A new report from TrimTabs, the investment analysts, has blown the whistle on what really went on behind the stock-market "boom" we saw in the first quarter, when the S&P 500 Index rose more than 5%.
No wonder everyone turned bullish by the end of March — just before the market started tanking again.
So who was driving up the market? What was creating this boom?
Turns out it was the companies themselves. TrimTabs says companies spent a thumping $124 billion in the first three months of the year trying to boost their share prices by buying up stock.
That works out at about $2 billion for every day the market opened.
Meanwhile, according to Trim Tabs, guess who avoided buying stock during the first quarter? Company executives. The "insiders."
These are the guys whose stock purchases tend to strongly signal bull markets and genuine booms. They were spending investors' money buying their stock, but weren't spending their own.
TrimTabs says insiders' stock purchases came to less than $2 billion for the entire quarter, a comparatively low level.
"We've never seen such a sharp contrast between what insiders are doing with their own money and what they're doing with the money of the companies they manage," TrimTabs Chief Executive Charles Biderman wrote in a note. Stock buybacks outnumbered executive stock purchases by the highest ratio TrimTabs has seen since it started tracking the numbers back in 2004.
"While insiders are willing to use corporate cash to try to support the value of their stock-based compensation, they don't seem to think their stocks are attractively priced," Biderman said.
No kidding. When it comes to insiders, follow what they do, not what they say.
When company executives are spending their own money buying stock, it's a bullish sign. After all, who better knows their companies' prospects? But when they are sitting on their hands or cashing out, it's not so good.
As for companies buying up their own shares, this needn't be a bad thing. After all, if you drive up stock prices, all shareholders benefit.
Share buybacks also are a pretty good way of returning cash to investors. They're not as good as paying dividends, but they are a better investment than most of the other things management likes to do with the money — like investing in pet projects, or providing more executive perks or making ill-timed acquisitions.
Alas, in this case, there's another chapter to this story.
Where did the companies find the money to buy back their stock? In some cases the money came from profits. That's a good thing. But in other cases they just borrowed the funds.
According to the latest data from the Federal Reserve, corporate debt surged again last quarter — to the highest levels on record.
Debts for nonfinancial corporates hit $7.3 trillion by March 31, reports the Fed. That's up more than $100 billion since the start of the year.
The total at the end of 2007, at the peak of the so-called "credit bubble," was just $6.7 trillion.
This borrowing spree has pushed overall gearing for nonfarm, nonfinancial corporates to hefty levels. The Fed says that U.S. nonfinancial corporates now have debt equal to 50% of their net worth. It's near record levels for modern times. As recently as 2006, it was just 40%.
When a company borrows money to bolster its own stock price, it makes me wary of the bonds. When the executives aren't even willing to invest their own money, it doesn't exactly make me enthusiastic about the stock either.
I love articles like this because they present interesting and solid data behind what's going on in the world.
Company buy backs are nothing new and by themselves I would not call them alarming. It does help reduce the number of shares outstanding, which assists in earnings growth. And while it's a touch manipulative, if done consistently, it does allow executives to provide a more consistent growth pattern in earnings, which investors like and helps stock values go higher.
That being said, there are two parts to this story that should raise a serious red flag.
First, insiders are not buying shares. If the prospects for their companies over the next 3-5-10 years were really that good and their stocks were cheap, we'd see insiders buying hard and they are not. It's a vote of no confidence from the top of corporate America. Very easy warning sign.
Secondly, nonfinancial firms have 50% of their wealth in debt with total debt higher than the peak debt during the bubble days. That would suggest corporate America in aggregate is close to being tapped out in their ability to borrower in the future. We live in a debt fueled economy, and if borrowing comes to a slow down in corporate America, the velocity of money within it should slow down. That's not good for the economy near term should that play out.
I feel this report does a great job of presenting some worth while data to review. It's by no means the kind of data I would use for short term market timing. However, I do think it casts a shadow over the stock market for 2012-2014.
I have several reasons why another 2008 is coming and this data seems to raise the red flags for the future.
Hope all is well.
J.D. Rosendahl, Rosey