🙅🏻♀️🎓 Supreme Court Not a Fan of Student Loan Forgiveness
Happy Wednesday all,
It is now March! We are 16-ish percent through the year, incredible how quickly time flies.
Today’s newsletter features an insightful explainer on how stock buybacks work. I think you’ll find it interesting and when you hear in the news that a company has a stock buyback, you’ll now know what that means.
Currently, I am planning for my move to SF, buying furniture (which gets expensive!) - I’m looking for some furniture on Facebook Marketplace. I’ll keep you all updated on how that goes and I look forward to making a tour video on the apartment when I’m all settled.
Enjoy this week’s Hump Days!
- Humphrey, Rickie & Tim
Tweet of the Week
The Weekly Brief
Fed Might Raise Policy Rates to 6%, says Bank of America (Reuters)
According to BofA Global Research, the Fed may hike interest rates to nearly 6% as strong consumer demand and a tight labor market would force the central bank to battle inflation for longer. Traders are currently pricing in a peak of 5.4%. BofA expects the U.S. economy to tip into a recession by Q3 2023.
Why Does it Matter?
As we have talked about numerous times in the past, the current health of the economy is surprisingly resilient with strong consumer demand and a strong labor market. The Fed surely did not expect for the economy to be this resilient meaning they will need to turn up the notch to get inflation under control. But what happens when the factors keeping us afloat start to turn in the other direction? I don't really want to find out.
Supreme Court Seems Ready to Reject Student Loan Forgiveness (AP)
Conservative Supreme Court justices who hold the majority look as though they will put an end to President Joe Biden’s plan for student loan forgiveness. Loan payments have been on hold for the last three years and are expected to resume no later than this summer. The chief justice said the program would cost a half-trillion dollars, pointing to its wide impact and hefty expense for why the Biden administration should have gotten explicit approval from Congress.
Why Does it Matter?
It seems as though the Biden administration's hefty promise of wiping away or reducing student loans reached a roadblock, (a significant one at that) and the Supreme Court's conservative justices seem intent on not letting this move much further.
U.S. Consumer Confidence Retreats, House Price Inflation Cools Further (Reuters)
U.S. consumer confidence unexpectedly fell in February, mainly concentrated among lower-middle-income households. Consumers became apprehensive about buying big-ticket items like motor vehicles and household appliances over the next six months. The strong labor market has kept Americans spending despite concerns about future rate hikes by the Fed. The home price index also increased by 5.8% in December YoY, the smallest annual gain since mid-2020.
Why Does it Matter?
The decline mostly reflected pessimism among consumers with annual incomes in the $35k-$50k range. Those who are seeing their consumer confidence decrease are likely just being cautious because they're seeing inflation still at elevated levels. They are, however, still continuing to spend for now due to strong job growth that is restoring their incomes.
You’ll Find This Interesting
Apple is making significant strides in a no-prick blood glucose tracking feature for the Apple Watch. The company recently hit a major milestone and now believes it could eventually bring glucose monitoring to market, which would help cement Apple as a powerhouse in the healthcare industry.
Hump Days Scoop
Stock buybacks are projected to top $1 trillion in 2023 by companies in the S&P 500 for the first time in a calendar year. This has been an underlying trend ever since the SEC gave executives a safe harbor against stock price manipulation in the mid-1980s. Buybacks surpassed dividends as a way to redistribute cash to shareholders in 1997 and have not slowed down since. But what are stock buybacks? How do they work? Is this trend a good thing? Let’s fill you in on what you need to know about: Stock Buybacks.
What are stock buybacks?
The official term for a stock buyback is "open-market repurchase”. This involves the company’s board authorizing a buyback program for a specific dollar amount and expiration date. After that is done, the company can buy its own shares on the open market and ultimately absorb them back into the company. The end result is a decrease in outstanding shares, giving a lift to the remaining shares.
Why would a company want to buy its own stock? Why not issue dividends?
Companies decide on buybacks for many reasons. Here are a few of them.
They believe their stock to be undervalued.
Avoid a taxable event (like you have with dividends @15%-23.8%). Although, the government implemented a 1% tax on buybacks, but it is still far less than what we see on dividends. As it currently stands, it is the most efficient way to get cash back into the hands of shareholders.
Increase earnings per share to make earnings growth look better than it actually is. You have the same earnings divided over fewer shares after the repurchase.
However, the decision on why “buybacks > dividends” largely falls on
The flexibility of cutting the buyback program should times get tough.
Cutting a long-standing dividend can have disastrous outcomes for a company’s stock price and signals to the market that it can no longer comfortably redistribute cash back to shareholders. A stock buyback program is often a one-off event. You’re not necessarily expecting it but it’s nice when it happens. Not buying back shares has no negative outcome.
Is there a negative side to stock buybacks?
The steady climb in stock buybacks peaked as we saw repurchase announcements north of $75B like with Chevron. Large players in the investment community have come forward about repurchases such as Warren Buffett who speak very highly of the practice. However, the sheer dollar amount we’re seeing now as the economy shifts from prosperous to deceleration or stagnation leaves room to question the practice and the motives for it. Too much of a good thing can be bad.
According to this article from the Harvard Business Review, where the money comes from is a huge factor in whether a stock repurchase can be harmful or not. The traditional model of a stock repurchase program is that a company is sitting on excess cash, and they want to redistribute it back to shareholders instead of just sitting on it. This model has shifted materially based on data from 2017 that showed the proportion of buybacks funded by corporate bonds reached as high as 30%. This meant that instead of taking on debt to invest in projects that would eventually generate revenue to pay off said debt, companies were using that cash to redistribute directly back to shareholders, a non-productive action. If this trend continues, when the economic tides shift, that debt is going to come calling, and companies may not have the revenue-generating projects to adequately facilitate that debt.
What We’ve Been Reading
Markets
Highly Rated U.S. Companies are turning to Convertible Bonds to Raise Funds as Rates Rise (Reuters)
Salesforce Shares Jump 13% on Better-than-Expected Forecast (CNBC)
Economy
U.S. Companies Say It Is Easier to Hire Despite Low Jobless Rate (Financial Times)
Canada’s Economy Surprises with Q4 Flat Line, Backing Up Rate Pause (Reuters)
Government
FBI Director Says Covid Pandemic Likely Caused by Chinese Lab Leak (WSJ)
Biden to Address House Democrats Ahead of Budget Release (WSJ)