Ramifcations of Higher Rates and Buybacks

The Economy: We're into the Holiday Season with year-end driving all considerations. Mid-term election results have been incorporated into projections. Global financial markets are selling off as uncertainty has provided the trigger for investors exiting overvalued positions. But the world hasn't come to an end … and it won't. However, the narrative has changed from unbridled optimism to a more pessimistic tone. Fed officials seem to be uniformly hawkish. Rising interest rates will reduce the value of long-dated fixed income assets. Higher inflation will pressure corporate profitability. Global monetary policy has shifted from easing to tightening. Trade policy is reversing decades of the liberal order.  Public and private sectors are increasingly leveraged. China’s economy is slowing. Algos are driving selling programs. Talk of Peak Profit is rampant as companies see a more challenging environment. Impeach! Impeach! Resist! Resist! does little to boost business confidence.

Food for Thought: General Electric (GE) is the poster child of share buyback fallacy. GE is the storied company that was the envy of The Street for decades. Yet in the past two years GE has crashed from $33/share to $8/share; a drop of almost 75%. In that time, GE management has spent more than $150 Billion on share buybacks in an effort to prop up the share price. To no avail. Investors flocked to the stock because of its rich dividend. But management recently cut the dividend by 80%. The perfect storm and a warning to all investors who buy dividend paying stocks. GE is now saddled with massive debt because of the buyback program. It is slowly being dismantled as profitable parts are sold to keep the rump company alive. Bankruptcy is possible. Buybacks which were touted as "enhancing shareholder value" have proven to be a bust. We expect to see more of these buyback programs prove futile. At Higgins Capital We Quarterback Money®. If we can help you make sense of the new volatility in financial markets, please contact us.