Friday, April 19th, 2019 MST

Ending stock buybacks to sink stock market?

Opposition to publicly-traded corporations buying back their stock is developing into a hot political issue that may sink the stock market.  The amount of money used in buybacks is astounding.

According to one analysis, since 2010, net buybacks averaged $420 billion annually, while buying from households, mutual funds, pension funds and foreign investors was less than $10 billion for each year.  2018 alone saw a trillion dollars in buybacks, which comes out to $4 billion a trading day.

Much of the funds for the buybacks came from corporate earnings, which were boosted by  the Trump tax cut.  However, significant amounts came from the issuance of bonds at the lowest interest rates seen in decades.

The touchy issue with buybacks is the board members that approve them nearly always have stock options.  Buybacks, of course, support stock, which make stock options more valuable.  Board members can be accused of putting their personal interests ahead of the shareholders.

Of course, it can be argued that buybacks benefit shareholders because they help support stock prices.  David Stockman, however, rails against buybacks, saying that instead of investing in new plants, equipment and technology, buybacks waste money.  Had the board chosen to spend the money on new equipment, thereby increasing productivity, the stock price would have risen as investors noted the company’s increased competitiveness.

The top 1% of Americans own 40% of the national wealth, while the bottom 90% own on 21%.  Three decades ago, the top 1% owned 34%, and the bottom 90% owned 33%.  This divide is one of the reasons Donald Trump was elected president.  Although voters may not have known the exact statistics, they inherently knew that they were getting the short end of the stick.

Look for this issue to become a hot topic, especially with the Left.  If buybacks are banned (Marco Rubio has talked about taxing them.), stocks will take a major hit.  If it even looks like they will be outlawed, stocks could suffer long before a law is passed.  If so, this will be positive for gold and silver.

 

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