Tuesday, September 27, 2016

BUY BACK OF SHARES...CREATING INCOME INEQUALITY FOR COMMON INVESTORS.

 When global uncertainty strikes and stock markets head for correction we find financial tools being deployed to keep the market alive.  These practices only results short term gains and long term income inequality problems for the society. This article will throw some light over the concerned matter of how various tools of finance are exploiting the common investor’s resources and how in the long term income inequality will be created. Buy Back of shares has become new game where despite of weak corporate earnings and grim outlook of growth of economy and company the share prices soar to new highs. This is mainly married to the concept that at any cost stock market and its related investor’s needs to be fooled at all point of time. Well it’s quite harsh but the fact is that when we find that on an quarterly basis the Buy back of the S&P 500 have soared to $175 billion in 2016 Q1 from $75 billion in 2012 on a quarterly basis. In the 12-month period ending March 2016, S&P 500 companies spent a record $589.4 billion on share repurchases according to S&P Dow Jones Indices, beating the previous year-over-year record of $589.1 billion set in 2007.  That number and the funds are huge. Zero interest rates have only benefitted the cash rich of society and not creating enough employment opportunities. I find its quite impossible to stop as we are more in an integrated financial markets where safe assets like PPF and hybrid bonds have invested all in stock markets. ETF and other products have also injected their funds into the same segment. Hence buy back is impossible as if any government imposition or restriction practices come ahead it will create problem for the markets as a whole to grow.

It’s a disguise game being played where despite of weak financials and company, economy the stock markets grows. We all know that if the stock markets grow despite of weak economic growth the world will accept the growth at any cost. If you don’t believe the strength of impact of buy back then please note that stock repurchases worth almost $2 trillion have helped buoy the bull market since March 2009. Fund managers are clever too; they came up with Buyback based funds where inflows and returns were beyond phenomenal.   European companies also followed the same path. Hence a question which comes in mind when the bubble will go for burst. It will never and even if it goes it will impact the common investors and not the cash rich fellows of the society. These practices have created income inequality and created long problems for the social life of the society as behavioral culture changes.  Income inequality is going to rise in the long term as more complicated the financial products and its investments are going to grow.. An argument might come that buyback helps to rewards shareholders but that’s story in the short term. Common investors goes by growth and returns and hence when growth is achieved by Buy back its often ignores the real story of the company. This is the place of birth of income inequality.

Paying divined to the investors are better since these companies and practices don’t hide any de-growth stories and are very clear in their operation. They don’t play with common investors and one can read very clearly the growth stories of the company. Buy back on the other hand is way to hide poor growth numbers and outlook of a company.  When the next recession will hit its quite hard to find any new theory of crisis management at today’s time.


Now getting into the shoes Indian corporate have also started rolling out of Buy Back of shares. Well the logic behind such buy back is that share holders are being taxed in case of hefty dividend payouts as dividend payout is very much under taxation slab. Well a good path to reward shareholders and also fool the government.

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