I rarely have the TV sound on.
But today I do.
One of the loopy talking heads "Investment Committee" actually said an important backdrop for a bullish outlook are the ubiquitous stock buyback programs.
OK, a company can do that with excess cash flow. Great.
But if a company is borrowing money (issue debt) to buy back shares,
that can be very dangerous.
The danger being common stock dividends can be cut at any time.
But that doesn't work for bond interest.
If a company can't pay bond interest, they are headed into some kind type of bankruptcy.
And the upside for companies to issue debt to buyback shares is that the
earnings/share will go up. All the officers of the company are off the hook.
All the retirement packages are tied to this.
Giant stock awards.
But what happens if rates on the debt start going up, and don't stop??
That is called a bear market.
Hmmm.
Stock buybacks were illegal until 1982.
So it's not a piece of financial wizardry nobody thought of.
It was seen as inordinate risk.
When it was flipped under Reagan, it was assumed companies
would do this prudently and responsibly.
And with a prudent and responsible FED over-seeimg the whole thing.
But now we are where we are.
In particular, I remember Boeing getting into a jam, I think the stock slide
early 2020. People were screaming that the FED should't bail out BA.
"they did it to themselves."
But today I do.
One of the loopy talking heads "Investment Committee" actually said an important backdrop for a bullish outlook are the ubiquitous stock buyback programs.
OK, a company can do that with excess cash flow. Great.
But if a company is borrowing money (issue debt) to buy back shares,
that can be very dangerous.
The danger being common stock dividends can be cut at any time.
But that doesn't work for bond interest.
If a company can't pay bond interest, they are headed into some kind type of bankruptcy.
And the upside for companies to issue debt to buyback shares is that the
earnings/share will go up. All the officers of the company are off the hook.
All the retirement packages are tied to this.
Giant stock awards.
But what happens if rates on the debt start going up, and don't stop??
That is called a bear market.
Hmmm.
Stock buybacks were illegal until 1982.
So it's not a piece of financial wizardry nobody thought of.
It was seen as inordinate risk.
When it was flipped under Reagan, it was assumed companies
would do this prudently and responsibly.
And with a prudent and responsible FED over-seeimg the whole thing.
But now we are where we are.
In particular, I remember Boeing getting into a jam, I think the stock slide
early 2020. People were screaming that the FED should't bail out BA.
"they did it to themselves."
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