Current Marketing Thoughts
Kevin Van Trump
Kevin Van Trump has over 20 years of experience in the grain and livestock industry.
All time highs in the stock market today, now what?
May 03, 2013
The stock market seems to be trapped in a period where "all news" is "good news." Granted today's employment numbers were better than expected and the market just hit all time highs this morning. Global easing programs and safety nets continue to be put in place. For me I am starting to become a little more concerned that this period of "euphoria" may start to lose its luster. Why you ask? Consider the following:
The price of a stock is nothing more than its perceived "value." As always people buy "value" NOT "price." Hence when the market crashed and bottomed out (MAR-2009), the perceived "value" of stocks for many of our nations greatest companies appeared excessively cheap. Not only cheap in investors eyes, but as companies trimmed the fat, cut back expenses and started to once again turn big profits, they started buying back their own shares. Therefore it is obvious to see the buying frenzy has not been from individual investors or the "mom-and-pops," but rather from the funds and managed money players who were forced to put money at work in the marketplace because of no other real alternatives (Fed dropping the bottom out of rates), and the corporations who have been aggressively buying back their own stock because perceived "value" has been extremely affordable.
Like any other market, "supply" and "demand" is major price determinant. Greater demand (or buying by the corporations) means less supply in the marketplace and therefore higher prices. Same song and dance for stocks. Corporations buying back their own shares takes supply out of the marketplace. Funds aggressively buying shares because the perceived value is cheap also takes shares out of the marketplace. Simple economics...less supply, plus strong demand, equals higher prices. My fear moving forward is that perceived "value" is fading. I am starting to hear more and more talk from fund managers saying the "easy-money" is gone. Finding "real" value is becoming tougher and tougher. Think about it like this, If the market was truly "strong" and standing on its own two-feet, not moving higher on Fed assistance, or decreasing supply, then IPO's would be sailing higher...but they are not. Instead nobody wants to go public after seeing what happened to Facebook, Zynga and Groupon. New issues aren't in the business of buying back their own shares, they are in the game of issuing new shares in order to generate capital. Point is what happens when US corporations stop buying back their own shares and taking available "supply" out of the marketplace? Unless their buying can be replaced by the "mom-and-pops" we may start to slide. As always money-flow remains king. I am not sure if we are there as of yet, but when the corporations start to turn off their buy-back machines we need to be looking for the exit signs.
EXAMPLE: In case you haven't heard, Apple is jumping on the buy-back bandwagon. Just last week they announced a $60 billion share buyback plan, the largest ever in corporate history, representing about 15% of all their outstanding shares. On the outside you have to believe they are hopping that by eliminating shares, demand will increase and prices will in turn move higher. I am afraid there is a lot more to it than just that. As you probably know, Apple is sitting on close to $150 billion in cash. The problem is about two-thirds of their cash is is held overseas. Meaning Apple would have to pay fortunes in US income tax if it were to use that money here at home. In "playing the game," Apple has decided to simply borrow the money from bankers here at home to fund their massive stock buy-back program. It's a no brainer! Assume Apple goes out and borrows the money at an interest rate of 3% (which is not unrealistic), then uses the money to buy-back its own stock at the current price of between $400 and $450 a share. Keep in mind for each share Apple buys-back they ultimately reduce their annual dividend payment by $12.20 a share. Assuming they are going to buy-back 140-150 million shares, they will be saving close to $1.8 billion in annual dividend payments. Wow, thats convenient. If you figure up the the annual interest they will be paying on $60 billion, at 3% it comes to right around $1.8 billion. Sounds like a perfect wash right??? Wrong! Even better, Apple understand, like other US corporations that interest is tax-deductible...dividends are NOT!
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