- Dancing to Uncle Sam’s tune
- Warren Buffett bucks Biden
- The “demonization” of stock buybacks
- The SEC, NFTs and the NBA (#rocketshipemoji)
- What happened to America? (“Wow”)… How Nixon neutralized the nuclear family… And more!
You take the government’s money, you dance to the government’s tune.
The semiconductor industry is learning that this week — good and hard.
Yesterday the White House rolled out its terms and conditions for companies that want a cut of the $39 billion in subsidies included in the CHIPS Act passed last year.
Among other things, says this morning’s New York Times, “they will need to provide child care for employees, run their plants on low-emission sources of energy, pay union wages for construction workers, shun stock buybacks and potentially share certain profits with the government.
“That decision is a bet on the power of the federal government to transform private industry. But it is also a distinct break from how the United States has traditionally engaged with corporate America.”
Let’s call it what it is — an attempted nationalization of the one American industry government hasn’t totally mucked up at this point. Socialism through the back door.
Child care? “The condition marks an unusual use of the federal government’s powers,” avers the BBC. No, really?
Yes, someone might attempt a challenge in court. It probably won’t fly. While the current makeup of the Supreme Court appears skeptical about executive-branch power grabs, all bets are off when business climbs in bed with government. That’s why the justices didn’t stand in the way of COVID vaccine mandates for health care providers that take Medicare/Medicaid money.
Missing from the NYT’s laundry list, by the way, is a requirement that subsidized chipmakers will be barred from expanding their operations within China for at least a decade.
The good news is that the overall impact of these rules is likely to be muted.
Yes, $39 billion for one industry is a lot of money… but it pales in comparison with “the $3 trillion that, according to a 2021 report, semiconductor companies were expected to spend on capital expenditure and research and development over the coming decade,” per today’s Wall Street Journal.
In addition, the terms might be so onerous that some chipmakers will opt to reject the gummint’s money.
Rest assured Ray Blanco and the rest of our tech-investing team here at Paradigm Press will be following the money closely. Even with the layers of regulations, it might pay to invest in certain companies benefiting from government largesse. But it might also pay to invest in other companies charting a more free-market route. Stay tuned…
Before the news gets too old and moldy, we should explore Warren Buffett’s not-so-veiled swipe at the Biden administration.
In his annual letter to Berkshire Hathaway shareholders released last Saturday, Buffett weighed in on the topic of share buybacks: “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”
The White House has been on a jihad against buybacks the last two years — to wit, the aforementioned curb on buybacks for companies taking CHIPS Act money. The administration even tucked a 1% tax on corporate buybacks into the “Inflation Reduction Act” last year.
If the idea of the tax was to slow the pace of buybacks, it’s not working: Buybacks by S&P 500 companies are set to top $1 trillion in 2023 for the first time in a calendar year, per a front-page story in yesterday’s Wall Street Journal. In just the first six weeks of this year, Chevron announced it would buy back $75 billion in shares, Facebook parent Meta announced $40 billion and Goldman Sachs $30 billion.
“I agree with Buffett: This demonization is based on politics and votes, not on reason,” says Paradigm’s retirement-investing pro Zach Scheidt.
A quick reminder how the process works: “Companies use cash from their balance sheets to buy shares of stock in the open market, which are then retired and taken out of circulation. This means each remaining share represents a larger piece of the overall company.
“So if you’re holding a single share of this company (or 100 shares or any other number), you automatically own a larger percentage.
“In other words, you’re entitled to more of the company’s profits… the company can pay larger dividends… and your shares represent a larger claim on the company’s assets.”
To be clear, not all buybacks are made equal. Buffett himself made this point when he said buybacks are sensible only when made at “value-accretive prices” — that is, when companies don’t overpay for their shares.
The good news is there are plenty of companies that use buybacks wisely and strategically — and are worth a look.
- For instance, the aforementioned Chevron (CVX) with its planned $75 billion buyback. “As that capital is put to work,” says Zach, “existing CVX shares should become much more valuable”
- Or consider one of Zach’s longtime favorites, Apple (AAPL). “Thanks to its focus on recurring service revenue, AAPL has huge amounts of cash flowing into its balance sheet each quarter. Now that the stock has pulled back from last year’s highs, AAPL can retire more shares for the same amount of money spent.”
- And another mainstay among Zach’s blue chip picks, Procter & Gamble (PG): “The company spent more than $40 billion in share buybacks over the last five years. And thanks to the company’s reliable profits, I expect more of the same in 2023.” Like AAPL, PG is trading at a discount from its 2022 peak.
“So the next time you hear a politician criticizing a company for repurchasing shares,” Zach concludes, “you can know what’s really happening behind the scenes. The company is spending your money to help add more value to your investment.”
