Saturday, November 15, 2014

About buybacks --- AND --- Your Weekly Update

When you buy a share of stock you own a piece of a company. And you therefore own a piece of a company’s earnings. Your wish is that the company you own generates more earnings per share going forward (pushing your share price higher) than it did when you purchased the stock. That’s it, bottom line! Whether that company earns more per share in a given year due to an increase in sales, or productivity, or both—or due to it buying back its own stock from other shareholders (results in the same dollar amount of earnings being divided among a fewer number of outstanding shares [i.e., more for you]) should be of little concern to you. Right?

Well, yeah, and, well, nah. You probably wouldn't want your per share earnings to grow primarily due to share buybacks every year. You'd probably want your company to actually make a little money providing something folks are eager to buy. Besides, it has to generate some cash every now and again with which to---every now and again---buy back its shares. Yes, I know, many companies borrow to finance buybacks---but who'd lend to a company that doesn't make money?

I bring this up because over the past year U.S. companies have bought back their own stock to the tune of over $500 billion worth---that's close to a new record. All this proactive boosting of per share earnings gives fodder to the bears who'd have you believe that your portfolio's comeback from the '09 lows rests on a house of cards. Their story goes that firms are foregoing capital investment to artificially boost their share prices---often at the behest of execs whose compensation is largely based on earnings-per-share targets. Or upon the insistence of activist billionaire shareholders looking to make a quick buck during the post-buyback-announcement rally.

Me? I'm agnostic when it comes to buybacks (Sure, maybe IBM's overdone it and has consequently fallen behind the innovation curve. Meaning, maybe its long-term vision has given way to quarterly bottom line myopia---a lesson for others perhaps). I simply see buybacks as phenomena to consider when gauging the market: I expect it to occur when cash levels are high and interest rates are low---which generally characterizes periods of uncertainty. And when a company's reluctant to expand while maintaining a heavy cash balance---and sees its own stock as a bargain---why not buy back a few shares? It'll surely make for happy shareholders.

I've made the case for many months that a key ingredient to a truly healthy expansion has been sorely missing during this one---capex spending (businesses investing in capital [expanding]), that is. And while this year's surveys have come in lukewarm on capex, I suspect that amid growing optimism (at least for the U.S. economy), jobs (perhaps a sign of a pick up in capex) and, surely, a great deal of pent up demand, we'll begin seeing a turn in that direction in the not-too-distant future. Maybe...

The following highlights from my last week's (U.S.) economic journal show continued strength in employment, capex optimism among small businesses, down and up (chronologically) retail results, a blah mortgage market, comfortable inventories and an optimistic consumer. While I wouldn't uncork the bubbly just yet, all in, things are looking up:

NOVEMBER 10, 2014

THE CONFERENCE BOARD EMPLOYMENT TREND INDEX for October came in very strong at 123.09. Here's from the Conference Board release:

The index now stands at 123.09, up from 121.91 (an upward revision) in September. This represents a 7.7 percent gain in the ETI compared to a year ago.

“The Employment Trends Index continues to increase rapidly, with all eight components improving in October,” said Gad Levanon, Managing Director of Macroeconomic and Labor Market Research at The Conference Board. “The index is signaling solid job growth through the winter. As a result, we could see the unemployment rate reach its natural rate of 5.5 percent by early Spring.”

NOVEMBER 11, 2014

NFIB SMALL BUSINESS OPTIMISM INDEX gained .8 points over the prior month. Worth noting is the expectation of greater capex spending going forward. The employment component gained as well. Overall, however, the tone remains cautious.

THE ICSC CHAIN STORE SALES weekly report shows strength, 1.5% compared to the prior week -1.6%.. Year-over-year: 2.1% vs 1.8% prior. Better, but still nothing to get excited about.

THE JOHNSON REDBOOK month-over-month retail results show a surprising 1% decline versus a .2% rise the prior week. Year-over-year results showed a slight softening compared to the prior week (3.8% from 3.9%). While 3.5% to 4% is the norm during a healthy expansion, the recent trend is uninspiring. I remain optimistic on the retail sector for Q4.

