Repurchases of company stock, mostly under the safe harbor exemption from market manipulation provided by SEC Rule 10b-18, set an all time record of $366 billion (net) in 2005. This was 260% of levels in 2004 and 880% of buybacks in 2002.

Despite extremely aggressive tactics of corporate management to manipulate stock prices upwards and give value to option and bonus plans, stock prices rose only about 3% in 2005, on average.

Federal Reserve national flow of funds accounts of corporate equities (Table F213) show why stock buybacks were less effective in boosting prices than in the past:

1. Individuals (U.S. Households) sold, on balance, $501.1 billion in equities in 2005 — mostly executives cashing in on option remuneration plans. This was a record sell-out, twice the level of 2004. Obviously, direct holders of equities did not have as optimistic an outlook for equity prices as did Wall Street touts.

2. Foreign corporations sold a record net $137.5 billion of new issues into the U.S. market, taking advantage of the over-pricing of U.S. equities engendered by buyback programs. Over-valued stocks mean lower capital costs to companies that are building for the future.

Meanwhile, as executives used stock buybacks to pay themselves, they continued to short-change long-term investors. Cash dividends fell to the lowest level in five years: $234.8 billion.

Not surprisingly, Wall Street firms with special 10b-18 departments reported record profits in 2005.

Long-term, unsophisticated investors, trusting to mutual funds through 401(k) and other tax deferred retirement plans, continued unaware of the massive looting of their savings. (See: Essays on Stock Buybacks and Options), while the SEC looked away, even encouraging this type of market manipulation.

This entry was posted on Thursday, March 16th, 2006 at 10:07 am and is filed under Equities, Corporate Managers, Individual Investors, Equity Risk. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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