The world turns. New people are born and eventually move off the couch and into something resembling employment. And thus new generations of nonsense about “solved” topics are produced.

Robert Armstrong of the FT labors well under the insanity of having to produce daily content about financial markets. This piece touches on some of the usual “blah blahs” of share repurchase but speculates that the rise in interest rates will reduce share repurchase, which a number of commentators suggest was a big backdrop for stock performance. We disagree and note the following in a “Why am I up this early” email to him.

Robert:

1. Never rely on a quant for a practical explanation of how life works.

2. While directionally correct on rates, as you note, it does not work like that. The biggest increase in share buyback activity has been to support the argument that stock-based compensation does not count as a real expense and it resides in large cap tech which issues stock like candy to fake earnings and then buy back stock to keep shares flat. This happens almost without regard to the valuation of the stock, the level of interest rates, or the price of cheese in Paris.

3. Procyclicality is the 2nd biggest factor. VERY few do the actual math you suggest as to whether to buy back stock or not. If they do no one opens the spreadsheet. I feel good and generate cash at the top of a cycle so I do it is more of the operative Board narrative. Conversely, I am scared out of my pants when my stock is low so I do nothing. VERY few actually try to understand a baseline value for their own company and simply buy stock when it’s below that or do nothing..or issue it when it’s high as a fact pattern.

4. The key factor to watch is PER SHARE value, not market cap, enterprise value, of the gross revenue, ebitda or earnings number. And the whole thing matters because if dilution is “4 to 6%” per company before the sun rises on Jan 1, that becomes a more and more difficult hurdle for competitive returns.

Never changes.
JB