Stock Buybacks are BS

This statement is now proven. For some time I had pointed out how corporate executives use stock buybacks to raise artificially the prices of their stocks so thus to increase the value of their stock options. A dividend doesn't do that, except indirectly by giving long term investors a reason to own the stock. Stock buybacks gives institutions and hedge funds a bid for their sales. So the price of the stock is propped up, financially benefiting the corporate CEO and other top executive.

If those arguments are not sufficient to prove the claim, we now have evidence that stock buybacks are a disaster financially.

GE has announced that it will sell preferred stock to Warren Buffet at a usurious 10% dividend rate. And it will sell over $12 billion of new common stock. Just last week GE suspended its stock buyback program. How much stock did GE buy back as higher prices than it is now issuing new stock ? Billions.

How much stock did WB and other banks buy back at high prices in the past few years - billions that could have forestalled collapse that destroyed the investments of long term shareholders.

From the FT of last Friday:
LEH bought back more that $5 billion in 2006-7
C bought back about $7 billion in 2006-7, but had to sell $7.5 billion in high priced equity to Abu Dhabi in November 2007.
MER bought back almost $14 billion in 2006-2007; it sold itself to BAC for far lower prices.
MS did $7 billion in buybacks in 2006-7 at high prices.

And on and on.

Some pharmaceutical spend more $ on buybacks than on R&D companies.
Oil companies buy back billions, but are rather miserly in raising dividends for long term shareholders.

For all the talk about wanting a long term focus, stock buybacks are just the ultimate short term fix, aiding only short term traders and hedge funds and corporate CEOs with fat packages of stock options.

What to do ?

Be wary of companies that buy back large amounts of stock. The only stock purchases that one can justify perhaps would be buybacks in panics or in bear raids at very low prices, provided the company's financials are truly solid. Even then, perhaps buying back or defeasing debt makes more sense.

Markets

ECB lunacy continues - keeping rates high for fear of phantom inflation. I wonder if the EU can survive if this recession bcomes very severe ? I hope so, but some nations like Germany are remarkably arrogant in their unwillingness to help members with weaker economies or banks. Little unity is apparent.

US Senate passes a funding bill for troubled assets. Maybe R's are getting a bit of pushback now. I am skeptical, but verily have no idea what Congress will do.

I note that for two weeks, Congress has done nothing after Hank & Ben hit the alarm buttons. The fire has spread very far now. Analogies are always just analogies, but we know that putting out a fire is far easier when one gets the water hoses on it early when the fire is small. At some point, the fire cannot be extinguished until the fuel runs out. I don't know where this credit fire is now, but no doubt durable goods sales are being crushed and small businesses are being hurt. Funding for Christmas inventories might be hurt, too. Budgets for 2009 are being considered. And the latest economic data are troubling.

I am very disappointed in DC, but I suppose I should not have been surprised. The extent of both knavery and foolishness there cannot be underestimated.

I continue to focus on Krypto Fund asset allocations and deployments of new cash there. As I have written many times before, the bulk - about 85% - of my investments are there in patient, long term asset classes.

Colossal sums still are "invested" in beefers, but some money is being withdrawn by the foolish rich. I suppose they are dumping it into T-bills now.

The screaming buy in fixed income markets is in municipal bonds. Those are very illiquid, so one must only put very long term money there. Some of my new cash must be invested in fixed incomes classes to maintain my class allocations. I can't bear buying Treasury securities [except TIPs which are now fairly priced] at price levels which are guaranteed to be long term money-losers. So I am buying some municipal bonds. I bought one chuck a couple days ago and perhaps in a month I'll buy more if prices are still good.

Since Obama is likely to be elected and raise income taxes by a large amount, I guess putting some money in municipal bonds is rational now. I don't think he'll tax them [as I advocate] since his friends run those municipalities and his rich supporters own trillions.

Word of the Day

"Palimpsest" - noun [$10]; accent is on the "pal" syllable.
Palimpsest means 1. a piece of writing material or manuscript on which later writing has been written over the effaced original writing; 2. a monumental brass turned and re-engraved on the reverse side.
Sentence: The US Senate last evening approved a palimpsest for its spending bill to regain the initiative in the Troubled Asset Relief Program by massively re-writing an existing spending bill the House had previously passed , which tactic was necessary as the US Constitution requires all spending bill to being in the House of Representatives.

Bonus Quote of the Week

This quote uses today's Word of the Day; is from "The Tycoons" by Charles Morris, pg. 231; and seems particularly appropriate now.

"A troubled company's balance sheet is a palimpsest of past business reverses and managerial misjudgments - the layers of debt and preferred stock pile up like scar tissue ..."