Rampant share buybacks bold ill for future growth

Excerpt from an article by John Plender, the thoughtful Financial Times commentator:

"If liquidity and confidence were the only considerations, there would be little cause for concern about the real economy. Yet US home lending has been a huge driver of global demand.

It is now going into reverse, with analysts such as Bill Gross of the Pimco fund management group expecting house price deflation in the US of up to 10 per cent in the absence of governmental intervention to prop up the market. On present policy, it is hard to see how the change in mortgage market conditions can fail to precipitate an economic slowdown.

In the midst of all this, many investors are baffled that equity markets have not been more seriously damaged. Part of the explanation, which may be a more hopeful pointer for the global economy, is that confidence in the corporate sector has taken much less of a knock than in finance. With relatively unstretched balance sheets, business people across the world have responded to falling share prices by initiating share buy-backs."

In response to the original article, I believe that the general corporate response to falling shares is not corporate buybacks. Corporations are coincidentally buying back shares because they cannot find a better yielding investment in which to place their excess cash. This might appease the complacent or short term shareholder, but it definitely bolds ill for future productivity and earnings for there is no investment in the future. This holds twice as true for those firms in growth industries. Entities in growth industries should be focused on growing, not buying back shares.

Comments

[Trader John]

Appreciate your insights. Good writing, insight, and analysis. You are now in my stable of regular sources to check. Thanks.