What Happens When The Buy-Back Music Stops?

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Chuck Prince, Citigroup™ CEO, 2007 interview with FT™ in Japan.

Would any next-in-rotation fund-manager care to explain what happened next? “Bueller?”

Let me continue with even more of what can only be described as, fall-down, laugh-out-loud material, that I’ve been watching professed across much of the mainstream business/financial media over the past few weeks.

It’s been so outrageously laughable – it’s down right scary.

Here’s a sample using a composite view of the myriad of next-in-rotation fund-mangers paraded across the mainstream business/financial media of late. For if I heard the following once, I heard it a thousand times. To wit:

Everyone was worried about earnings and that has been put to rest with __%(fill in percentage metric of choice or, just go bold as some did, stating “all”) beating expectations.

So all this worry about trade and more is just the wrong-again Bears, once again, trying to put fear into the marketplace.

They are wrong now, they were wrong in the past, and we think they’re wrong about the future.

We see this as another buying opportunity, with even higher highs going into the end of year, based on what we heard from earnings calls, along with the Fed now cutting rates.

There’s plenty of cash still on the sidelines. And the market reaction to buying this latest sell-off shows there’s still an appetite for equities. Not to mention, where else are they going to go? i.e., T.I.N.A. there is no alternative.

Here’s the dirty little secret to the above:

All that “buying” has been nothing more than all these companies beating EPS metrics (many on lower guided metrics) by borrowing and spending precious resources once used for such archaic ideas as R&D and more, only to buy back their shares to the tune of $100’s of Billions per quarter. Yes, per quarter.

2018 set a record at over $223 Billion in Q4 alone making 2018 a record year, shattering a prior record of a what now seems paltry in comparison of $589.1 Billion. But here’s the kicker…

In what year was that prior record set? Hint: See opening quote above.

Apple™ alone spent $74.2 Billion in 2018. It spent some $20+ Billion including dividends just this last quarter alone.

But wait…there’s more! As in, much more: In May they announced an additional, yes, that’s on top of all other allocations, an additional $100 Billion buy back allocation – and – increase its dividend by 16%.

So, I ask you dear reader: With out it, where would Apple-the-stock be trading, currently?

In May of 2014 I made the following observation that caused many a TV, next-in-rotation fund manager, to argue I had no idea of what I was talking about. To wit:

The call of the day: And with the potential move to buy Beats, Apple  could very well take the final step in its (d)evolution into Microsoft. That’s pretty much how Mark St. Cyr sees it. Of course, he’s not the only one piling on such a purchase. Music critic Bob Lefsetz calls Tim Cook a clueless operations guy. But St. Cyr takes it a step forward by comparing Apple to the lumbering software giant. In a “complete and utter cave-in to Wall Street,” Apple’s latest report wasn’t consumer-products based; rather, it was designed to play Wall Street’s game, he says.

“Dividends, debt, splits, and more,” he said. “I don’t think the iPhone has added as many new features at once as the new features released in Apple the stock.” That’s how Microsoft does it, said St. Cyr as he waxed on about the Apple you knew is no longer. “I hope I’m wrong, but the actions are beginning to not only speak for themselves — they’re screaming.”

Shawn Langlois, MarketWatch™ May 13, 2014

So let’s use the same media outlet, so those same “analysts” can’t accuse me (though they will anyway) of “cherry-picking” my numbers or sources, and see how that’s all working out, shall we? Again, to wit:

Apple’s evolution mirrors Microsoft’s in many ways. While many investors worry that Apple is losing its grip on innovation and growth, they are missing the broader story of this tech stock becoming a more mature company that may not move as fast but still has plenty left to offer.

Jeff Reeves, MarketWatch™ “Opinion: Apple is the new Microsoft…” June 4, 2018

So, some of you may be saying, “Yeah, so what?! Just look at these markets since!!” And that would be a fair point. But all I’ll say or do, once again, is to point out that was exactly the overwhelming premise of thought when Mr. Prince made his now infamous remark. i.e., just before it all went quiet.

Buy backs for 2018 came in at just under ($804) a $TRILLION Dollars. 2019 is already on pace to shatter that $Trillion Dollar threshold with 2019 comparable already up 18%.

However, let’s remember, this was all before China decided to unleash the “Currency Kraken.” Now, currencies are coming into play, and make no mistake about it: Tariff tit-for-tats are like playing with BB guns – currency wars are where the heavy artillery hang out, where unintended casualties and friendly fire mishaps happen on global scales, where no one is immune.

I’ll get back to the currency problem in a moment, but first this point needs to be emphasized: When you, a company, a market, a ______(fill in the blank) rely solely on the largess of what some central bank authority decides as some crutch to keep your “stock” value or bonus aloft. All you’ve done is sold your company’s prospects for continued success down the river. Period.

Think I’m off base? Fair point – than think about it this way…

It was only back in December when you would read or heard things like the following. To wit:

Boeing’s board voted Monday to raise its quarterly dividend 20 percent to $2.05 per share in 2019. Additionally, the Dow component’s board approved a $20 billion stock buyback plan, replacing its prior authorization.

CNBC: “Boeing raises its dividend 20%, boosts buyback plan to $20 billion, reaffirming its bullish outlook”

Then, to be polite, “when things hit the fan.” Suddenly all that great use of cash going into buy-backs rather, than R&D or safety research, training, et cetera, et cetera, suddenly doesn’t seem as such a smart call by the C-suite any longer. For just four months hence, as in April, that same company calling for even more spending on bonus compensation buy-backs, suspended them.

Now, one has to wonder, which thing is going to be the “thing” Boeing focuses on keeping aloft first: Boeing-the-stock? Or Boeing aircraft?

I’m sorry, and I know that seems crass. However, is it really when compared to how much Boeing has been spending on everything other (e.g., buy-backs) than its core product? Especially now in retrospect.

For is it not fair to say, at the least, to point out there appears to have been just a tad too much focus and willingness to allocate precious resources on its stock performance rather, than the core product? Again, I know how it sounds, but the questions of prudence still remain, regardless.

“Now what does this all have to do with currency?” you may be asking, as always, great questions, and it’s this…

Should for whatever reasons a true currency war erupt in earnest as is already appearing to be emanating from China, whether the politburo is outright responsible for it, or not, other nations central banks’ will need to sell anything and everything they can to help fund possible gyrations within their own currencies to help, or at least try, to stabilize their own.

To be clear: I am of the view they (China) are hopelessly lost in reaction mode, as in, it’s already out of their control.

That one situation alone portends a possible panic selling, at the worst time, for all those central banks which purchased equities solely with their “print buttons” prior. Why?

Because when you need money, fast – you sell what’s profitable first. And currency markets make equity markets look like child’s play.

“Any precedent?” you ask. Again, great questions. Let me try with this one…

Hint: Swiss National Bank, 2018 Market Rout. To wit:

(Source: ZeroHedge™: SNB unexpectedly sold US stocks in Q3, dumping over 1 million Apple shares)

“Why does the above matter?” you may be asking. Another, great question, and it is this…

The SNB is now one, if not the, largest sovereign hedge funds the world has ever known. And when the world of currencies panic? They panic run to the Swiss Franc. Which then can cause the Swiss to panic needing to sell anything and everything to help stabilize their currency which is no longer pegged. Not to mention try and “lock-in” any prior profits.

So now I’ll just end with me asking: What could possibly go wrong?

After all, isn’t this just another buying opportunity as all the talking-heads across the business/financial media are telling us?

“Bueller?” Anyone?

© 2019 Mark St.Cyr