Secret buyer is increasing inventory right now

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It was in the spring of 2021, and Apple Inc.

AAPL
had a problem.

It was time to announce their second quarter results. With the economy largely back to normal, even reaching new highs, Wall Street expected good news. In a press release, the company revealed what was really going on.

The turnover had reached a record level: 89.6 billion dollars. There was double digit growth in all product categories. Sales increased 54% year-on-year. Profits increased 119%. The high expectations of investors have been completely shattered.

What exactly was the problem then?

Well, as funny as it sounds, Apple had too much money.

As of early spring, the company held $ 160 billion in marketable securities (mostly US Treasuries). On top of that, they were sitting on $ 38.5 billion in cash. That is, in total, more than $ 200 billion. To put that number into perspective, consider this:

If you took the amount of Apple money did not use, on its own, and used it to start a whole new business, it would be the 56th Most Valuable Business in the world.

We’re talking about an all-time record. Apple was overflowing with wealth and, with revenues higher than ever, was printing new money faster than it could spend the old one.

Of course, we do not care if we call this a “problem”. Except that really is a problem.

You see, when the pandemic first hit, having a lot of cash on hand was important, if not necessary, for struggling businesses. We all know the story by now: stores have closed, people have lost their jobs, transactions have slowed at a breakneck pace. No one knew how long the virus would last and, by extension, how long the economy would continue to collapse. So Apple, JP Morgan, and regular mom and pop stores all boosted their funds for rainy days. According to data from Refinitiv, from 2019 to 2020, the amount of cash and cash equivalents held by US and European companies increased by about three trillion dollars. By the end of the year, however, the vaccines were approved, unemployment had fallen to new lows, and the encouraging fiscal policy meant companies were borrowing at a healthy rate. Suddenly, companies like Apple and JP Morgan, who had survived the pandemic with barely a scratch, found themselves with piles of cash lying around and little risk of needing it. And this is where the problem begins.

Under pressure from investors to spend these funds, Apple, Google

GOOG
, JP Morgan and many of America’s biggest companies today have all come up with the same solution. And it is causing absolute waves in the stock market.

I’m talking about share buybacks.

The companies themselves have become the biggest buyers in the market today, absorbing nearly 2% of the entire S&P 500. Experts have even given it a name: the “redemption bonanza”.

Last year, as companies boosted their cash reserves, they slowed down spending on things as unnecessary as stock buybacks. Today, the reverse is true: those rainy day funds are converted into massive redemption orders.

In the tech sector, for example, Apple and Google are turning those $ 200 billion and $ 160 billion reserves into $ 90 billion and $ 50 billion buyouts. Microsoft

MSFT
bought 20 billion MSFT in the first half of this year. Go down the line and you will see the same trend.

And nowhere has the growth in buyouts been greater than in the banking sector. During the pandemic, to maintain liquidity and reduce the risk of worst-case scenarios, the Federal Reserve subjected the nation’s largest banks to a series of “stress tests.” For a year, in addition to other restrictions, the banks were forced to buy back their shares. That would seem like a small price to pay for financial security, but it’s worth noting that under normal circumstances, according to CNBC, buybacks account for 70% of the principal payments banks provide to investors.

Meanwhile, according to Autonomous Research, under Fed restrictions, America’s six largest banks have had to sit on their $ 150 billion in excess capital. That is to say until June. Minutes after the Fed announced that COVID-era restrictions on banks would be lifted, JP Morgan released his plan to buy back $ 30 billion from JPM. JPM jumped 5% that day alone.

Finally, consider that companies are more likely to buy their shares (bet on their own company) if they are confident in the future of their companies. The Conference Board surveys CEOs to measure and graph their confidence. Their measurement recently reached an all-time high.

So if you are wondering who is buying stocks when the markets are looking foamy, it could be a period that is self-perpetuating where the bigger the profit gains, the bigger the stock purchases are. important. In other words, when things are good, they are really good.


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