Thursday, April 26, 2007

Sale of the century - Buy Backs / Economist

in almost every conference call or press release management has tried to save bad earnings with a large buyback. very often debt fueled. some of them are just 3-6 month later in big big trouble ( several lender, homebuilder etc ) or already gone (new century...). the percentage of junk as shown from s&p doesn´t makes things more comfortable.......another point is that management is unloading their shares at the same time the companies are buying back the shares.... and the scary thing is management doesn´t bother if their debt fueled buyback triggers a downgrade of the entire debt......
kann diese einschätzung nur bestätigen. in nahezu jedem call oder veröffentlichung hat das management versucht schlechte ergebnisse durch massive (ofte auf pump) aktienrückkäufe zu verschleiern. etliche von denen sind keine 3 bis 6 monate später in großen problemen oder gar pleite. die betrachtung der s&p statistik macht das ganze nicht gerade gemütlicher.....ausserdem verkauft das management in gleicher zeit in rekordtempo eigene aktien/optionen.....besonders bedenklich wird es wenn das management auf pump aktien zurückkauft und dadurch sogar die unmittelbare herunterstufung de kreditwürdigkeit achselzuckend in kauf nimmt.

Companies are buying back their own shares at a record rate

BUY now while stocks last. The retailers' traditional slogan is being re-enacted in the American stockmarket. The supply of quoted shares is shrinking fast.

The biggest buyer is the corporate sector itself. According to Tim Bond, of Barclays Capital, American companies acquired (via takeovers and buy-backs) some $602 billion of shares last year. In the fourth quarter, the pace of purchases was running at an annualised rate of 6% of the entire market. April 23rd was the biggest day for takeover announcements since the AOL/Time Warner deal of January 2000 and the following day saw IBM announce a $15 billion buy-back. With that kind of support, it is hardly surprising that investors can shrug off economic and geopolitical concerns and push the Dow Jones industrials to a new record above 13,000, as they did on April 25th.

Mr Bond says this equity-buying splurge is almost exactly matched by the corporate sector's financial deficit—in other words, companies are borrowing money to buy back shares. This gearing up of the balance sheet is occurring when profit margins are at their highest level since the 1950s. It looks like hubris....

größer / bigger

Smithers & Co, an economic consultancy, takes a gloomy view, arguing that American profit margins are reverting to the mean and thus the prospects for company earnings are all downhill from here. It has observed an inverse link between profit margins and personal savings, which are very low in America. This creates the risk of a vicious circle in which any fall in the stockmarket will push up personal savings, depressing profits and hurting the stockmarket further.......
Despite good results so far, HSBC says forecasts for 2007 earnings per share for S&P 500 companies have edged down from $95 in the middle of last year to less than $93 today. And Dave Rosenberg, a Merrill Lynch economist, says that, over the past six months, business sales have fallen at an annual rate of 2.3%.

If business conditions are getting more difficult, a bit of financial engineering will help. Buying back shares with borrowed money boosts earnings per share, so profit growth can continue to look healthy. That was an important driver in the final stages of the 1990s bull market.
>here one example from the builders. and at the same time they have bought back stocks.
> hier das beispiel der builder. alle haben in 06 aktien zurückgekauft.

More than half, or 11, of the 21 builders that Moody's rates failed to generate more cash than they spent in 2006, analyst Joseph Snider in New York said in a report today

Pulte was one of three investment-grade companies generating negative cash flow for the previous 12 months at the end of the year, Snider said. The other two are Dallas-based Centex Corp. and Toll Brothers Inc. in Horsham, Pennsylvania.

Speculative-grade companies losing cash at the end of 2006 were: Red Bank, New Jersey-based Hovnanian Enterprises Inc.; Irvine, California-based Standard Pacific Corp.; Hollywood, Florida-based Technical Olympic USA Inc.; Columbus, Ohio-based M/I Homes Inc.; WCI Communities Inc. in Bonita Springs, Florida; Reston, Virginia-based Stanley-Martin Communities LLC; William Lyon Homes Inc. in Newport Beach, California; and Meritage Homes Corp. in Scottsdale, Arizona.

In the long run, this is not sustainable. But so far, investors do not seem to have noticed. Slowing profits forecasts have been offset by an increase in the prospective profits multiple on American shares. Corporate borrowing rates are at cyclical lows, increasing the incentive for companies to buy back shares and for private-equity groups to launch takeovers. For as long as that buying spree continues, those who worry about the long-term will look out of touch.
> the homebuilder etc have been forced to shift priroties to be bondholder friendly within a quarter. things can change very quickly.
> am beispiel der homebuilder kann man sehen wie schnell sich die prioritäten des managements verändern können.
disclosure: short several homebuilder

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