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Canceled Stock Buybacks Mount, and They May Not Return for Years

The comment suggested his distaste for the practice predates the coronavirus outbreak and echoed criticism from Democratic presidential candidates who have long viewed buybacks as a waste and social ill.

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Comments of the Day

26 March 2020

Video Commentary for March 25th 2020

 

Eoin Treacy's view

 A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics covered include: attention turns to buybacks as details of fiscal package emerge, palladium surges and is now short-term overbought, Dollar eases versus Euro and Pound, stock markets extend rebounds but Wall Street fails to hold intraday high, bonds steady but high yield spreads are elevated and the TED spread is still expanding. 

 

The Great Leverage Unwind

This note from Guggenheim may be of interest to subscribers. Here is a section:

In addition to Troubled Asset Relief Program (TARP)-like programs to assist companies and industries, there is no other choice but for the Fed to step up to keep markets functioning. That’s why I’ve been saying that we would need to see about $4.5 trillion of quantitative easing (QE) before everything was resolved. This is in addition to emergency lending through the discount window, dealer repo operations, central bank liquidity swaps, and the Commercial Paper Funding Facility, Primary Dealer Credit Facility, and Money Market Mutual Fund Liquidity Facility. That would take the Fed’s balance sheet to at least $9 trillion, or about 40 percent of last year’s gross domestic product (GDP). That might sound like an alarmingly big number, but to put it in perspective the Bank of Japan’s balance sheet is the equivalent of 105 percent of GDP. So, the United States is a piker on QE.

 

Eoin Treacy's view

The Fed has now entered its ‘at all costs’ phase of assistance. I will freely admit my initial estimate from six months ago the Fed’s balance sheet would reach $6 trillion is now wildly overoptimistic. Considering the extent of the challenge and the desperate need for liquidity $10 trillion is probably a more likely number for the size of the Fed’s balance sheet.

 

Canceled Stock Buybacks Mount, and They May Not Return for Years

This article by Phil Serafino, Kasper Viita and Sarah Ponczek for Bloomberg may be of interest to subscribers. Here is a section:

The comment suggested his distaste for the practice predates the coronavirus outbreak and echoed criticism from Democratic presidential candidates who have long viewed buybacks as a waste and social ill.

“When we did a big tax cut and when they took the money and did buybacks, that’s not building a hangar, that’s not buying aircraft, that’s not doing the kind of things that I want them to do,” Trump said on Friday. “We didn’t think we would have had to restrict it because we thought they would have known better. But they didn’t know better, in some cases.”

Trump said he would support a prohibition on buybacks for companies that receive government aid. The five biggest U.S. airlines -- prime targets for bailout funds -- spent 96% of their free cash flow on repurchases over the last decade, money that could have been used to build rainy-day funds. Overall
buybacks started to slow in the first couple of months of the year in the U.S., when they were $122 billion in January and February, down 46% from a year earlier in the slowest start to the year since 2009.

While some viewed share repurchases as one of the driving forces behind the bull market, the practice was constantly criticized, particularly in populist circles. Companies were simply inflating their stock prices inorganically, using cheap money in the process, so the argument went, exacerbating wealth inequality as the ultra-rich cashed out.

 

Eoin Treacy's view

Buybacks have been the primary source of demand supporting the market, particularly during pullbacks, over the last decade. The problem with relying on buybacks as a rationale for being bullish is they are inherently procyclical. The majority of companies are not in a position to buy back shares following big declines. Additionally, since debt loads have increased, at least in part to fund buybacks, they are overleveraged at peaks and debt obligations come before equity during a downturn.  

 

Email of the day on dollar cost averaging

Many thanks for the latest Big Picture Long-Term video. For the last ten years my forty-year old twins have been investing every month in the Vanguard Star Fund. My instinct is to advise them to continue this monthly investment as long as they have a regular income. What do you think about this strategy?

 

Eoin Treacy's view

Thank you for this question which may be of interest to subscribers. Dollar cost averaging works because you get to buy more during the declines and less at the top by never wavering in the amount regularly committed to the market. Therefore, it only succeeds in achieving in controlling the average purchase price if it is practiced, or initiated, during big market declines.

 

Eoin's personal portfolio: last updated March 16th

 

Eoin Treacy's view

One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change. I'll change the title to the date of publication of new details so you will know when the information was provided.

 

 

 

 

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