Nick’s Note: The political tide is turning against Wall Street…
Firebrand democratic socialist Alexandria Ocasio-Cortez questioned whether we should have a system that allows billionaires to exist. And just last month, Senators Bernie Sanders and Chuck Schumer proposed legislation banning corporations from repurchasing their shares unless they increase pay for their workers.
I wanted to find out how their proposal would affect the market, so I called Jason Bodner, editor of Palm Beach Trader. He spent nearly two decades on Wall Street as a trader and has seen it all—including living through the Occupy Wall Street movement.
In today’s interview, Jason tells us why Americans are angry at Wall Street…
By Nick Rokke, analyst, The Palm Beach Daily
Nick: Thanks for joining me today, Jason. There’s a lot of talk about “socialism” in the headlines today.
For instance, Senators Bernie Sanders and Chuck Schumer proposed legislation last month that would restrict share buybacks unless corporations pay their employees more money.
What do you think of their plan?
Jason: Ultimately, I don’t think the proposal will go anywhere. We have a Republican-controlled Senate and a Republican president. So I doubt it’ll get passed.
Here’s what I think is happening…
Democrats are trying to take the temperature of America. They have an obscene number of candidates for the 2020 presidential election. And these people are throwing around ideas to see what sticks.
They saw how the Occupy Wall Street movement helped reelect President Obama in 2012. Understandably, people were upset that big banks were making all this money, then getting bailed out during the Great Recession.
So the movement wanted the government to increase regulations on Wall Street to keep that from happening again. And the Democratic presidential candidates today are trying to tap into that same emotion for this next election.
Nick: You worked on Wall Street during the Occupy Wall Street movement. What was it like?
Jason: I was at Cantor Fitzgerald at the time. It was a little disconcerting. People were mad and lashing out.
In 2012, I was in downtown Manhattan meeting a client near the offices of global trading firm Susquehanna. There were Occupy tents all over the place—filled with grungy kids with a cause to be angry.
It was kind of sad because it was bloody freezing at the time. But it was clear they picked that spot because it was the epicenter of Wall Street.
I was just going to work every day, trying to support my family. And I had done nothing wrong. Yet, I was feeling the wrath of the people just because of a few bad actors. Not everyone on Wall Street fits the “evil-doer” stereotype that was politically popular at the time. Most of us were just everyday people doing our jobs.
Look, Wall Street doesn’t try to screw people. Most traders act honestly; but like every other industry, there are some bad apples.
And in my opinion, the answer isn’t more regulations like the Occupy Wall Street people wanted.
Nick: Why not?
Jason: Politically, I’m not as far right as some of the people in our business. I think regulations ensuring that businesses operate fairly make sense. But these regulations have to be limited—and shouldn’t hamstring the good actors.
Regulating free markets goes against what our democracy stands for. I want to protect the little guy… without restricting the markets. And outlawing buybacks would severely restrict the operations of publicly traded companies.
Nick: Democratic socialists like Bernie Sanders and Alexandria Ocasio-Cortez would argue that corporate CEOs use buybacks to manipulate share prices and enrich themselves.
How would you respond to them?
Jason: At their most sinister, it’s true that corporate executives could do that. Granted, I don’t think it always works like that… but for the sake of argument, let’s say it does.
Now, even if executives were buying back shares out of self-interest or greed, the share prices would still be going up for everyone else, too. So all investors would be profiting along with the executives. And that doesn’t sound too bad.
But it would only work in the short term… because most executives receive stock options that are deferred for five to 10 years. So any short-term fluctuations won’t help them out over that time frame.
The real reason stock prices increase after buybacks is because investors own larger portions of the companies—since the number of shares available has decreased. So each investor gets a larger share of current profits.
This is why I like buybacks… I want to own bigger pieces of the businesses I’m investing in. It can make a huge difference in the long run.
Take Warren Buffett as an example…
Last month, he released his annual letter to shareholders. In it, he said that his firm, Berkshire Hathaway, owned 12.6% of American Express eight years ago. But through buybacks alone, Berkshire’s ownership has increased to 17.9% now.
He went on to say, “When earnings increase and shares outstanding decrease, owners—over time—usually do well.”
And I agree with the Oracle of Omaha on that one.
Nick: Me, too.
Now, regular readers know that your proprietary system scans nearly 5,500 stocks every day looking for those showing likely institutional buying. Does it factor in buybacks, too?
Jason: Yes, but indirectly. You see, when a company announces a buyback, it’s really saying, “We might buy back a certain number of shares if we feel like it.”
It’s really just giving the company the option to buy back shares. If shares rise 25% after announcing the buyback, it probably won’t repurchase as many shares as it originally thought.
But my system picks up buybacks once they actually start happening. So if you have a $20 billion company that announces a $2 billion buyback—and follows through—it’ll show up as unusual activity on my system.
And that’s what my system looks for: unusual institutional [UI] activity.
Nick: Do you have any recent examples of your system picking up buybacks?
Jason: We have a few, but a good example is Boeing. At the end of 2017, Boeing approved an $18 billion buyback. By the end of 2018, it had completed half of that.
My system flashed several UI buys for Boeing throughout 2018.
And while I don’t know exactly when Boeing was repurchasing shares… I can conclude that we captured that activity. It wouldn’t surprise me if Boeing had gotten more aggressive on its repurchases last October and December when the market kept establishing lows.
Nick: Now, I know you can’t give out recommendations from your portfolio… But is there an easy way for readers to take advantage of buybacks?
Jason: I’d look into some sectors with high cash flows and low capital expenditures—like technology companies.
Information technology and software firms gush cash, but have low maintenance costs. So they’re perfect candidates for buybacks.
Nick: Great. Thanks for taking the time to give us the insider’s perspective on buybacks.
Jason: You’re welcome.
Nick’s Note: For 16 years, Jason worked inside the belly of Wall Street, placing trades for the richest institutions in the world.
But as we discussed today, the government is always creating all kinds of crazy rules and regulations to “monitor” what happens on the trading floor.
Most of them make sense… But about eight years ago, Jason came across a little-known “loophole” that requires Wall Street’s biggest titans to notify the Securities and Exchange Commission—in writing—when they’ve bought large blocks of stock.
Jason created his proprietary system to spot these big money flows. And now, you can watch his full story here…
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