If you have followed my Markibbles one of the most popular ones is The Plank of risk. I had it jazzed up by a professional cartoonist. More relevant now that we are seeing QE to infinity…
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James Rickards wrote it in his book Currency Wars I just put it into an image. Thanks for the great book Jim!
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Below is a curious slash worrisome chart that outlines record inflation adjusted corporate earnings. This would be fine if we did not consider the current economic backdrop is not very supportive of this continuing. But, then again how did the earning plummet then go stratospheric? Perhaps central planning has something to do with it?? 
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Recently, I put together a study of market volatility. The study used the daily New York Stock Exchange (NYSE) advance-decline data going back to 1970. Advance-decline data simply looks at the number of stocks advancing (increasing) and the number of stocks declining in value. What I looked for was outsized ratios of daily advance-decline data. A ratio over 9:1, whether it be advancers to decliners or decliners to advancers is considered outsized. The results are below. Hmmm…
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I had my my current market commentary conference call transcribed and turned into report form.
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Bob Janjuah from Nomura Bloomberg interview presented with no commentary other than not much one can argue with in this video.
If it seems like you have read a lot about companies buying back shares of their own company you are right. According to Bloomberg 2011 is on track to be the third largest year in corporate buy backs behind 2006 and 2007. While the Bloomberg article, in typical cheerleading fashion, points to buybacks being bullish none other than Kiplinger has recently made the correct warning that buybacks are not always good.
In the current environment buying back shares helps one item that is very important to how investors view a company. As a matter of fact it is the item most analysts focus on – earnings. So image if a company has 100 shares outstanding and earnings “x” amount that equates to $1 dollar per share. If the company buys back 50 shares and earns the same “x” amount the earnings per share then per share earnings would be $2. In a world where unemployment is high, borrowing tight and growth prospects muted what easier way to goose the numbers than share buybacks.
What really matters is stark contrast to what companies do with company money is what the executives of companies have been doing with their own money. Let’s have a look. Below is a chart from the Wall Street Journal Market Data center and shows what executives, that must report transactions in their own company stock, have been doing and plan to do.
So let’s get this right, with company money stock is being bought back to goose earnings (presumably) while the executives who are acting in their own self interest are selling with their hands and feet. Since the executives are interested in themselves and are selling then for the interest of the company, not share holders, they are buying back shares to keep the facade of corporate health intact while they sneak out the back door (selling in their own portfolios).
In hindsight we see that 2007 was where the cracks in the economy and financial world were starting to show up. So the question is that if in 2006 and 2007 we saw record buy backs and what followed was an implosion in stocks could it be that 2011’s buyback mania is foretelling companies having trouble with earnings?
Unless you have been living under a rock you will have noticed that investing markets have been whipped around by the hair like an unloved ragged doll. At the root of the markets gyrations is Europe and whether they can solve their debt crisis. The reality is, at minimum, Europe needs to come up with approximately 2.5 Euro (or more). The 2.5 trillion figure is derived by taking the total debts of the weak nations (PIIGS plus some more) take a 50% haircut and you have about 2.5 trillion. With no haircut we are looking at 5 trillion plus. The way I see it they have a few options.
- The first option is economic growth in a huge way in the troubled nations in particular. This means a complete reversal of the path they are on. This option is highly unlikely.
- The second option is they could find a huge pot or source of money. They will not just find money and the only place that can fund such is China and they are balking if not disinterested entirely. Whatever China does not cough up (if any) Europe will have to figure a way by borrowing which assumes there are entities willing to lend to their disaster.
- The third option is massive defaults above the 50% haircut. Remember that a 50% haircut is a default since 100% of investor money is not being returned.
- Print money on a huge scale and bail out the weak nations.
Option one is a dream of a dream. Options two is possible but unlikely that China will cough up all the cash. Option three and four are more plausible, not good for markets and scream protect your money.
First up is the Weekly S&P 500 and NYSE volume. Note the volume spike in August that sent the market down has no been matched with a upward spike or anything close to an upward spike.
Next up is ISM New Orders minus Inventories (ISM NO-INV) versus the S&P 500. We have seen a move up in the ISM NO-INV along with the recent move up in stocks. Big spreads like we have seen recently in this chart are usually closed with a drop in stocks with a rise in ISM NO-INV. My fear is the recent run up in stocks had more to do with a rising Euro than market fundamentals. We shall see.
Next up is the ECRI WLI growth rate versus Annualized GDP growth by quarter. Real hard to see this chart changing upward. Keep in mind ECRI has been very accurate in predicting the last few recessions.
Last is the ECRI WLI growth rate versus the S&P 500. Again, where will we go from here. With a China hard landing possible, Europe burning and the US muddling through its tough not to see this chart moving lower.
