The first time I saw Martin Scorsese’s Goodfellas was the summer after my freshman year of college, when I took an introductory film studies course. That was the same class that introduced me to Woody Allen’s Annie Hall.
In retrospect, that was a fucking great course.
There was one line in particular that struck me in Goodfellas: “Saturday night was for wives, but Friday night at the Copa was always for the girlfriends.”
That’s kind of how I feel about podcasts: The week is for working, but the weekend is for catching up on my backlog of episodes.
This weekend, I listened to the Mar. 29 episode of the Quoth the Raven podcast, in which Chris Irons and George Gammon talk about the coronavirus, the $2 trillion stimulus package recently passed by Congress, and much more.
In the pod, Gammon spends some time talking about the stipulations on stock buybacks in the stimulus package and what those conditions might mean for the stock market.
And, like Gammon, I think these restrictions will be incredibly important for investors to keep in mind.
Buyback Stipulations in the $2 Trillion Stimulus Package
In making a generally bearish investment case for the market, Gammon touches on stock buybacks and how they’ve functioned to drive up share prices over the past decade — and he appropriately notes that, with limited buyback programs in the future, the market will be materially hindered.
So what’s next? If there’s no Fed put, if there’s no government put, then what is driving stock prices? And you say, “Well, we’ll just go back to investors buying.” No, people don’t understand. If you go back to 2010, the only net buyer in the market was corporations buying their shares back — not the only, but the majority, right? — so that’s your majority buyer in the market.
Well, now, look at what’s going on with these bailouts. They have all these stipulations where corporations aren’t going to be able to buy their shares back, or it’s going to be limited, right? And I put this out on Twitter … before this bailout stimulus even was in the news, and I said, “In my opinion, there’s going to be so much blowback from the public about these bailouts, they’re either going to eliminate them or they’re going to limit them on a moving-forward basis” And everyone on Twitter told me that I was crazy.
And, sure enough, when they came out with this bill, you’ve got all this verbiage that implies that. And I’m not saying that’s a good or bad thing. I’m saying that people aren’t thinking it through. … You can limit those buybacks, but if you do, what is that going to do to your 401K over the next 10 years if the main buyer in the stock market is gone?
It’s pretty easy to be bearish right now: U.S. coronavirus testing is still inadequate. It’s improving, which is great news, but it’s not where it needs to be.
Also, too many people are acting as if the coronavirus is a short-term problem. Even after the coronavirus is under control, its aftermath will linger.
And the post-coronavirus economic data coming out of China is discouraging. A V-shaped recovery might be unrealistic.
The negative impact of the buyback restrictions on the stock market is just another reason to be pessimist.
Present in the 883-page stimulus bill is the stipulation that any company getting a loan from the government will be unable to buy back stock for the term of the loan plus one year. Additionally, those companies must adopt policies friendly to workers and unions.
In other words, companies will have a harder time in the future artificially inflating their stock prices and cutting expenses. While I think both of those facts are good for the long-term health of the economy, they’re probably not ideal for the mid-term future of the stock market.
I’m not a financial advisor, and I don’t suggest that you make any decisions based on anything I say or write … but I fear we’re going to see something like this in the future.
https://www.youtube.com/watch?v=6t5awMTGqog