MarketWatch reports that much of the markets gains in the first half of 2011 may be less substantial they appear, saying,”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 (NYSE:SPY) rose more than 5%.” The report from TrimTabs reveals that companies spent a total $124 billion ($2 billion per day) in the first three months of the year on stock buyback campaigns. More disconcertingly, executives at companies that were buying back stock in swaths were not moving in their own portfolios, signifying either an artificial corporate confidence in company stock or a disconnect in valuations between the companies and their leading inside execs.
TrimTabs Chief Executive Charles Biderman comments, “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. 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.” MWs Arends elaborates, “Stock buybacks outnumbered executive stock purchases by the highest ratio TrimTabs has seen since it started tracking the numbers back in 2004.”
A widely held investing maxim, following the lead of trading moves by insiders (who are often privy to good intel) can bring outside investors significant returns, one reason why published filings of hedge fund managers and famed investors, such as Warren Buffet, George Soros, and John Paulson, are given so much credence. When it comes to corporate stock buybacks, the motives are less certain, especially in the case of this year’s moves, which were reportedly funded by borrowed money.
Arends continues, “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…When a company borrows money to bolster its own stock price, it makes me wary of the bonds.”
The second half of 2011 will show us whether or not the year’s early gains are real or sustainable. Here are some of the company’s making the biggest buyback purchases in the first two quarters of this year. Walmart (NYSE:WMT) recently announced a coming $15 billion dollar stock buyback, in addition to a $14.8 billion dollar purchase the company made of its own shares last year. Lorillard (NYSE:LO), the 3rd largest US cigarette maker, also announced in May plans to buyback $400 million in stocks, extending its run of self-investments to $1.4 billion. Leading investment bank JP Morgan (NYSE:JPM) also made a big purchase of its own stock in March, totaling $15 billion. Other banks were also big on buybacks in early 2011, with Wells Fargo (NYSE:WFC) taking a $6 billion stake in its own shares, and Bank of New York (NYSE:BK) issuing a $1.1 billion share repurchase.
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