Monday, February 23, 2015

Fundamentally Flawed - Chapter 3.5, Taxes and Corporate Stock Buybacks...Stock Market Nirvana

From ‘00 to present corporate profits increased $1.41 trillion while Federal tax revenue increased $287 billion.  Or said otherwise, as you can see in the below chart, corporations are keeping a far greater share of their income despite zero net job growth and below trend capital expenditures over the last 14 years.

Tax & Corporate Profits Source, US BEA, GDP; Employment Source, US BLS, Productivity and Costs

A quick glance at the chart below shows the % of federal tax receipts as a % of corporate after tax income began collapsing under GW Bush and went to new lows under Obama.  Corporations making record profits, paying so little in taxes, and creating no net jobs since 2000 in the process. 
Tax & Corporate Profits Source, US BEA, GDP
And below the collapsing corporate tax rate (as a % of corporate profits) vs. consistent personal tax collections (as a % of all employee income).  Note the 2000 corporate tax rate of 46%...and how it’s fallen off a cliff since!  Also recognize the US employee Salary / Wage data is only there as an indicator of the % of taxes taken from the working public…but the savings rate is negative so (net) none of this money actually hits bank accounts as do corporate after tax profits.
Tax & Corporate Profits Source, US BEA, GDP; Salary/Wage Source, US BEA
The chart below shows the blast off of corporate profits since 2000 and the massive boost to those profits from abnormally low tax collection (pretty good guess these abnormally low tax collections coupled with float shrink are helping push equities ever higher…).
Tax Source, US BEA, GDP
Below you can see, on an annual basis, how much money flowed to corporations and away from federal taxes coupled with a spending spree resulting in far larger federal deficits.
Tax Source, US BEA, GDP
Under GW Bush and Obama, the collapsing of the corporate tax rates from long term averages, has added approximately $3 trillion to corporations and saddled taxpayers with the same $3 trillion in additional national debt.  GW Bush certainly started this game but a very popular Obama and Democratic Congress had every opportunity to change this…and actually only extended and broadened the Bush initiatives.
Tax Source, US BEA, GDP
Below is a clear view of the progression of this heist of wealth to a small minority and debt to the vast majority. 
Tax Source, US BEA, GDP
Corporate taxes rising is about as likely as the Fed raising interest rates!!!  These are one way trips.  So what do corporations do with all that money? 

Here, courtesy of Deutsche Bank (via ZeroHedge), is the answer:

In case it is unclear just what the chart above shows, here is DB's explanation: "buyback announcements have surged with February ($98bn) posting the  largest monthly tally on record. The pace of actual buybacks tends to closely follow that of announcements."

Aka: lots and lots of buybacks.... but apparently not enough (as despite record corporate buying is starting to wane...)

2014 saw record share repurchases by companies, many at record valuations.  Still, even more went beyond using their own earnings as many also took advantage of cheap money loans thanks to low interest rates to repurchase even more shares.  Due to this, the net outstanding shares are shrinking, earnings ratios based on profits vs. outstanding shares are misleading, and corporate debt continues rising.

What is obvious is the economy isn't driving stock prices...see chart below.  So stock buybacks far in advance of new share creation makes a lot of sense...until it doesn't.

"surprise" index in 12 months...