Stock Buybacks Break Record in Q2 2005
Corporate net repurchases of their own stock reached $294.4 billion (annual rate) in Q2 2005. This was about two and one-half times the rate of stock buybacks in 2000, the peak of the Great Bubble.
However, as of November 2005, these buybacks were not having much effect. The S&P 500 index was up only 3% for the year.
Corporate buybacks were financed out of increased profits and much higher levels of net new corporate borrowing from banks and mortgages ($250.5 billion, annual rate).
Dampening the effect of massive corporate buybacks in Q2 2005 were net equity sales (annual rates) by households ($266.1 billion), private pension funds ($48.2 billion), state and local government retirement funds ($43.7 billion), and net new issues by foreign corporations ($83.3 billion).
Mutual fund net investment in equities during Q2 2005 ran at an annual rate of $124.2 billion, indicating that the Common Stock Legend was still in effect, but motivating only two-third the rate of purchases as in the year 2000.
Smarter Investors Are Selling
This data shows that, while motivation supporting the buyback-option movement is still as strong as ever, smarter investors (pension and retirement funds) and executives eager to cash in their options are now potent neutralizing forces. For a discussion of ’smart institutions’, see the Case Study: Equities USA 2000
Of interest is an article in the Wall Street Journal (November 21, 2005), headlined, “Cash-Rich Firms Urged to Spend”, suggesting that “investors call for share buybacks to boost stagnant stock prices”. On reading the article, the only “investor” supporting this view mentioned was the managing partner of a New York hedge fund.
In the same article, an opposing position is presented by another hedge fund operator, Jeff Matthews, of Ram Partners LLC, who noted that using corporate cash to jack up stock prices was less in the interests of the company than of the hedge funds themselves.
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