Experts at Propping Up Earnings? 70% of S&P 500 Firms Buy Back Stock in 2012

Experts at Propping Up EarningsThe corporate earnings season for the first quarter of 2013 may not be as positive as optimistic stock advisors believe it will be. The reality is that companies in the U.S. economy are struggling to maintain corporate earnings growth, so they’re resorting to employee cost-cutting measures.

Consider the six largest banks in the U.S. economy; they announced a reduction in their collective labor force of about 21,000 in the first three months of 2013—the highest amount since the third quarter of 2011. (Source: Bloomberg, April 9, 2013.) Why? Because if it’s difficult to increase revenues, just cut expenses to maintain profits.

JPMorgan Chase & Co. (NYSE/JPM), a component of the S&P 500, posted record corporate earnings for the past three years but has planned to cut 17,000 employees by the end of 2014.

American Express Company (NYSE/AXP) is planning to cut 5,400 jobs this year, reducing its workforce by 8.5%.

Other measures companies are taking to maintain corporate earnings growth include major stock buyback programs. In the fourth quarter of 2012, S&P 500 companies purchased $93.5 billion worth of their own shares. For the whole of 2012, S&P 500 companies purchased $385 billion worth of shares. Of all the companies on the S&P 500, 70% were involved in buying back their shares in 2012. (Source: FactSet, April 3, 2013.)

As I have continually said in these pages, at the end of the day, corporate earnings fuel real stock market rallies. Right now, key stock indices are running ahead of themselves, and I’m looking at this as a warning sign.

In the third quarter of 2012, S&P 500 companies reported negative growth in their corporate earnings. Now, in the first quarter of 2013, they are expected to do the same. If this happens, it would mark the second quarter of negative corporate earnings growth in the last three quarters.

Meanwhile, economic conditions in both the U.S. economy and the global economy are deteriorating quickly. The U.S. saw anemic growth in the fourth quarter of 2012. The first quarter of this year won’t be any different, as not a lot has changed with the economy—the unemployment rate is bleak, consumer confidence is in ruins, and consumer spending has no chance of increasing anytime soon.

As for the global economy, problems, especially in the eurozone, still persist. Trade among countries is decreasing as demand is declining.

The stock market euphoria could turn into panic as more companies release their corporate earnings. Be cautious.

Michael’s Personal Notes:

Through its third round of quantitative easing, the Federal Reserve is essentially printing $85.0 billion a month in new money and buying government bonds and mortgage-backed securities with the newly printed money. The Bank of Japan has been taking similar measures for some time now and is failing to move the Japanese economy toward growth.

In spite of its failure, the Bank of Japan has taken quantitative easing to another level. The central bank announced it will inject $1.4 trillion into the Japanese economy in its attempt to end the deflation and economic misery the country has been experiencing for years. (Source: Reuters, April 5, 2013.) The Japanese economy is in a recession, and the country’s exports are in a slump.

The Bank of Japan is purchasing $73.0 billion worth of government bonds per month. In addition, it will be purchasing one trillion yen worth of exchange-traded funds (ETFs) per year and 30 billion yen worth of real estate funds. In its attempts to boost economic growth, the Bank of Japan is purchasing 70% of the new debt issued by the Japanese government.

As a result of its quantitative easing, there are fears that asset bubbles are forming in the Japanese economy. The Japanese yen has fallen in value by more than 30%, as is shown on the chart below. Key stock indices in the Japanese economy have increased substantially and are reaching beyond the highs made in 2008.

$XJY Japanese Yen Philadelphia stock chart

Chart courtesy of

In the U.S. economy, we see the same thing happening. Quantitative easing is creating inflationary pressures, bond investors have been squeezed and are forced to take higher risks, and the stock market is moving ahead of reality.

Dear reader, we need to learn from the mistakes of the Bank of Japan and see that quantitative easing hasn’t done much to help the Japanese economy. Lowering interest rates and printing a significant amount of paper money doesn’t work in the long term.

Quantitative easing by the Federal Reserve has essentially provided the U.S. government with a line of credit to spend non-stop. Similar to the actions of the Bank of Japan, our central bank is buying up a hefty amount of new debt issued by the government. This practice cannot be sustained. I believe the longer the Fed keeps its quantitative easing programs running, the bigger our financial problems will become.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower interest rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in Profit Confidential, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.