Wasted

Normally, Monday’s Substack is business related and it will be but there is just something that has been bugging me for the last week or so.

The American withdrawal from Afghanistan is front and center this week, as well it should be. This is a disaster for the people of Afghanistan on a scale we haven’t seen in 50 years. The return of the country to the Taliban and their Shira law will unfold on the front pages of every newspaper in the country and the Biden administration can spend all their time blaming Donald Trump but this one is really on them. The withdrawal could have been done differently for sure and it just seemed like there really wasn’t any planning to this.

I have a few comments and something to think about. One, I understand why we went into Afghanistan but if history was any indication, we should have known from the start, it wasn’t going to turn out well. The Russians spent 19 years in Afghanistan and I am pretty sure the Russian tactics were different than the American tactics considering that the Russians do not believe in the Geneva Convention or any other humanitarian rules of fighting. They couldn’t roust the Taliban, Al Queda or any other terrorist organization. What made anyone think we would? Another thing to think about is this: We had several administrations that had a chance to withdraw and they never did. We stuck it out, for what? Over 2,200 young men and women died in this un-winnable war. Lastly, How is that 70,000 Taliban fighters can basically take over a country of 35 million and 230,000 square miles in less than a week? It still doesn’t make sense to me.

Back to business and more wasted money.

Goldman Sachs came out with a report recently about stock repurchase programs and I think it’s worth talking about. Their report stated that they believe that corporate repurchase programs will total around 720 billion dollars this year. Also, with the power of the buyback in full swing, the S&P will rally to around 4700 by year end. Regrettably, I will have to agree with their analysts reasoning and that is where I believe a lot of the coming problems in our economy may come from.

Let me explain.

As everyone already knows, corporations tend to use excess cash on hand to repurchase shares in their own company. This rewards shareholders for owning the shares by reducing the amount of shares outstanding. It also has the added effect of improving Price/earnings multiples as well. This is important for a couple of reasons. Higher P/Es multiples tend to draw investor interest. Wow, look at this ones multiples, they must be doing something right! It also solidifies C-suites executives pay packages and most executives have some compensation tied to how well the stock does. A buyback achieves share price appreciation without any relative improvement in the business.

If you are a shareholder, whats not to like? Short term (6 months to a year) it’s a genius move but for the company itself, it achieves nothing. Companies spending billions on buybacks don’t spend it on research. They don’t spend it employees directly (indirectly possibly). They don’t spend it on building out their business in any meaningful way. It is all about the stockholders, not the stakeholders.

I know this is hypocritical of me considering that my old firm handled two of the largest stock repurchase programs at the time. Those buybacks helped pay for several kids college educations but as we get older and a little wiser we see things differently.

When the Trump tax cuts took effect several years ago, I was on a panel on CNBC and said while this will help boost the economy significantly, I feared that a lot of companies would use the repatriated money and increased cash flow to repurchase shares and spend little to improve their employees lives (better healthcare coverage, higher wages and increased profit sharing). Some companies did but most quietly increased the rate of their buyback programs and the market started another bull run but real time corporate earnings (without the effects of buybacks and tax reduction) increased marginally.

It isn’t going away anytime soon and even though I feel that a substantial portion of the stock markets rise is due to these buybacks, there will be a reckoning. Corporations at some point will need to stand up without some artificial prop and show earnings that are not impacted by that prop. C-Suite types won’t be happy but had they done their job initially and worked on growing their businesses instead of growing their stock prices, maybe that reckoning would never come.