Be Very Afraid of Share Buybacks

Be Very Afraid of Share Buybacks
  • Ouch…always know your downside
  • A resurging sector in the debt markets…
  • Relax — it’s all explained here with some deep insight from one of the financial world’s luminaries…

Before we get down to business, last week my publisher and I recorded a video detailing the biggest industry disruption in Australia for 100 years…and the huge opportunity coming out of it.

This morning we finally released it.

When you get a moment today, grab some headphones or earphones, and give it a watch. It’ll be worth your while.

Now…just when the Aussie market looked to be brewing for a bit of a run higher, the US market throws in its worst session since May.

The S&P500 was down 1.4% overnight (our time).

Let’s see how Aussie stocks hold up today.

Earnings season rolls on. Results have been slightly choppy across the board. You have to feel for shareholders in ResApp [ASX: RAP].

The shares were absolutlely hammered on Wednesday. Down 78% on the close, and they’re unlikely to bounce back any time soon.

As a trader I know says, ‘if the market gives you time to panic, it’s already too late’. It’s a good example of why risk management is the most important thing you can control as an investor.

Even Nick Scali took a 15% hit yesterday despite the fact the company posting a record net profit. Boss Anthony Scali suggested some store sales might slow. Cue sell-off. You have to know what type of investor you are there. If you’re in it for the long-term, you can probably ride that one out.

Like I said, a bit choppy. Mind you, the banks seem to be doing ok. Commonwealth Bank logged a $9.9 billion profit earlier in the week.

And now NAB’s [ASX: NAB] latest trading update says cash profit is up and doubtful debts down.

$675 million for Pepper…too low?

You might remember I mentioned that non-bank lender Pepper Group [ASX: PEP] had received a takeover offer last month. There a question over whether it would get done.

Well, it’s now confirmed Pepper’s management are going for it.

Shareholders still need to approve the deal. Interestingly, investment group Perpetual hold a 12% stake in Pepper and will vote against it.

Perpetual is saying the $3.60 offer price undervalues the company. I’m inclined to agree with them. Pepper’s earnings were really beginning to crank up.

Regardless, I find this interesting in the context of Australian housing…

KKR, the firm wanting to buy Pepper, has obviously done its due diligence here and doesn’t see real estate as crashing anytime soon.

It also signals that the resurgance of residential mortgage-backed securities will continue. The level of these bonds has doubled this year over the last.

So even with the regulators cracking down on the big banks when it comes to housing loans, there’s plenty of cash that can flow through to property via the non bank sector.

It’s just a question if they can keep finding cheap sources of funding. Watch this space.

Relax…it’s all explained now

You might remember residential mortgage-backed securities played a big role in the global financial crisis. We just hit an anniversary now on this.

It was on 9 August 2007 that French bank BNP Paribas freezed some US$2.2 billion worth of money market funds.

Jim O’Neill, a former Goldman Sachs guy, says that marked the beginning of the crisis in an opinion piece in today’s Australian Financial Review.

O’Neill is famous for coining the term ‘BRICs’ to describe the rising power of Brazil, Russia, India and China back in 2001.

He’s ridden this term in corporate events and speeches and on TV ever since, though you don’t tend to hear it as much anymore.

What’s interesting with this piece though is O’Neill reflecting on the global financial crisis as part of this BNP anniversary.

He attributes the 2007-2009 crisis to the trade imbalance between China and the USA. Implied in this is his forecasting ability. He claims he wrote and handed out research papers on this topic prior to this crisis.

He doesn’t quite explain why this imbalance crashed the economy, only that the global financial system ‘performed that job rather poorly’.

And despite this factor still being unbalanced ­— if improved ­— right now, and it’s been the same for a decade, the global economy is somehow ‘much healthier than it was 10 years ago’.

O’Neill then ponders where another financial bubble might come from.

He opines that many leading companies focus excessively on quarterly profits, because executives link their pay to the share price. He even has a go at share buybacks.

What these two things have to do with a possible financial bubble remains a mystery, except to Jim.

He even cheers British PM Theresa May for ‘taking a hard look at the role’ of share buybacks. I can’t help but think with all the problems in Britain, is this really a big concern for her?

We can take a look at share buybacks right here…

A company has some money.

It decides to retire some of its shares by buying them and extinguishing them.

What, exactly, is the problem here?

It’s at moments like these you can’t help but grab your stomach and have a good belly laugh.

I’m not sure what’s more absurd — the pontificating that people make around the financial system, or the poor souls who take it seriously.

Best wishes,

Callum Newman

Editor, The Daily Reckoning Australia

P.S. As I said at the start, do try and find some time to watch this video. Most people see the threats of this looming event. Hardly anyone is seeing the money-making potential. But you should see it for yourself. Click here to view, and let me know what you think!