Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Corporate Earnings

Corporate earnings are also referred to as “company earnings” and “corporate profits:” basically, the amount of money a company makes in certain period of time. The price/earnings multiple is still the most common tool used to value a company. The stock market values a company based on the amount of money—the earnings and profits—the company has after all expenses, including taxes, have been paid. In a stock market where stocks are traded at an average of 12 times earnings, a company making $1.00 a share per year would be valued at $12.00. All things being equal, the more money a public company makes, the higher its stock price.

Why Stock Buybacks Will End Up Being a Terrible Investment for Companies

By for Profit Confidential

Great Stock Buyback MirageIn these pages, I have been very critical about stock buybacks by companies on the key stock indices. I see them as nothing more than a form of financial engineering used to manipulate per-share corporate earnings…and a bad investment for the companies buying their stocks back.

According to data compiled by Bloomberg and the S&P Dow Jones Indices, companies on the key stock indices are expected to spend $914 billion on share buybacks and dividends this year. Looking at it from their corporate earnings perspective, public companies will be paying out 95% of what they earn. (Source: Bloomberg, October 6, 2014.) Look at it this way: for every $100.00 of corporate earnings, they are paying out $95.00.

Almost $2.0 trillion has been spent by public companies on stock buybacks since 2009.

When companies increase buybacks, all else unchanged, they show an increase in their per-share corporate earnings. Some of the biggest names in key stock indices are doing this. FedEx Corporation (NYSE/FDX) was able to increase its per-share corporate earnings by seven percent, almost all directly related to its stock buyback program (reducing the amount of shares it has outstanding).

Why do I think stock buybacks are bad?

Over the past few years, companies on the key stock indices, by buying their own shares back and removing them from the market, have created a mirage that business is good because their stock prices are rising.

But business isn’t better. If the S&P 500 companies are spending 95% of their corporate earnings on share buybacks and dividends, it means they are spending very few dollars on growing their business.

According to … Read More

What Job Growth? Labor Participation Hits 30-Year Low

By for Profit Confidential

Job GrowthFinally, some good news for the U.S. economy?

Last week, the U.S. Bureau of Labor Statistics reported 248,000 jobs were created in the U.S. economy in September, pushing the unemployment rate down to 5.9% from 6.1% the previous month. (Source: Bureau of Labor Statistics, October 3, 2014.)

The September jobs market report showed good job creation in sectors like professional and business services, information, mining, construction, and financial. Combined, these six sectors saw job growth of 130,000 jobs, just over half of all jobs created in the month. This is a fresh and welcome change over the past few years where we saw massive growth in low-wage-paying sectors like retail and food services.

While the news from this month’s jobs market sounds good on the surface, the reality is that there’s a severe problem with the employment situation in this country.

Long-term readers of Profit Confidential know I focus on the underemployment rate because it includes people in the jobs market who have given up looking for work and those with part-time jobs who can’t get full-time jobs. Look at that number (what I call the real unemployment rate) and you’ll see it still sits stubbornly around 12%…like it has for the past five years.

And the only boom I can find in the jobs market today is in part-time work! There are now 7.1 million Americans who are working part-time in the U.S. economy.

But the most troubling problem with the jobs market has to do with people who are leaving the jobs market.

In September, the labor force participation rate stood at 62.7%. This means that only 62.7% … Read More

The Problem With Reality in 2014

By for Profit Confidential

U.S. Economy Halfway to a Recession AlreadyEarlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)

Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.

We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.

At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.

But there are two blatant threats to companies in the key stock indices and the profits they generate.

First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more … Read More

So This Is Why Stocks Are Really Rising

By for Profit Confidential

Demand for Stocks Outweighs Supply at This PointOne of the oddest things to happen with the stock market since it has recovered is that the number of shares trading hands each day has slowly disappeared.

In the table that I have created for you below, I list the trading volume for the S&P 500 for each June since 2009 and the percentage change in volume from the previous June.

Trading volume on the S&P 500 has dropped 60% since 2009!

Trading Volume, S&P 500, June of Each Year, 2009 – 2014

Year Volume (Shares Traded Per Month) Year-Over-Year % Change
June 2009 93,147,496,448
June 2010 91,971,043,328 -1.3%
June 2011 63,674,499,072 -30.8%
June 2012 59,703,365,632 -6.2%
June 2013 51,560,980,480 -13.6%
June 2014 38,765,629,440 -24.8%

Data source: www.StockCharts.com, last accessed July 1, 2014

What’s happening here? How can the stock market rise year after year if trading volume is down?

It’s very simple, but I’ll explain this new phenomenon in a moment. First, look at the chart of the S&P 500 below. Pay close attention to the volume at the bottom of the chart. As volume on the S&P 500 collapsed, the price of the index rose.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Volume is collapsing because the number of shares companies have outstanding is being reduced at an accelerated rate. For example, in the first quarter of 2014, S&P 500 companies purchased $154.5 billion worth of their shares back (stock buyback programs). Over the trailing 12 months, S&P 500 companies purchased more than half-a-trillion-dollars worth of their own shares—$535.2 billion to be exact. (Source: FactSet, June 18, 2014.)

Add to the shrinking number of shares outstanding the fact that central … Read More

These Safest Names Still Offer the Best Returns

By for Profit Confidential

Same Old Trend to Continue Despite Improved Earnings NumbersThe earnings are beginning to flow and it’s a total mixed bag out there again.

Carnival Corporation (CCL) beat the Street with its second-quarter numbers, with cruise line sales growing four percent over the second quarter of 2013.

Guidance, however, was mediocre and the position sold off on its earnings results.

Walgreen Co. (WAG) has been very strong on the stock market over the last 12 months. The drugstore chain produced a six-percent gain in sales to $19.4 billion, and a 16% gain in earnings to $722 million.

But the company is getting squeezed both by health insurers and pharmaceutical manufacturers, so its business model is getting pressured.

Walgreen is considering reincorporating overseas to reduce its tax burden, but it won’t have details on any potential plan until later in the summer. The stock went up on the news.

Second-quarter earnings results were actually a bit better than expected and once we get into blue chip numbers, I think the market will be a bit more appeased.

It is important to remember where stocks are coming from. It’s been an exceptionally good last few years for equities; 2013 was outstanding.

The first quarter was a tough one, both due to the weather and general business cycle conditions. The market isn’t expecting second-quarter numbers to be strong, and that goes for both gross domestic product (GDP) and corporate earnings.

All that corporations have to do is meet or beat on one financial metric and either affirm or improve existing full-year guidance. With this backdrop, institutional investors will keep buying.

Monsanto Company (MON) soared to a record 52-week high after releasing a … Read More

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