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

Why Corporate Earnings Have Yet to Collapse

Monday, February 25th, 2013
By for Profit Confidential

250213_PC_lombardiAs the key stock indices, like the S&P 500, move towards their pre-financial crisis highs, a popular trick for increasing per share earnings is becoming even more popular—companies are buying their own shares to prop up earnings.

Call me a skeptic, but when I see S&P 500 companies buying back their own shares, I think two things: 1) companies are scared to spend their cash elsewhere; and 2) they are pushing per share earnings up, reducing the amount of shares in circulation as opposed to recognizing real earnings growth.

If a company has one million shares outstanding and earns $1.0 million in profit, corporate earnings of this company would be $1.00 per share. Now, if the company buys back 50,000 shares and earns the same profit, earnings per share (EPS) goes up to $1.05—an increase of five percent.

As an example, Safeway Inc. (NYSE/SWY), an S&P 500 company, reported it earned $0.94 per share in the fourth quarter of 2012. But the company’s earnings were much lower if you consider its share buyback. Over the quarter, this S&P 500 company spent $1.2 billion to buy back its shares, boosting per share earnings by $0.17. (Source: Market Watch, February 21, 2013.)

But Safeway isn’t the only S&P 500 company involved in buying back its own shares. Like many other companies, Texas Instruments Incoporated (NYSE/TXN) is using a massive amount of its cash holdings to buy back its shares. The company just announced that it will purchase another $5.0 billion worth of its own shares, bringing the repurchase total to $8.4 billion. (Source: The Globe and Mail, February 21, 2013.) While announcing its fourth-quarter corporate earnings, the company warned investors about fluctuating demand for its products due to economic uncertainty.

Other big names in the S&P 500 are taking similar actions. In the fourth quarter, The Coca-Cola Company (NYSE/KO), Pfizer Inc. (NYSE/PFE), and General Electric Company (NYSE/GE) all announced that they were planning to buy back $10.0 billion worth of shares each. (Source: Chicago Tribune, January 27, 2013.)

  • Double your money every year for 24 years running?

    Since 1989, we've made 912 option picks, with an average annualized profit of 166.17% per recommendation.

    All from Lombardi's best option picks!

    Click here to learn more.

In the first nine months of 2012 alone, S&P 500 companies spent $299.8 billion to buy back their own shares!

Dear reader, what this all tells me is very simple. Businesses, just like the individuals in the U.S. economy, are scared. They are not making investments, which create jobs; rather, they are buying back their shares to make their corporate earnings look better than they actually are.

Funny enough, as companies on the S&P 500 continue to buy back their shares, optimism among investors seems to be increasing. I saw one stock advisor forecasting significant upward moves in the key stock indices, suggesting the Dow Jones Industrial Average will reach 20,000 and the S&P 500 will reach 2,500. But I see the road ahead in a very different light…and that’s a road that includes a stock market moving lower, not higher.

Michael’s Personal Notes

Quantitative easing and the loose monetary policy of the Federal Reserve may have been needed back when the financial system was on the verge of collapse, but could the easy-money policies of today come back to bite investors tomorrow?

Here’s what James Bullard, President of the Federal Reserve Bank of St. Louis had to say regarding quantitative easing: “These are untested policies. It’s not clear how it will end… So because there’s uncertainty about that we’d rather not do more than we have to.” (Source: Saphir, A., “Markets on edge as Fed officials differ on bond buying,” Reuters, February 21, 2013.)

The fact of the matter is that the quantitative easing initiated by the Federal Reserve has fallen short of its expected outcome.

As the Federal Reserve continues to create more money (currently printing at the rate of $85.0 billion a month and keeping interest rates near zero), inflation isn’t the only problem in our future. Asset bubbles are forming.

Investors chase the highest return. We all know this.

But with the Federal Reserve keeping interest rates artificially low for so long, it could be causing investors to take greater risk in pursuit of higher rates of return. For example, in 2012, companies issued $274 billion worth of junk bonds, which by their very nature are higher-risk default bonds. That amount was 55% higher from a year earlier, according to Dealogic. At the same time, the yields for these kinds of bonds have fallen below six percent. (Source: Wall Street Journal, February 20, 2013.)

Turning to the stock market, it’s impossible to determine just how much the Federal Reserve’s easy-money policies have contributed to bringing the stock market back near its record high. But if I had to guess, if it were not for the Fed’s quantitative easing programs, the stock market would be much lower today. For one, if the Fed didn’t take questionable mortgage-backed securities off the books of big banks, banks would still be struggling today and their stock prices would be much lower.

Let’s face it. We have a stock market rising in a period when corporate earnings growth has collapsed, consumer spending is not growing, and the U.S. economy is contracting. How can that be?

Just think what will happen if the Federal Reserve starts to take its monetary policy the other way, raising interest rates and pulling back on money printing as inflation becomes out of control? Such actions will cause bond prices to collapse and the stock market to decline.

The longer the Federal Reserve keeps doing “the same thing,” the harsher conditions investors will face. If something doesn’t work the first time, second time, or third time, chances are that it won’t work at all. Quantitative easing is becoming troublesome now for the U.S. economy, especially for those who are heavily invested in the bond market. I see a perfect storm forming, as the Federal Reserve’s quantitative easing policies have gone on far too long.

Where the Market Stands; Where it’s Headed:

Let me put it in a nutshell for you: overbought and overpriced. That’s how I would classify today’s stock market. Let the calls for new stock market highs march on. I continue to believe that we are being set-up for a big fall in stock prices.

What He Said:

“Over-built, over-speculated, over-financed and over-done. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

VN:F [1.9.22_1171]
Rating: 1.0/10 (1 vote cast)
VN:F [1.9.22_1171]
Rating: -1 (from 1 vote)
Why Corporate Earnings Have Yet to Collapse, 1.0 out of 10 based on 1 rating

This is an entirely free service. No credit card required.

We hate spam as much as you do.
Check out our privacy policy.

Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles

The Great Crash of 2014

A stock market crash bigger than what happened in 2008 and early 2009 is headed our way.

In fact, we are predicting this crash will be even more devastating than the 1929 crash…

…the ramifications of which will hit the economy and Americans deeper than anything we’ve ever seen.

Our 27-year-old research firm feels so strongly about this, we’ve just produced a video to warn investors called, “The Great Crash of 2014.”

In case you are not familiar with our research work on the stock market:

In late 2001, in the aftermath of 9/11, we told our clients to buy small-cap stocks. They rose about 100% after we made that call.

We were one of the first major advisors to turn bullish on gold.

Throughout 2002, we urged our readers to buy gold stocks; many of which doubled and even tripled in price.

In November of 2007, we started begging our customers to get out of the stock market. Shortly afterwards, it was widely recognized that October 2007 was the top for stocks.

We correctly predicted the crash in the stock market of 2008 and early 2009.

And in March of 2009, we started telling our readers to jump into small caps. The Russell 2000 gained about 175% from when we made that call in 2009 to today.

Many investors will find our next prediction hard to believe until they see all the proof we have to back it up.

Even if you don’t own stocks, what’s about to happen will affect you!

I urge you to be among the first to get our next major prediction.
See it here now in this just-released alarming video.