I share a brief post with you today. A dear friend of mine wrote to me this week about corporate buybacks where stock repurchases are coming more and more at the expense of balance sheet health. It seems that risky leverage is the growing trend of our world today
I read an article this weekend that talks about several eras in the stock market occurring since around 1950, eras of significant market moves where an economist, Brian Barnier, identified a single major driver enabling each era. Go here to read the article. It caught my attention because of the title, “The Fed caused 93% of the entire stock market’s move since 2008: Analysis.”
It particularly caught my attention that leverage was a major theme during the eras identified by Barnier. I’m wondering, will we ever get around to settling any debt??
I’m sure it’s pretty evident from all my writings that I believe a failure to maintain a healthy balance sheet presents major financial risk. Therefore, when it comes to individual stock investing, I believe it’s always wise to stick with companies that show a propensity for maintaining a healthy balance sheet, and that means a propensity to be conservative when it comes to the use of financial leverage.
I also saw the interview on Yahoo and found it quite interesting. Bloomberg has a current article to support this.
http://www.bloomberg.com/news/articles/2016-03-14/there-s-only-one-buyer-keeping-the-s-p-500-s-bull-market-alive
Another motivation may be off-setting the options issued to executives to avoid conspicuous dilution of stockholders’ interests.
Most companies seem to buy their stock back at inflated valuations, thereby destroying value. That is a huge waste of stockholders’ money.
Dear David,
Thanks for weighing in. And thanks for the bloomberg piece. A one dimensional market is intuitively vulnerable. It is an excellent point you make too concerning executives who may be using buybacks to distract attention from dilutive options.
Also, to tag on to your final comment, I recall that Jake Taylor commented in his interview with me last spring how company buybacks are most rampant when stocks are trading at inflated prices. What has happened to management acting in a fiduciary manner toward its owners? It sure suggests a time to be most careful with decisions made in the stock market. Thanks again!
Paul