Shocked to read that Jim Cramer wants a big down open for the stock market for today? Don't be. This drip-drip-drip of bad news pushing markets relentlessly lower around the world is worse than a really good cleanup. (By the way, you still have until tonight at midnight to read Jim's articles and see his portfolio, Action Alerts PLUS, for free. Click here to get access.)
The Wall Street Journal has calculated that the number of job cuts announced recently by big companies such as Yahoo! (YHOO) or Johnson & Johnson (JNJ) has hit 14,000. Meanwhile, oil companies around the globe are all retreating, mothballing wells and offshore oil rigs.
In Europe, where the oil industry isn't as developed as in the U.S., banks are bearing the brunt of the downturn, with Italian banks in particular suffering under the weight of still unresolved bad loans.
Credit Suisse (CS) is one of the European banks which most recently reported bad results. Its shares tanked to their lowest in 24 years last Tuesday, after it posted a loss of 2.4 billion Swiss francs ($2.4 billion) in 2015 compared with a 3.6 billion Swiss francs profit in 2014.
In this environment, pressures from shareholders on management to find solutions to the crises the companies suddenly find themselves in have been intensifying.
On Monday, one executive responded to these pressures in a way that is likely to disrupt his whole industry: Tidjane Thiam, the chief executive of Credit Suisse, has asked for a pay cut. As a spokesman for the bank told the Financial Times, Thiam "asked the board to cut the bonus awarded to him for 2016 as an act of solidarity given the difficult year the bank has had and the fact that bonuses have been cut elsewhere across the group."
The paper reports that the CEO has asked that his bonus for this year be cut by between 25% and 50%. Investor activism is on the rise everywhere, and perhaps Thiam's pre-emptive strike will save him from more criticism from shareholders for now. Expect more such initiatives from other highly paid executives in the near future.
Will Share Buybacks Save the Day?
Share buybacks have been another way in which companies have kept their shareholders happy in an environment of otherwise low growth in the real economy. They are partly to blame for the elevated valuations before the market selloff, but have also served as tremendous fuel for the bull market.
A report by investment research firm Aranca shows that U.S. companies have spent almost $2.3 trillion on share buybacks since the 2009 market crash. In 2014, companies in the S&P 500 index spent more than 90% of their earnings on buybacks and dividends, according to the research.
The latest data available are for the third quarter of last year, and they show that total buybacks were the second-highest post-recession, at $150.6 billion; share buybacks hit a record high of $159 billion in the first quarter of 2014.
The analysts at Aranca say they expect shareholders' payouts, meaning share buybacks plus dividends, to have reached a record figure of $950 billion last year and to touch and maybe even pass the trillion-dollar mark this year.
Before rejoicing at this corporate largesse, however, consider the damage that buyback activity is doing to companies over the longer term. Yes, in the short term it supports share prices, flatters earnings per share and increases valuations, and may act as a counter-weight to the current selloff.
However, over the longer term share buybacks risk weakening the companies that rely on them. An increase in debt to finance them may look benign when interest rates are low, but as recent distressed debt stories have show, a benign credit environment could quickly turn malignant.
To read more about the debt problems that have already begun to appear, check out Real Money's Stressed Out index of companies with distressed debt.