Net repurchases of equity by nonfinancial domestic corporations soared to an annual rate of $586.8 billion in Q1 2006 (a new record), pushing stock prices slightly higher.
This frenzied buying was five times the buyback rate in 2000, the year the Great Bubble collapsed!
Corporate executives were aided significantly in their efforts to use buybacks to boost stock prices, by unsophisticated investors acquiring stocks through mutual funds ($205.1 billion) and by direct purchases of equities by foreign investors ($226.8 billion) [net annual rates].
Option Exercisers and Foreign Issuers Are Sellers
Almost matching the frantic stock buying by corporations, mutual funds, and foreign investors, were new records of stock sales by individuals ($866.5 billion) and foreign issuers ($172 billion) [annual rates].
Most sales by individuals were related to the exercise of stock options, representing an enormous transfer of wealth from corporations to executives and insiders, to the detriment of long-term investors holding equities in tax-deferred savings plans through mutual funds.
Despite the negative features of the Sarbanes-Oxley Act and higher costs of going public in the U.S. market, foreign issuers seemed to have a clearer notion of where money could be put to use than their overpaid American counterparts. Foreign corporate issuers could not resist the low costs of capital occasioned by the buyback pressure on stock prices.
Similarities to 2000
Just as was seen at the peak of the Great Bubble, the ’smart institutions’ (property and casualty insurers, private pension funds, and state and local government retirement funds) were net sellers of equities.
The pattern of transactions between the players in the equity market in Q1 2006 was similar to that of the year 2000 when the bubble of the 1990s came to an end.
See Case Study on the Great Bubble of 2000.
