Jul 23, 2019

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational awareness:

  • Congress reached a bipartisan deal with President Trump to suspend the U.S. debt ceiling and increase spending Monday night. (Twitter)
  • Voting has closed and Boris Johnson is expected to be announced as Britain’s next prime minister today. (Reuters)
  • GNC says it plans to shutter as many as 900 stores with big cuts to mall locations expected. (USA Today)
  • Apple is in advanced talks to buy Intel’s smartphone-modem chip business for $1 billion. (WSJ)
1 big thing: The future of monetary policy comes to Washington

Bank of Japan Governor Haruhiko Kuroda. Photo: Alastair Pike /AFP/Getty Images

As the Fed approaches a likely rate cut at the end of the month — in the face of 50-year low unemployment, rising wages and strong consumer spending — it could not have been a better time for a visit to Washington from Bank of Japan Governor Haruhiko Kuroda.

What it means: Kuroda has instituted some of the world’s most extreme and unorthodox monetary policies, including directing the central bank to buy Japanese stocks. More analysts are starting to believe such policies will be adopted in other places, including the U.S.

  • "Most economies have been experiencing low inflation and low growth since the global financial crisis," Kuroda said in a speech Monday at IMF headquarters in Washington. "Japan’s experience in the long battle against deflation could provide a case study for other central banks in conducting monetary policy going forward."

Catch up quick:

  • BOJ owns around 50% of Japan's government bonds — the world's largest single holder, by far (for comparison, the Fed holds about 10% of U.S. government bonds).
  • BOJ has even bought Japanese corporate bonds and owns around 80% of the country's ETFs.
  • BOJ's yield curve control program seeks to hold 10-year yields near 0%, effectively directing what is supposed to be a free market.
  • It was the first central bank in the world to introduce negative interest rates.
  • The central bank holds over $5 trillion of assets on its balance sheet, which is more than Japan's GDP, and the country's outstanding public debt is more than 5 times the size of its economy.

"We live in a time where the book on monetary policy continues to be rewritten ... just about every day," IMF acting managing director David Lipton said. "Of course, all serious monetary policy students will have read the book on Japan."

What's next: “If the ECB is really going to try to restimulate the economy in Europe, they are going to have to buy equities,” BlackRock CEO Larry Fink said on CNBC Friday.

  • "As soon as an unexpected event takes the market down hard and fast, we believe this will trigger the next wave of buying from central banks, but this time directed at stocks," Yves Lamoureux, president and founder of behavioral research firm Lamoureux & Co., tells Axios.
  • That will certainly include the Fed, Lamoureux says.

The last word: Asked whether it would be a good idea for other central banks to follow his lead, Kuroda said that in light of the current economic environment, "that might be the case."

2. With a Fed rate cut coming, investors should "ride the wave"
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Data: LPL Research, FactSet; Chart: Axios Visuals

The S&P 500's 19% year-to-date return this year is no reason to sell, especially in light of July's expected Fed rate cut, strategists from LPL Financial argue.

What they're saying: “Even though fundamentals may not justify the market going much above our 3,000 forecast on the S&P 500, with the Fed tailwind behind us, we’ll ride the wave for now,” LPL chief investment strategist John Lynch said in a note.

  • While the market has already reached LPL's 2019 year-end target, Lynch and senior market strategist Ryan Detrick say the old stock market adage “Don’t fight the Fed” has them expecting more gains, and history is on their side.

By the numbers: The last 5 times the Fed started cutting rates outside of recessions, the S&P rose an average of 11.1% over the next 6 months and 15.8% over the next year,

  • The only caveat would be if the country is in the midst of a recession, like in 2001 and 2007. That's unlikely, given economists' expectations for a reading of 1.3%–3.3% on Q2 GDP.
3. Investors punish CBS and AT&T for blackout

Investors unloaded AT&T and CBS stocks Monday after at least 6.5 million customers lost their access to CBS over the weekend.

What happened: The carriage agreement between AT&T's DirecTV and U-verse and the country's No. 1 broadcaster expired without a new deal Friday night and customers in New York, LA and a host of major markets around the country were blacked out on CBS.

  • The dispute went public Monday, with both parties releasing harshly worded statements. CBS accused AT&T of "aggressive tactics to get programmers to accept below market terms.”
  • AT&T says “CBS is a repeat blackout offender,” and the network "continues to demand unprecedented increases even as CBS advances content on CBS All Access instead of on its local broadcast stations."

The last word: CBS' stock closed 1.3% lower and AT&T's stock dropped 2% Monday.

4. For credit cards, cash is king
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Reproduced from a CreditCards.com report; Chart: Axios Visuals

A new survey from CreditCards.com finds that in addition to being the most sought after credit cards, ones that offer cash back were the most likely to be redeemed (88% did so at least once).

  • “The math says that transferable travel rewards are the most valuable, but it takes time and effort to maximize them, whereas cash back offers simplicity and universal appeal,” Ted Rossman, industry analyst at CreditCards.com, said in a statement.
5. Stock buybacks are a "swindle"

The Atlantic's Jerry Useem writes: "[A]nother effort is under way to raid corporate assets at the expense of employees, investors, and taxpayers."

  • It's called stock buybacks, he says, and it's "anything but normal."

What's happening: Data released this year shows companies spent more than $1 trillion in 2018 to buy back their own stock, far outpacing what they spent on R&D. Buybacks accounted for more than half of earnings per share growth last year, and companies are expected to spend more to buy back stock this year.

  • According to Useem, Fed data compiled by Goldman Sachs shows that over the past 9 years, "corporations have put more money into their own stocks — an astonishing $3.8 trillion — than every other type of investor (individuals, mutual funds, pension funds, foreign investors) combined."
  • Further, he writes, a study by Fortuna Advisors finds that, after 5 years, "the stocks of companies that engaged in heavy buybacks performed worse for shareholders than the stocks of companies that didn’t."

The big picture: Useem argues that buybacks are not just detrimental to the market and investors, they're eroding U.S. companies by incentivizing executives to pump stock prices at the expense of workers and the long-term interests of their firms.

  • CEOs are selling their stock after buyback announcements to "personally capture the benefit of the short-term stock-price pop," SEC commissioner Robert Jackson Jr. said after commissioning a study on the impact of buybacks, per the article.

Quick take: "By systematically draining capital from America’s public companies," Useem writes, "the habit threatens the competitive prospects of American industry — and corrupts the underpinnings of corporate capitalism itself."

Yes, but: There remains a great deal of skepticism that stock buybacks are really all that bad. (Here, here and here are just few examples.)

Go deeper: The Stock-Buyback Swindle

Dion Rabouin