Expect The Corporate Share Buyback Wave To
Continue In 2019
Buybacks could become a very powerful force
once again this year, and keep the stock market ball rolling a while longer.
Nomi Prins explains why…A crucial theme from last
year is continuing into this year — stock buybacks. Last year was a banner year
for companies buying back their own shares. A month into 2019, it appears that
Wall Street is set to continue that trend.
Last year, U.S. companies announced a whopping $1.1 trillion worth of
buyback plans. Armed with extra cash from favorable corporate tax policy
enacted in 2017, they enthusiastically bought back their own shares.
But as of mid-December, only about $800 billion of those
buybacks had actually occurred. That means there could be another $300 billion
of the total 2018 target still waiting to hit the market.
In fact, Wall Street is already gearing up for another banner
buyback year. In a recent report, J.P. Morgan strategist Dubravko
Lakos-Bujas wrote, “It’s expected that S&P 500 companies will execute some
$800 billion in buybacks… in 2019.”
The Wall Street strategist also explained that the quality of
2018 buybacks were high. He revealed that companies were using their cash,
rather than borrowed money, to fund buybacks. Using cash toward buybacks is
expensive less than using debt.
But why did the wave of buybacks slow down late last year?
The first reason is that companies involved had already
purchased stock at a very rapid rate through last September. That was one major reason we saw the market peak around that
time, and in fact, hit new records.
The second was that despite trade war fears and uncertainty,
companies felt confident enough to go ahead with their buybacks initially.
That’s why we saw market players largely shrug off warning signs through the
first three quarters of 2018.
But sentiment shifted dramatically during the last quarter of
the year, culminating in essentially a bear market by late December. And more reports
around the world began to point to slowing economic growth ahead.
A key factor cited for this slowdown was the impact of prolonged
trade wars, which could curb real economic activity and create more
uncertainty. In turn, growing volatility would keep businesses from planning
expansions, or using the cash originally set aside for buybacks.
A third reason for the drop off in buybacks late last year was a
record amount of public corporate and consumer debt that
had to be repaid or at least serviced regularly. This overhang of debt was
weighing on growth expectations. That debt load would become even more
expensive if the Fed kept up with its forecasted rate hike activity in December
and throughout 2019.
Some analysts even warned that the Fed might go ahead with
another four rate hikes this year. That triggered fears on Wall Street that the
central bank stimulus game could truly be over.
The reason for the concern is simple: The higher the interest
rates, the more expensive it is to borrow and repay existing debt. For more
highly leveraged corporations and emerging market countries, this would be an
even greater threat. A higher dollar, resulting from more Fed tightening, could
cause other currencies to depreciate against the dollar. That would make it
harder to repay debt taken out in dollars.
Finally, there was heightened tension in the financial markets
due to political uncertainty. With U.S. election results
ensuring added battles between Congress (with Democrats taking the majority in
the House of Representatives) and the White House, doubt set in over the
functionality of the U.S. government going forward.
Those reservations were justified. The government shutdown that
kicked off 2019 had a lot to do with shifts in the political balance in
Washington.
Geopolitical tensions also rose at the end of 2018,
including Brexit in the United Kingdom, street revolts in France, potential
recession fears in Italy and growing unrest in South America.
All these factors combined ensured that markets were extremely
volatile during the last quarter of 2018, and why it was the worst one for the markets since the Great
Depression. It was not conducive to buybacks. Buybacks are supposed to raise
the stock price. But strong market headwinds could have largely canceled their
effects.
The prudent approach for companies facing such a negative
environment was to wait out the problems until the new year.
But Jerome Powell subsequently gave into Wall Street and took a much more
dovish position on both rate hikes and balance sheet reductions. That means the
coast is clear again to resume the buybacks.
Back in December, some major players announced plans for 2019
buybacks. These include Boeing, which announced an $18 billion repurchase program. It also
includes tech giant Facebook, which plans to buy back $9 billion of
its own shares, in addition to an existing $15 billion share repurchase program
started in 2017.
Also in on the buyback wave is Johnson & Johnson, which announced a $5
billion stock buyback. Others include Lowe’s and Pfizer, which both announced a $10 billion stock buyback program.
These plans are now much more likely to go forward.
Furthermore, many large corporations like Microsoft, Procter
& Gamble, Home Depot and Walmart didn’t even announce buybacks in 2018.
They could well announce them for 2019. Companies that did
announce big buybacks last year, like Apple, could also engage in more, adding
a potential $100 billion share repurchases this year to match 2018.
Another indicator for a sizeable 2019 buyback wave is that stock
prices are lower now than they were going into the fourth quarter of 2018. That
means companies can buy back their shares at cheaper prices. They could buy at
a discount, in other words, or at least what they hope will be a discount.
