Dear Diary,
It is another cool, cloudy day in Poitou. The whole summer has been like this – like a winter in Georgia, with hardly a single warm day. Vacationers head back to Paris with the same white skin they came with. Beach resorts empty out… embarrassed at the way they treated their loyal customers.
But the roofers have liked it. No hot sun has beat down on them.
We are redoing the roof of one of the barns. Alas, it is a slate roof, which costs a fortune. But at least you only have to replace it once a generation. Slate roofs last for 60 to 70 years.
Every day the roofers arrive at 7:30 a.m…. mount their scaffold and get to work, nailing the new slates to the roof. At noon, they stop and go to lunch… resuming work at 1:30 p.m…. keeping at it until 6 p.m.
Just two angry young men.
What are they angry about?
“We learned a trade. We work hard. But other people get as much as we do without working. They get rent assistance. And welfare payments. Many of them live better than we do.
“Of course, it’s not just their fault. The education system orients young people to office work. But there aren’t enough of those jobs. And they don’t want to do this kind of hard work anyway.
“I don’t know how it’s going to end… but I don’t think it is going to end well.”
Broken Promises
And here’s op-ed columnist for the International Herald Tribune William Pfaff with the numbers:
The latest French statistics have been awful. Income tax came in at €10 billion less than last year, despite painful and unpopular tax increases. Growth was 0% in the last trimester. And France’s promise to the EU to bring the annual deficit down to 4% was officially broken.
The longer we spend in France the more similarities we see between its economic problems and those in the US. Same bureaucracies. Same deficits. Same zombies. Same claptrap theories and self-serving delusions. Same slowdown. Same policy responses (more or less).
The world’s economies were “globalized” in the 1990s and the 2000s. Now, the economic problems are globalized, too.
Instead of individual economies – each one mucked up by its own policymakers, each speaking his own language – now, Shinzo, Janet and Mario muck them all up together in the language of international financial muck: English!
“Whatever It Takes”
In the US, market moves yesterday were piddly. Not much to talk about.
This is a little worrying to the technical traders and theoreticians. The aforementioned authorities have promised to do “whatever it takes” to keep the credit bubble expanding.
But aside from jaw-dropping moves in the bond market – where prices for Italian, French, Spanish and Portuguese debt are higher than anytime in history – progress to the upside has been plodding rather than soaring.
This bespeaks weakness and weariness.
We bring it up to remind readers that rising markets always end in falling markets. Usually, assets that are way overpriced drop suddenly, often for no apparent reason.
This brings the “buy the dip” crowd into the market, which gives the impression – briefly – that the party is still going on. Reassured and misled, investors stick with their overpriced positions far too long… and suffer big losses.
Psychologically, it is very difficult to get out of a position with even a small loss… especially when you have been trained by many years to believe that “prices always go up”… or that “the Fed won’t let prices stay down for long.”
That is why it is best to get out early, before the sell-off begins. Better too early than too late.
Regards,
Bill
Market Insight:
Where Would Stocks Be Without Buybacks?
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Central bankers may muck things up… but they often do so in a way that makes people think they’re doing a good job.
An example of this is the share buyback bonanza that has been helping push US stocks skyward.
This year is set to become the third biggest year ever for buybacks, with US corporations already buying back $296 billion of their own shares. (The record, so far, was set in 2007, when US share buybacks reached $810 billion.)
Share buybacks are financial engineering, pure and simple. By buying back their shares, companies boost their earnings per share, without having to increase their earnings.
In other words, instead of growing the numerator (earnings), they shrink the denominator (the number of shares outstanding). And – hey, presto! – their earnings per share goes up.
As you can see from the chart below, which draws on Fed data, corporations (represented by the purple bars) have been the biggest buyers of shares since the start of the bull run in 2009.
Source: Smithers & Co.
Corporations borrow money at the Fed’s ultra-low interest rates. They use this money to buy back their stocks. Earnings per share rise. And the S&P 500 hits new highs.
What’s not to like?
Quite a lot, actually.
First, as short-seller Jim Chanos points out, they augur lower profits ahead. Here’s what Chanos told Barry Ritholtz recently on Bloomberg Radio:
What worries me is that corporate America in aggregate has pretax returns on capital in the mid- to high teens. The long-term expected rate of the equity markets is roughly half that. And when corporations embarked on massive buybacks across all industries and all companies, in effect these CEOs are buying the stock market.
So what they’re telling you then is unequivocally that they think that either they’re happy to earn the stock market rate of return or maybe something hopefully better. Or their rate of return on the margin of any new capital project is much, much lower – in fact half or less of what is stated. And that does not bode well for the future of profits, or for the quality of earnings reported as current profits.
And second, as QE comes to an end… and cheap debt funding comes to an end… so will share buybacks.
And when that happens, corporations will have to boost their earnings per share the hard way: by increasing earnings.
And with US retail sales flat in January – the worst reading in six months – that’s going to be a tough task.