Dennis Berman reports (in his January 2 c1 Wall Street Journal column) that, according to Standards and Poors, "companies bought back $327 billion of their own shares, more money than they spent investing in equipment" in the first nine months of 2006. Some of those buybacks were financed out of profits, but a lot were financed by debt.
This is old hat to those who follow equity markets, I know -- but I was still struck by the size of stock buybacks relative to new investment. I understand the logic of using cheap debt to gear up an existing asset (by paying down existing equity) when it is easy and cheap to borrow. Berman:
"Companies are embracing the idea that they don't need outsiders to do privately what they can do themselves in public: take on substantial new debt and use the cash proceeds to fund dividends, stock backs, or, if adventuresome, a new project for future profit."
With so much money flowing into the US and Europe from the emerging world, debt is cheap. Lots of folks have made lots of money by changing the capital structure of firms with too much equity and too little debt by current standards.
At the same time, you can only gear up your existing assets once. Eventually, you have to start investing to build up your capital stock. And if you are gearing up your existing assets with funds borrowed from abroad, I tend to think you need to invest in assets that generate future export proceeds ...