Stock buy back is a huge problem. It was actually illigal until 1982.
The prices of stocks has been artificially supported by the very companies themselves because of cheap money for last 8 -9 years.
The main issue here is the access to inexpensive capital by the companies has been used to buy back their shares opposed to growing the company itself, spending on human resources and technological breakthroughs.
"It boosts prices in the short run, but the real way to boost the value of a corporation is to invest in the future, and they are not doing that.”
This is how ridiculous it has gotten. The price of Chipotle, shares of the upscale fast food chain have skyrocketed from $60 to $800.
So what did the company do? Bought back shares at $500, $600, $800.
Now it’s buying shares back at $280!!!
What a waist!!!
And this is just one example of the many!
They should have shorted their own shares instead as a hedge against something bad happening.
Millions of dollars waisted that could have gone to expansion, product development, advertising, hiring, investments in technology and so on.
But what is the result? The company is miserably failing.
There is no way to get millions of waisted capital back.
As interest rates rise they will no longer waist the capital to buy shares back.
What do you think will happen?
Shares will fall even lower.
Which means the shares they bought back at $800 would be worth 80-90% less then what the company paid for it.
With that money they could have started awhile new company or invested in something meaningful.
But guess what? One of the senior management guys was too busy snorting cocaine.
When the money is easily obtainable it is waisted. Especially in the hands of the wrong people.
When money is not produced but simply printed and put in circulation by the fed it simply produces a temporary injection of fake and wasteful demand in the economy.
When the printer stops- fake consumption stops.. But by that time the people are so used to the easy way of making money and easy way of doing business. When they are actually faced with a situation where they have to work hard to earn it thats when things start getting really bad. The disaster happens-nobody wants to work hard anymore.
Why do you think after 3.9 trillion injection in the US economy by the Fed GDP barely moved?
The money was not used on production. The money was waisted.
Why work? When you can just buy bitcoin.
Cheap money created dangerous mentality.
Similar mentality was observed in 1920's when production in agricultural sector suffered as a result of everyone just wanted to get in the stock market and get rich by watching stock prices skyrocket.
The price of such mentality was a decade of great depression that followed the market crash of 1929.
For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation.
But since 1982, when they were essentially legalized by the SEC, buybacks have become perhaps the most popular financial engineering tool in the C-Suite tool shed.
And it’s obvious why Wall Street loves them: Buying back company stock can inflate a company’s share price and boost its earnings per share — metrics that often guide lucrative executive bonuses.