Corporate buybacks hit record levels in Q3 2004 …

Stock buybacks by U.S. Nonfarm Nonfinancial Corporations reached an annual level of $208.8 billion in Q3 2004, 76.6% higher than the frantic pace of buybacks at the peak of the Great Bubble in 2000.

The level of buybacks was 3.3 times corporate profits after taxes and dividends — an indication of how anxious corporate executives were to give value to stock options before FASB 123 accounting rules kick in later this year.

Profits before taxes in Q3 2004 were 20% higher than in 2000, but buybacks expanded by 77%.

Life insurance companies, generally strong buyers of equities, bought only $47.7 billion during the quarter, less than the levels of 2000-2002, and just slightly more than in 2003, a down year for stocks.

See table on Corporate Equities.

Buybacks were the primary force keeping stock prices up in Q3 2004, even exceeding the effect of purchases by mutual funds. By channeling such huge amounts of corporate cash into the hands of short-term speculators, at the expense of long-term investors, U.S. corporate executives demonstrated once again that the “corporate governance” movement is largely a sham — meaningless doubletalk to deceive unsophisticated investors.

(See: The Great Misleading and Corporate Governance.

Signs of weakness in stock flows during Q3 2004

Despite the record level of buybacks, stock prices represented by the S&P 500 index rose less than 0.3% during Q3 2004. Individual investors were net sellers of stocks, even taking into consideration purchases through mutual funds.

Households sold a net $238.8 billion in equities (annual rate), while mutual funds bought only a net $146.8 billion (annual rate).

Throughout 2004, individuals have been net sellers of equities (even with mutual fund investment). This suggests that the bloom may be off the Common Stock Legend.

Another sign of weakness was that private pension funds and bank trusts and estates were net sellers of equities during the quarter. Considering that stocks seem over-priced in historical terms, both with respect to cash dividends and price-earnings ratios, the outlook for equities would seem to merit caution.

Waiting for foreign issuers to drop the other shoe …

Perhaps the surest sign of the fragility of stock prices was the low level of issues by foreign corporations (only $34.3 billion), the lowest level since 2002.

Ordinarily, foreign issuers cancel out much of the effect of domestic buybacks, but during Q3 2004 this countervailing force was largely absent.

Nevertheless, massive domestic buybacks only managed to move up stock prices marginally. When foreign issuers return to the market, domestic buybacks may be insufficient to sustain stock prices.

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