My old Wall Street firm, Goldman Sachs, has already forecast $940 billion worth of buybacks for
2019. They previously had predicted over a trillion dollars’ worth of buybacks
for 2018. The number of buybacks for 2018 even exceeded their predictions.
By mid-January, of the S&P 500 companies that reported their
fourth-quarter earnings, nearly 70% of them have exceeded Wall Street’s profit
expectations. It’s a favorable environment for buybacks.
Yet, it may still take some time for companies to move forward
with this year’s buybacks. That’s because we are still in the “black-out”
period that the Securities and Exchange Commission (SEC) has created.
The period covers the time just before and after companies post
earnings results. The sell-off in October coincided with the third quarter
earnings season’s “blackout period.” The combination of negative environmental
factors plus fewer buybacks drove markets even lower.
Now, once earnings season and the current blackout period is
over, Wall Street will be unleashed to buy large blocks of stock for their
major corporate clients.
If the Federal Reserve truly holds back on its former interest
rate and quantitative tightening plans, as it seems likely to do, expect
central bank stimulus to continue to fuel markets.
Of course, buybacks do not come without negative implications. That’s because companies are not using
their cash for expansion or to pay workers more, which would generate more
buying power in the overall economy. But in the short run at least, they tend
to raise the stock price.
Even if Wall Street comes up against headwinds of volatility,
slowing economic growth, political strife and trade wars, they can now expect
the Fed and other central banks to have their backs.
Buybacks could become a very powerful force once again this
year, and keep the ball rolling a while longer.
35 Mind-Blowing Facts About America That
Previous Generations Would Have Never Believed
Imagine what it would be like for a group of
average Americans from 1919 to suddenly be transported to our time, and then
hit with these 35 facts…The only thing that seems to
be constant in our society is change, and today America is changing at a pace
that is more rapid than we have ever seen before. But is that a good
thing or a bad thing? For a moment, I would like for you to imagine what
it would be like for a group of average Americans from 1919 to suddenly be
transported to our time. How do you think that they would feel about what
we have become? Certainly they would be absolutely amazed by our advanced
technology, but beyond that they would almost certainly have very strong
opinions about the current state of our society. Similarly, if any of us
were suddenly transported 100 years into the future, I am sure that we would be
completely and utterly shocked by how things had changed. The decisions
that we make today are going to echo long into the future, and if we make very
bad decisions there might not be a future for our country at all.
The following are 35 mind blowing facts about America that
previous generations of Americans never would have believed…
#2 By the time an American child
reaches the age of 18, that child will have seen approximately 40,000 murders on
television.
#5 According to the American Road and
Transportation Builders Association, nearly 56,000 bridges in the United States
are currently “structurally deficient”. What makes that
number even more chilling is the fact that vehicles cross those bridges a total
of 185 million times a day.
#6 In more than half of all U.S.
states, the highest paid public employee in the state is a football coach.
#7 The Pentagon has more
square footage of office space than any other office
building in the entire world.
#8 The state of Alaska is 429 times larger than
the state of Rhode Island. But Rhode Island has a significantly larger
population than Alaska does.
#10 The city of Juneau, Alaska is
about 3,000 square miles in
size. It is actually larger than the entire state of Delaware.
#13 There are more than 75 million dogs in
the United States, and that number is constantly growing.
#15 The grizzly bear is the official
state animal of California. But no grizzly bears have been seen in the
state since 1922.
#20 One study found that one-third of
all American teenagers haven’t
read a single book in the past year.
#23 Women have earned at least 57
percent of all bachelor’s degrees in the United States for 18 years in a row.
#24 If the U.S. health care system was
a country, it would have the fifth largest GDPon
the entire planet.
#26 Today, a
million Americans are living in their RVS, and that number is
rising with each passing year.
#30 There is actually a town in
Michigan called “Hell“, and during the recent polar vortex it actually froze over.
#33 Congestion on our highways costs
Americans approximately 101 billion dollars a year in
wasted fuel and time.
#34 According to Bloomberg, it is being projected “that by 2025, shortfalls
in infrastructure investment will subtract as much as $3.9 trillion from
U.S. gross domestic product.”
#35 In 1980, the U.S. national debt had
just surpassed the one trillion dollar mark. In 2019, we are about to
surpass the 22 trillion dollar
mark with no end in sight.
These days, just about everyone that tries to step forward and
shake up the system is slapped with heavy criticism.
But at least they are trying to do something.
Holding an important position does not make you a leader.
Rather, being a leader is about having a positive vision for the
future and doing whatever you can to achieve that vision.
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