Thursday, November 12, 2015

Corporate borrowing and stock buybacks reach the point of diminishing returns

Over the past two years, corporations in the U.S. have been manipulating their EPS (Earnings per share) by focusing on the number of share’s side of the equation, rather than increasing sales and revenue.  And while the new normal on Wall Street has been to exceed analyst’s estimated earnings per share, more often than not they have failed in beating Wall Street’s quarterly forecasts for overall earnings.
However, like the Federal Reserve finally reaching their own point of diminishing returns, where it now takes approximately $14 in newly printed dollars to create $1 of real GDP, the consequences for corporations borrowing extensively to buy back their own stock has now reached the point where default, bankruptcy, or even worse, a corporate takeover is a real possibility for a growing number of companies.

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