bonds of the same issuers. Unfortunately, companies are now cutting dividends, which means that investors will turn away for a long time.
This suggests that stocks are nowhere near the bottom yet.
On top of all this bad news, we have the Obama administration spending money that there is only one way to pay back — inflation. The United States won’t go “bankrupt”. It will simply do what countries have always done when they borrow more than they can repay — the US will debase the currency.
What this means is that interest rates will soar (because of inflation), stocks will plunge even more, and the only “winners” will be those holding debt and hard assets (like real estate).
History shows that the favorite way for a country to pay off debt is to devalue the currency through inflation.
I lived through many years of high inflation in Brazil and it is not the end of the world, if you know what you’re doing. Some people, who understand the process, get very rich during inflation. So think positive.
By the way, even if Obama is a one-term president, the damage that he will do in four years is likely to be so extreme that it will take at least a decade to recover.
Case Study: Applied Capital Flow Analysis
United States Equities: 2000
The above article said that stock market wouid fall because the cash used in buyback and dividend almost equal the earning of corporation.
But buyback still continue after 2000,and money used in buyback still be enough(even with borrow),so reasons in above article correct ?