Today’s stock market action is akin to watching paint dry.
At last check, the Dow is up a quarter percent to 32,739. The S&P 500 is barely in the red at 3,966. And the Nasdaq is down a quarter percent to 11,430.
Bond yields are climbing higher, the 10-year Treasury note just shy of 4% for the first time since mid-November.
Precious metals are rallying modestly, gold at $1,837 and silver at $20.94. The industrial metals are doing much better — copper up nearly 1% to $4.09 a pound, aluminum and zinc up over 2%.
But crude is getting no love after the Energy Department’s weekly inventory numbers; a barrel of West Texas intermediate is off just over a quarter to $76.77.
The big economic number of the day is the ISM manufacturing index: At 47.7, the index has registered four-straight sub-50 readings, suggesting the U.S. factory sector is shrinking.
A similar reading from China, meanwhile, leaped to 52.6 — the best showing since 2012 — now that Beijing has abandoned its obsession with “zero COVID.”
Hmmm… At what point do emojis become subject to securities law?
So yeah, we should back up a bit: As we’ve mentioned in the past, the NBA got in early on the craze for non-fungible tokens.
NFTs are one-of-a-kind or limited-edition digital collectibles, often “signed by the artist” — a concept that makes sense to us if you’re talking about, say, Tim Berners-Lee’s original files of the source code for the World Wide Web or Twitter founder Jack Dorsey’s first-ever tweet in 2006.
But it never made sense with NBA highlight clips — you know, random dunks by the likes of Steph Curry and Kevin Durant. You could get a “starter pack” of three for only $9.
At one point in 2021, a LeBron James NFT sold for $230,000. Today, you can get one of King James for a mere $40. Litigation was inevitable.
As evidence, the plaintiffs submitted tweets from NBA Top Shot such as this one…
Wrote U.S. District Judge Victor Marrero: “Although the literal word ‘profit’ is not included in any of the tweets, the rocket-ship emoji, stock-chart emoji and money-bags emoji objectively mean one thing: a financial return on investment.”
As such, Marrero declared them subject to securities laws dating back to the 1930s — laws written for stocks and bonds.
“The judge’s opinion is deeply unpopular among cryptocurrency and NFT aficionados who insist their coins and tokens are like art, baseball cards or other unregulated collectibles,” reports Crain’s New York Business. “The U.S. Securities and Exchange Commission disagrees.”
Marrero has yet to decide whether the plaintiffs are entitled to any relief. NBA Top Shot is a joint venture of the NBA, the NBA players’ union and an outfit called Dapper Labs — which just cut 20% of its workforce amid the general downturn in tech.
“Wow — you got some very insightful, intelligent replies from your readers to your ‘What happened to America?’ question,” a reader writes after yesterday’s edition.
“I’ll just offer my ‘Ditto’ to the answers:
— the creation of the Federal Reserve
— the destruction of the nuclear family
— we’ve lost our moral compass.
“All so true. I used to read the Old Testament and be mystified by how dumb the Israelites were — I kept wondering why they couldn’t see that the reason everything was going to hell in a handcart for them was because they’d turned away from God. But nowadays, looking at our society, I see just how easy it is to be that blind. (Shaking head wearily.)
“Oh — more answers to ‘What happened to America?’:
— the damn seat belt laws, which forever killed the all-American romantic habit of a guy driving along the road in a convertible, with his arm around his girlfriend
— the rabid anti-smoking movement, which was the beginning of the ‘pussy-fying’ of America 🙂
— the continual growth of the belief that nothing bad should ever happen to me — and if it does, I should be able to sue someone over it.”
The 5: One might say there’s a link between “the creation of the Federal Reserve” and “the destruction of the nuclear family.”
When Richard Nixon ended the last vestiges of the gold standard in 1971 — that was the only way Uncle Sam could continue paying for “guns and butter” — the resulting loss of the dollar’s purchasing power made it nearly impossible to maintain a middle-class lifestyle on one income.
But as Peter Thiel pointed out last year, it was all good for mainstream economists who bow to the false god of GDP: Instead of one breadwinner, there were two people earning incomes and paying someone else a third income to take care of the kids.
It was all about meaningless statistical aggregates, and not about individuals’ standard of living.
Add to that the rapacious practices of the industries we long ago labeled “the three Hs” — health care, higher education and housing — and prosperity as folks knew it in the 1950s and ’60s was all over.
In any event, yes, we got many, many thoughtful responses to our query — far more than we had space for the last few days. Our thanks to everyone who wrote in, once again reinforcing our conviction that The 5 has the most informed and engaged readers of any e-letter in the business!
Best regards,
Dave Gonigam
The 5 Min. Forecast
