Previous posts in this discussion:
Poston the US Middle Class and Stock Buybacks (Tor Guimaraes, USA, 05/02/13 4:27 am)
Istvan Simon's post on 30 April insists without much evidence that the US economy and middle class are just fine. The National Bureau of Economic Research seems rather less enthusiastic about this economic recovery:
Regarding the middle class, things don't look that rosy either. In 2011, the average Adjusted Gross Income corrected for inflation was the lowest since 1966. For the vast majority of US workers, the increase was $59, but for the top 10 percent the increase was 84 percent or $116,071. This is hardly evidence that the middle class is doing fine, as Istvan insists. The pay for CEOs increased 127 times faster than workers' pay over the last 30 years with data showing worker wages stagnant since the 1970s, leading to a sharp increase in American income inequality only seen in exceptional countries like the Ivory Coast and Pakistan. The shameful inequality is attributed not to the rich working harder or smarter, but to changes in federal income, gift, and estate tax regulations favoring rich investors. Capital gains tax cuts were considered "the biggest driver in the growth of American income inequality."
Further, Istvan made the observation that "companies' profits increased significantly, and so did their sales. This is not at all the picture that Tor paints. Furthermore, this has little to do with cheap money spurred by the Fed. Many companies are sitting on huge amounts of cash. Not cash borrowed from the government, but cash generated in sales. Apple Computer, for example, announced that it will buy back some of its stock. Obviously if Apple wants to buy back its stock, it is because it believes that it is undervalued rather than overvalued."
Such statements show a profound misunderstanding of what is going on. Indeed Apple's share value increased enormously since January 2009, from around $100 to $700 by October 2011. Since the peak, Apple shares have lost more than 35% of their value in seven months, and Apple CEO Tim Cook has listened to Wall Street calls to share with investors the huge and unproductive $140 billion in idle cash. A regular dividend has been paid since a year ago. But contrary to Istvan's assertion, Apple is now taking advantage of the Fed's cheap money and completing the largest corporate debt offering in history, seeking $17 billion in debt at very low interest rates. The cash will be used for Apple's planned $60 billion share buyback from the public over the next couple of years.
Similarly, total share buybacks by S&P 500 companies are around $100 billion for each of the past three quarters. Many have used nearly 80% of their free cash flow to buy their own stock. Buybacks will reduce shares in circulation, thus increasing earnings per share. The result can be clearly seen in the shares of the TrimTabs Float Shrink ETF (symbol: TTFS) comprising companies doing buybacks. TTFS handily beat the Dow and the S&P to the upside for the last 12 months. At some point companies will be paying too much for their own stock, regardless of how much cash they have. Stock buybacks are ultimately an indication that demand for their products and services cannot justify investment in new production facilities, as I explained in an earlier post.
Concurrently, for the last four quarters many companies have been further supplementing their cash flows with cheap debt for such things as stock buybacks. Indeed, in the first quarter they have sold $365 billion in new debt, moving steadily toward last year's record total of close to $1.4 trillion. Without necessarily implying that history will repeat itself, please note that the last time we had this intense and widespread buyback activity was in the third quarter of 2007 when the stock market reached its prior peak before crashing. In any case, as discussed above and contrary to Istvan's belief, cheap money from the Fed and stock buybacks have been significant factors for the stock market's steady climb to new highs.
Finally, Istvan stated, "Tor seems to think that if the Dow goes to 16,000 it is nothing to brag about. I do not agree. The Dow going to 16,000 is a 14% increase, which is quite a nice return." This is another baseless comment. How high the Dow goes means nothing for the return on investment in a particular stock. Only if one buys a Dow-based ETF would such statement make any sense.
JE comments: I heard a few days ago about Apple taking out the $17 billion loan. Then and now I don't understand: if Apple sits on $140 billion in cash, why assume the additional debt, even if it's nearly interest-free?
US Middle Class and the Dow
(Istvan Simon, USA
05/05/13 4:49 AM)
Tor Guimaraes wrote on 2 May that I have provided "little evidence" that the economy and the middle class are doing just fine in the United States. This is simply not true. I supported my statements with statistical data published in a New York Times article which had extensive salary data on workers in the last 10 years. I frankly can't understand how that is "little evidence" in support of my position. Or why Tor thinks that the statistics and interpretations he provides are in any way "better" evidence in support of this.