NOVEMBER 12, 2014

THE MBA NEW PURCHASE APPLICATION INDEX rose by 1% over last week and remains 11% lower on a year-over-year basis. Housing has not been, by a long shot, a leading sector during the course of the current expansion. The slow pace amid such a low interest rate environment speaks to the hangover, or post traumatic stress, from the 2008 recession/housing depression. Going forward, demographics favor the housing market in the U.S. In the near-term, so do jobs, consumer sentiment and perhaps energy prices. Recent optimism, and earnings results, among homebuilders signals the potential for an acceleration going forward.

REFINANCE APPLICATIONS last week, bucked the recent strong trend with an 11% decline versus the prior week.

THE ATLANTA FED BUSINESS INFLATION EXPECTATIONS suggest that firms see slightly higher inflation going forward: 2% vs 1.9% in October.

WHOLESALE INVENTORIES rose .3% in September, while wholesale sales rose .2%... The inventory to sales ratio remains at a very comfortable 1.19...

NOVEMBER 13, 2014

WEEKLY JOBLESS CLAIMS came in higher than expected at 290k... still, below 300k is bullish for the jobs market...

THE BLOOMBERG CONSUMER COMFORT INDEX shows an optimistic American consumer, while there is some hesitation that might question my expectation of a robust Christmas retail season... Here's Bloomberg:

Americans' views of the economy climbed last week to the highest level in almost seven years as the labor market strengthened and gasoline prices kept falling.

A Bloomberg measure of perceptions about the world's largest economy increased to 28.9 in the period ended Nov. 9, the highest read since January 2008, from 27.4. The weekly consumer comfort index, which also accounts for views of the buying climate and personal finances, was little changed at 38.2.

The cheapest gas since the end of 2010, more employment opportunities and record equity prices are helping bolster households' perceptions. At the same time, limited wage growth is reining optimism about finances and whether it's a good time to buy as the holiday-shopping season gets under way.

THE SEPTEMBER JOLTS (JOB OPENINGS AND LABOR TURNOVER) REPORT showed that there were 4.7 million job openings at the end of September. Little changed from the 4.8 million August read. The hires level increased to 5.0 million from 4.7 million in August. This was the highest level since December 2007. There were 4.8 million separations in September, vs 4.5 million in August. The quits rate increased to 2.8 million, from 2.5 million in August. The quits rate for September was 2.0%. A rising number of quits is a bullish sign for the jobs market, in that workers generally don't up and quit unless they have some better in the offing or believe strongly that they can walk into better employment elsewhere. In fact, this is a factor featured on Janet Yellen's Labor Market Dashboard. The pre-recession quits rate was 2.1%.... it had dropped to 1.3% amid the 2008 recession...

CRUDE OIL INVENTORIES declined by 1.735 million barrels last week. Clearly, refineries picking up the pace after maintenance season is impacting inventories. Distillates were down 2.0 million while gasoline rose 1.805 million...

NOVEMBER 14, 2014

THE CENSUS BUREAU'S RETAIL SALES number was a bit better than anticipated. Of course gas prices reduced the results for service stations, but you'd expect an offset as folks spent those savings elsewhere. Overall, including autos and gasoline, retail sales rose .3% in October. Ex-autos and gas they rose .6%, vs a .5% consensus estimate.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX's preliminary November number spiked to 89.4 vs the consensus estimate of 87.5 and prior reading of 86.9. This, as I continue to repeat, along with lower gas prices and better jobs numbers makes me optimistic about the Christmas shopping season.

BUSINESS INVENTORIES rose slightly: up .3% in September. I would attribute this small build more to optimism going into year-end, and less so to miscalculating demand. The all-important inventory to sales ratio held steady at .1.3%.

NAT GAS INVENTORIES rose 40 bcf last week.

1 comment:

  1. […] ways from robust, it is on as firm a footing as we’ve seen during this recovery. In my last update I suggested that growing optimism for the U.S. economy would ultimately equate to a pickup in capex […]