We wish the very best outcome for anyone who is sick with the Coronavirus. We at S Squared are fortunate to be able to work anywhere as long as we have our computers. We also have compassion for those who feel they must show up for work even when they are ill and who are worried that they may be laid off or downsized.
We do not have empathy for the many companies that have gorged on debt to unproductively buy back shares of their stock to enrich their own pockets. We feel strongly that companies and even entire industries that contributed to a debt crisis should not be bailed out. Failure is normal in a capitalistic society. Everyone can’t win. Hopefully, the moral compass of Americans will move toward responsiveness to the sick and disgust for companies that exacerbated the debt binge. In our opinion, fiscal stimulus should be geared to assisting individuals NOT providing bailouts to corporations or industries. The Trump tax cut and repatriation of income helped corporations more than individuals. The page below, from the February Chart book put out by Julex Capital sheds the light on the difference in taxes collected between individuals, payroll taxes and corporations. Of particular note, is the decrease in corporate taxes by almost one-third in 2018. Most of that decrease just fueled more stock buybacks. Corporate tax is puny when compared to individual and payroll taxes:
Even the SEC commissioner, Rob Jackson said recently, “Boards of directors who are allowing buybacks to occur without being transparent about allowing CEO’s to sell into them raise real questions about the leadership of that board.” In 2018, combined dividends and buybacks and were over $1.25 Trillion dollars-(over $4T total buybacks in the last 8 years). There have been four QE market injections, the 2018 corporate tax cuts, trillion-dollar federal deficits, bail outs of banks, bailouts of other companies in the’ 08-09 recession and now we are quite possibly in the same mess or worse. Was it worth it? It certainly was if you are Jamie Dimon or a CEO like him. Think about the idiocy of companies that were buying back their shares at all time highs, paying huge bonuses to management and now have the audacity to ask for a bailout? Even Clark Griswold knew better than to bail out Cousin Eddie in the movie, “Christmas Vacation”. If our government leaders truly wanted to help the American people, they would do the following in our opinion:
- Immediately suspend all corporate buybacks-forcing companies to preserve their cash (or not to incur additional debt)
- Mandate all Public Companies to reduce their dividends to conserve cash to meet payrolls for the next 6-12 months to save their employees, not to enrich themselves
- Immediately implement a check of $5000 to all households (under $125K AGI regardless of employment or not) which would cost the government $250B. This is significantly less than the $700B of payroll tax relief Trump proposed and would actually put the money in the hands of needy families. If necessary, an additional $5K could be provided in 6-12 months, if the virus sticks around-which would still be less than the payroll tax elimination. This also helps most retirees, since their AGI is under $125K, who would not get a benefit from the payroll tax reduction. Obviously, it also assists the homeless and the unemployed.
- Immediately allow all companies who wish to merge with a stronger company to do so using company stock only. Companies should not use cash- they need to preserve cash not spend it.
This program would be significantly ‘fairer’ to the American people, not the America elite that act as managers for major S&P500 companies. It would keep more workers employed, keep some companies in business and reduce the need for bailouts. For the record, we have no problem if companies retire their own shares at reasonable prices in ‘normal’ times. These are not normal times and the prices at which they repurchased were extreme. There is simply TOO much debt in companies, municipalities, households and in the world. Clearly, at some point it overwhelms the system, especially when magnified by leverage.
Lastly, here is a quick update on the major support levels that we are monitoring in the S&P500, at this point in time:
3350, 2725 and 2600 which have been broken on the downside and will provide resistance on the way back up on bounces
2350-bottom for virus only without a credit crisis
If this turns into a credit crisis, the next five levels are: 2000, 1700, 674, 500 and 400, (as a worse case) scenario. We do not ‘expect’ these levels to be broken. We monitor the information and adjust as it unfolds in real time. There are many minor support levels between the major levels that we may discuss in future writings. We provide this information as technical support. As always, this is for information only and we do not recommend that anyone trade on any material in our blog. It is for informational purposes and is from research for our own trading.
In closing, it seems as if everyone is concentrating only on the virus when discussing the equity markets, ignoring other problems: the overvalued state of U.S. equity and bond markets and a potential full-blown credit crisis. The virus can and will impact credit in a very negative manner, so companies should prepare just as prudently as individuals. Companies need to preserve cash, not frivolously buying stock to increase EPS at the expense of survival or potential bailout.
Currently the S&P and the Dow are down approximately 27% from just a few weeks ago. If the market reaction is only due to the virus, duration of the downturn will be approximately 6 -12 months. If it is not just the virus, and a credit crisis develops, the full downturn should unfold in 12-36 months from this point. Market levels today are relatively mild so far. We expect more volatility and large swings on the upside and downside. We highly suspect this is a credit crisis. History shows markets drop between 10-20% on a virus, 30-35% due to an overvalued state of equities and bonds, and 40-80% during a full Credit crisis. Prepare, and stay safe!