As it happens, there is fresh new evidence just published in the New York Times about revised employment data, which caused a major mini-rally of the stock market on Friday (3 May):
I have to say that I consider Tor's May 2 contribution one of the worst that he has ever written on the economy for WAIS. This is just my opinion, and I welcome other divergent views. But with all due respect to Tor, how can anyone take seriously a post in which he wrote:
"How high the Dow goes means nothing for the return on investment in a particular stock. Only if one buys a Dow-based ETF would such statement make any sense."
The Dow is a broad indicator of the health of the overall state of the stock market. That is why it is collected and published. It is wrong to say that it has nothing to do with return on investment. Of course it has a lot to do with return on investment. First of all, one can buy derivatives which will give the exact return of the Dow. Second, one can buy the shares of the individual companies that make up the index. Third, when the Dow rises, a very large number of stocks which are not themselves part of the Dow rise as well. If what Tor wrote were anywhere near the truth, why would anyone bother about the Dow in the first place? This is pretty uncontroversial and basic stuff, so I see no point in arguing about it any further.
I will also not bother with a point-by-point rebuttal of Tor's post. Let me just say that I stand on my past record of correct predictions on the US economy, and I leave it for WAISers to decide for themselves whose interpretation they trust best. Since my post has implications about the future performance of the United States economy, the future will tell who is right.
JE comments: I've been monitoring my tiny investment portfolio for years, and I would argue for a middle ground on the Simon-Guimaraes polemic. The Dow is a good yardstick for the overall health of the market, yet it does not guarantee the performance of any individual stock. In the meantime, the Dow is at the doorstep of 15,000. I think that if it hits 16K anytime soon, Istvan will be the one proven right--although WAIS is about analysis and discussion, not proving who is "right" and "wrong."
My gut feeling is that we'll see a modest decline during the coming weeks. It may be time to "sell in May and go away..."
Stock Indices and the Economy
(Tor Guimaraes, USA
05/06/13 7:14 AM)
John Eipper's commentary on Istvan Simon's 5 May post included, "The Dow is a good yardstick for the overall health of the market, yet it does not guarantee the performance of any individual stock. In the meantime, the Dow is at the doorstep of 15,000. I think that if it hits 16K anytime soon, Istvan will be the one proven right."
Indeed, in general the Dow is a fairly good yardstick for the overall market (the S&P is significantly better), but Istvan originally was mistakenly linking the Dow to the US economy and the health of the US middle class. In my earlier post I explicitly recognized that the Dow might reach 16,000. However, if such Dow levels are achieved because of stock buybacks and other gimmicks stemming from too much cheap money with no productive investments, this is not good for the US economy in the long run.
Therefore, if John Eipper wishes to declare a winner, let it be based on something more beneficial to the American people, such as employment, personal income, or even GDP. Anything more directly related to the US economy and US middle class standard of living than the Dow Jones.
Meanwhile, instead of repeating the same mixed evidence from the Wall Street article, I would like to hear Istvan's rosy glasses explanation for "how it now takes two spouses working to equal the wages of a one-income family of 40 years ago." Also regarding "wages have plummeted so low that a two-income family is now (on average) 15% poorer than a one-income family of 40 years ago. Using the year 2000 as the numerical base from which to 'zero' all of the numbers, real wages peaked in 1970 at around $20/hour. Today the average worker makes $8.50/hour--more than 57% less than in 1970. And since the average wage directly determines the standard of living of our society, we can see that the average standard of living in the US has plummeted by over 57% over a span of 40 years." I would say that a standard of living measure is much more relevant to the economy and middle class living conditions than the Dow Jones.
JE comments: WAIS is not about picking winners, but I'll agree with Tor Guimaraes that the stock indices are only part of the economic picture. But are working-class families materially worse off than in 1970? Certainly they have far more stuff (cell phones, computers, several TVs...).
In his address yesterday at Adrian College, Senator Carl Levin stressed the need to distinguish between "principled stands" and "blind confidence" in the certainty of one's views. These words of wisdom for our graduates were an oblique reference to the gridlock going on in Washington, but I'll take them as sound advice for WAIS discussions, too.
A report on Sen. Levin's visit is forthcoming.
- Stock Indices and the Economy (Tor Guimaraes, USA 05/06/13 7:14 AM)