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Thread: ...Torrent of Corporate Trading Dominating the Market & Short-Term Financial Engineer

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    ...Torrent of Corporate Trading Dominating the Market & Short-Term Financial Engineer

    Finally: SEC Frets about Share Buybacks, “Torrent of Corporate Trading Dominating the Market” and “Short-Term Financial Engineering”

    by Wolf Richter • Jun 11, 2018

    “Right after the company tells the market the stock is cheap, executives overwhelmingly decide to sell.”

    snip

    A study by the SEC of 385 recent share-buyback announcements — this is when companies announce how much money they will spend in the future on buying back their own shares, but before they actually begin buying them — found:

    Share-buyback announcements led to “abnormal returns” in the share price over the next 30 days.

    Executives used this share price surge to cash out.

    snip

    The surge in buybacks is largely due to the new corporate tax law. In the first quarter, companies actually repurchased an all-time-record $178 billion of their own shares. In terms of announcements of future share buybacks, May set an all-time record of $174 billion – in just one month! So this business is heating up.

    https://wolfstreet.com/2018/06/11/se...l-engineering/
    Last edited by labrea; 12th June 2018 at 07:01 AM.
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    Southern Strategy Liberal OldGaffer's Avatar
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    And massive cash flow ensues to the donor class...who knew?
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    Executives often claim that a buyback is the right long-term strategy for the company, and they’re not always wrong. But if that’s the case, they should want to hold the stock over the long run, not cash it out once a buyback is announced. If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is.
    Our founding fathers warned about corporations

    James Madison "incorporated companies with proper limitations and guards may, in particular cases, be useful; but they are at best a necessary evil only."

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    Quote Originally Posted by OldGaffer View Post
    And massive cash flow ensues to the donor class...who knew?
    yeah, its as many of us suspected, corporate tax breaks arent delivering investment in the future of the corporation, and people promise, but are helping line the pockets of a few.

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    Quote Originally Posted by labrea View Post
    Finally: SEC Frets about Share Buybacks, “Torrent of Corporate Trading Dominating the Market” and “Short-Term Financial Engineering”

    by Wolf Richter • Jun 11, 2018

    “Right after the company tells the market the stock is cheap, executives overwhelmingly decide to sell.”

    snip

    A study by the SEC of 385 recent share-buyback announcements — this is when companies announce how much money they will spend in the future on buying back their own shares, but before they actually begin buying them — found:

    Share-buyback announcements led to “abnormal returns” in the share price over the next 30 days.

    Executives used this share price surge to cash out.

    snip

    The surge in buybacks is largely due to the new corporate tax law. In the first quarter, companies actually repurchased an all-time-record $178 billion of their own shares. In terms of announcements of future share buybacks, May set an all-time record of $174 billion – in just one month! So this business is heating up.

    https://wolfstreet.com/2018/06/11/se...l-engineering/
    I doubled down on stock investing after Trump was elected, even though I initially thought he'd spook the markets and crash stock prices. By mid-November, I'd rethought my initial gloominess, just based on the math of corporate tax rates. When you sit down and crunch the numbers, it becomes clear what a difference a corporate tax cut can make.

    Think of it this way: the value of a stock can be thought of as the present value of all future dividends of that company. And dividends are post-tax. So, let's say you have a company that pays $10 in dividends per share per year. For simplicity, we'll say they dividend out 100% of their profit per year, and we'll treat it as a fixed dividend but depreciate the value by 3% per year to represent the time value of money. The value of that stock should be about $333.33 (the present value of all future dividends). To pay $10 per share after 35% tax, profits per share would have to have been $15.38. So, what happens if you lower the tax rate to 21%? The dividend should rise to $12.15 and the value of the stock to $405/share. So, that's a 21.5% rise in the value of the stock to an investor, just by way of falling corporate tax rates. To put that in perspective, since inauguration day, the S&P 500's value is up almost exactly that amount: 22.6% as of this writing.

