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June 29, 2011, 12:00 a.m. EDT
By Brett Arends, MarketWatch
NEW YORK (MarketWatch) "” A new report from TrimTabs, the investment analysts, has blown the whistle on what really went on behind the stock-market "boom" we saw in the first quarter, when the S&P 500 Index rose more than 5%.
No wonder everyone turned bullish by the end of March "” just before the market started tanking again.
So who was driving up the market? What was creating this boom?
Tiny GSV Capital made what seemed a most modest investment: plunking down $6.6 million to purchase private shares in Facebook. The response was anything but subdued.
Turns out it was the companies themselves. TrimTabs says companies spent a thumping $124 billion in the first three months of the year trying to boost their share prices by buying up stock.
That works out at about $2 billion for every day the market opened.
Meanwhile, according to Trim Tabs, guess who avoided buying stock during the first quarter? Company executives. The "insiders."
These are the guys whose stock purchases tend to strongly signal bull markets and genuine booms. They were spending investors' money buying their stock, but weren't spending their own.
TrimTabs says insiders' stock purchases came to less than $2 billion for the entire quarter, a comparatively low level.
"We've never seen such a sharp contrast between what insiders are doing with their own money and what they're doing with the money of the companies they manage," TrimTabs Chief Executive Charles Biderman wrote in a note. Stock buybacks outnumbered executive stock purchases by the highest ratio TrimTabs has seen since it started tracking the numbers back in 2004.
"While insiders are willing to use corporate cash to try to support the value of their stock-based compensation, they don't seem to think their stocks are attractively priced," Biderman said.
No kidding. When it comes to insiders, follow what they do, not what they say.
When company executives are spending their own money buying stock, it's a bullish sign. After all, who better knows their companies' prospects? But when they are sitting on their hands or cashing out, it's not so good.
As for companies buying up their own shares, this needn't be a bad thing. After all, if you drive up stock prices, all shareholders benefit.
Share buybacks also are a pretty good way of returning cash to investors. They're not as good as paying dividends, but they are a better investment than most of the other things management likes to do with the money "” like investing in pet projects, or providing more executive perks or making ill-timed acquisitions.
Alas, in this case, there's another chapter to this story.
Where did the companies find the money to buy back their stock? In some cases the money came from profits. That's a good thing. But in other cases they just borrowed the funds.
According to the latest data from the Federal Reserve, corporate debt surged again last quarter "” to the highest levels on record.
Debts for nonfinancial corporates hit $7.3 trillion by March 31, reports the Fed. That's up more than $100 billion since the start of the year.
The total at the end of 2007, at the peak of the so-called "credit bubble," was just $6.7 trillion.
This borrowing spree has pushed overall gearing for nonfarm, nonfinancial corporates to hefty levels. The Fed says that U.S. nonfinancial corporates now have debt equal to 50% of their net worth. It's near record levels for modern times. As recently as 2006, it was just 40%.
When a company borrows money to bolster its own stock price, it makes me wary of the bonds. When the executives aren't even willing to invest their own money, it doesn't exactly make me enthusiastic about the stock either.
Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse
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