Main US indexes slide; Nasdaq off most, down ~1.9%
Tech, Cons Disc weakest S&P 500 sectors; Just Energy, Staples gain
Dollar tumbles; bitcoin down ~3.5%; crude up >1.5%; gold up ~2%
US 10-Year Treasury yield jumps to ~4.28%
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IF SHARE BUYBACKS ARE BANNED, COMPANIES WILL TURN TO LBOS
A proposal to ban share repurchases for defense companies and homebuilders would likely lead to a sharp pullback in stocks, before a wave of leveraged buyouts takes prices back higher, according to Brian Reynolds, the chief market strategist at Reynolds Strategy.
U.S. President Donald Trump has vowed to block defense contractors like RTX from paying dividends or buying back shares until they speed up weapons production and he is also putting pressure on homebuilders over these activities in an effort to lower housing costs.
Reynolds sees less than 50% odds of a ban, but expects a 10-15% decline in stocks if it is implemented.
Debt-financed share buybacks have been key to stock gains as U.S. public pension funds and insurers pour money into credit, and companies use proceeds from the debt to buy back stock.
“The economy has been levered up just to boost stock prices,” Reynolds said. Share repurchases have also been key to driving up companies’ earnings per share relative to earnings.
However, banning the activity would not solve the problem, Reynolds said, noting that “the genie is out of the bottle. We do not know how to safely reverse that.”
In the event of a ban “credit flows would likely be redirected from funding buyouts to funding a similar number of LBOs. That would likely result in a historic down-and-up move in stocks,” he said.
(Karen Brettell)
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