    What we've seen under Trump, so far, doesn't look like a change in the fundamentals, but rather just a change in the cut of federal revenues that come from corporations. As they've gotten more of a free ride, the value of owning those share has risen. Some of that is showing up by way of those added after-tax profits going into stock buy-backs, some in the form of higher dividends, but in the big picture it's the same thing..... basically stock owners are getting a windfall by way of a tax change, while those who own less than an average amount of stock will end up paying for it, by way of their share of the increased debt the nation is running up as a result of the change.

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    Quote Originally Posted by Arkady View Post
    I doubled down on stock investing after Trump was elected, even though I initially thought he'd spook the markets and crash stock prices. By mid-November, I'd rethought my initial gloominess, just based on the math of corporate tax rates. When you sit down and crunch the numbers, it becomes clear what a difference a corporate tax cut can make.

    Think of it this way: the value of a stock can be thought of as the present value of all future dividends of that company. And dividends are post-tax. So, let's say you have a company that pays $10 in dividends per share per year. For simplicity, we'll say they dividend out 100% of their profit per year, and we'll treat it as a fixed dividend but depreciate the value by 3% per year to represent the time value of money. The value of that stock should be about $333.33 (the present value of all future dividends). To pay $10 per share after 35% tax, profits per share would have to have been $15.38. So, what happens if you lower the tax rate to 21%? The dividend should rise to $12.15 and the value of the stock to $405/share. So, that's a 21.5% rise in the value of the stock to an investor, just by way of falling corporate tax rates. To put that in perspective, since inauguration day, the S&P 500's value is up almost exactly that amount: 22.6% as of this writing.

    What we've seen under Trump, so far, doesn't look like a change in the fundamentals, but rather just a change in the cut of federal revenues that come from corporations. As they've gotten more of a free ride, the value of owning those share has risen. Some of that is showing up by way of those added after-tax profits going into stock buy-backs, some in the form of higher dividends, but in the big picture it's the same thing..... basically stock owners are getting a windfall by way of a tax change, while those who own less than an average amount of stock will end up paying for it, by way of their share of the increased debt the nation is running up as a result of the change.
    The short version, the rich just got richer and the poor just got poorer, thank you Trump!
    Thanks from labrea

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    Quote Originally Posted by Arkady View Post
    I doubled down on stock investing after Trump was elected, even though I initially thought he'd spook the markets and crash stock prices. By mid-November, I'd rethought my initial gloominess, just based on the math of corporate tax rates. When you sit down and crunch the numbers, it becomes clear what a difference a corporate tax cut can make.

    Think of it this way: the value of a stock can be thought of as the present value of all future dividends of that company. And dividends are post-tax. So, let's say you have a company that pays $10 in dividends per share per year. For simplicity, we'll say they dividend out 100% of their profit per year, and we'll treat it as a fixed dividend but depreciate the value by 3% per year to represent the time value of money. The value of that stock should be about $333.33 (the present value of all future dividends). To pay $10 per share after 35% tax, profits per share would have to have been $15.38. So, what happens if you lower the tax rate to 21%? The dividend should rise to $12.15 and the value of the stock to $405/share. So, that's a 21.5% rise in the value of the stock to an investor, just by way of falling corporate tax rates. To put that in perspective, since inauguration day, the S&P 500's value is up almost exactly that amount: 22.6% as of this writing.

    What we've seen under Trump, so far, doesn't look like a change in the fundamentals, but rather just a change in the cut of federal revenues that come from corporations. As they've gotten more of a free ride, the value of owning those share has risen. Some of that is showing up by way of those added after-tax profits going into stock buy-backs, some in the form of higher dividends, but in the big picture it's the same thing..... basically stock owners are getting a windfall by way of a tax change, while those who own less than an average amount of stock will end up paying for it, by way of their share of the increased debt the nation is running up as a result of the change.
    So then if all things are equal with the exception of the corporate tax rate, why are executives selling their stock now?

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