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Stock Buybacks Become Less Effective: 2005

Posted By John Schroy On 16th March 2006 @ 10:07 In Equities, Corporate Managers, Individual Investors, Equity Risk | Comments Disabled

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 ([1] 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 [2] Stock Buybacks and Options), while the SEC looked away, even encouraging this type of market manipulation.

Tags: [3] 401 k plans, [4] foreign corporations, [5] rule 10b 18, [6] SEC, [7] stock buybacks, [8] stock options
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URLs in this post:
[1] Table F213: http://capital-flow-analysis.info/flow-of-funds/F213.htm
[2] Stock Buybacks and Options: http://capital-flow-analysis.info/investment-resources/essays.html#buybacks
[3] 401 k plans: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=401-k-plans
[4] foreign corporations: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=foreign-corporations
[5] rule 10b 18: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=rule-10b-18
[6] SEC: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=sec
[7] stock buybacks: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=stock-buybacks
[8] stock options: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=stock-options
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