tyb
>>7216872 lb
DeVoss is a crazy bitch and glad she is gone.
ty anon appreciate that and always try to acknowledge when others take the time to do that.
Corporate Cash Plummets Amid Stock Buyback Spending Spree
There was a startling revelation in yesterday's GDP revision: according to the preliminary Q2 GDP results, implied operating profits for the period totaled $1,900 billion, down 5% from Q1, which would represent the third consecutive quarterly decline, and off over 7% from the year ago levels, one the largest declines recorded in several years. Yet, as ugly as the Q2 numbers appear to be on the surface, what are even more troubling are the sharp downward revisions for the last two years. According to the annual GDP revisions operating profits for 2017 were lowered by $93 billion, or 4.4%, and profits for 2018 were reduced by a whopping $188 billion of 8.3%.
The revised corporate profit numbers show that contrary to conventional wisdom that corporate profits have been increasing, operating profits peaked in Q3 2014 and have been moving sideways ever since, before declining over the past year. Operating profits in the GDP accounts and S&P 500 operating profits over the long run track fairly close to one another, although there can be large differences in any given year. Yet, what is truly bizarre is that over the past 5 years operating profits have gone nowhere - and have in fact declined - while during this period S&P 500 prices have increased over 50%.
How is that possible? Simple: this is where the Fed steps in with the oldest trick in the book - multiple expansion.
Which brings us to a startling observation: since there has been no EPS growth in 2019, more than 95% of the S&P 500’s YTD climb has been driven by an expansion in P/E multiples as 10-year US Treasury yields fell and the P/E multiple expanded from 14x to 17x. In other words, the reason why the S&P trades at all time high levels above 3,000 is just one: Jerome Powell.
Following the 1995 and 1998 “insurance” cuts, investment for growth continued to grow for 12 quarters after the Fed’s first cut. In contrast, investment cratered following the 2001 and 2007 cuts as the economy fell into recession.
Besides spending on investment, companies have another option of how to spend excess cash: namely, return it to shareholders via buybacks and dividends. How has such activity changed before and after prior rate cuts?
Of course, this time may well be different, as even without a rate cut, share repurchases have continued to surge during 2019 and are expected to surpass the 2018 all time high, rising above $1 trillion.
According to high frequency data from the Goldman Sachs repurchase desk, buyback executions have risen 26% year/year through mid-July, and Although S&P 500 repurchase authorizations have declined by 20% vs. the year-ago period, companies retain capacity to repurchase stock under multi-year authorizations.
As a result, Goldman estimates S&P 500 buybacks will climb by 13% to a new all-time high of $940 billion this year.
see Coogle's recently announced $25b share purchase program…tick,tock.
During 2017, non-Financial S&P 500 firms returned 82% of free cash flow to shareholders in the form of buybacks (net of equity issuance) and dividends compared to 104% during the 12 months ending 1Q 2019. As Goldman further notes, net buybacks and dividends surged by 30% during the past 12 months while free cash flow (FCF) increased by a comparably modest 10%.
Cap#2
Which brings us to the most striking observation of the day: the $272 billion drop in non Financial cash balances in the LTM period represents the largest percentage decline since at least 1980 (-15%). As a percentage of assets, non-Financial cash balances have declined from 12.7% in June 2018 to 10.4% today – the lowest level since March 2010.
Cap#3
It's not just cash that is plunging - this precipitous drop in cash balances has coincided with a sharp increase in corporate leverage.
Which brings us to one final observation: the polar opposite takes on how record corporate leverage is perceived on Wall Street.
On one hand, earlier this month in the latest Bank of America Fund Manager Survey, we found that a record 48% of professional investors say corporates are excessively levered, while noting that the number of OECD zombie companies (those companies with an interest coverage ratio below 1) is at new post-GFC highs (548).
Cap#4
In other words, not only has the Fed pushed the S&P to an all time high by massively expanding PE multiples, but it is explicitly forcing improper capital allocation, by forcing investors to put money in companies that will be the first to default once the next recession finally hits.
https://www.zerohedge.com/news/2019-07-27/corporate-cash-plummets-amid-stock-buyback-spending-spree