The secret of the 'Trump Rally'
The stock market is lovin' The Donald.
The Dow gained 8.6 percent from the election to the inauguration, after gaining only 5.2 percent in all 2016 before Election Day. The only question is how much credit does Donald Trump deserve?
Or maybe the story is more complicated. Maybe, just maybe, Trump shouldn't get any credit.
In fact, maybe the rally is all a sham.
There were two solid reasons for a stock market rally that had nothing to do with Trump.
#1) Corporate profits
It’s the first quarter in eight that S&P 500 Index profits will rise fast enough to pronounce an end to the earnings recession. Not only is income up more than 4 percent, so are sales, rising at the second-fastest clip since 2012. Earnings forecasts are in particularly good shape, with the tally of companies raising them outnumbering those that cut by the most since 2011 at this time of the year.
Analysts at JPMorgan paint a stark illustration of this positive picture for market technicals. They calculate that global equity supply fell into negative territory last year for the first time ever, as share buybacks, mergers and leveraged buyouts offset public offerings and other corporate activities that tend to increase the amount of shares outstanding, such as rights issues and employee stock programs.
Both trends are more than enough reason for a big stock rally, but I want to focus on the second trend.
Why would the equity supply be falling in this environment?
Funny you should ask that.
This is basically taking money from debt buyers to pad the pockets of equity holders. It has no obvious benefit to the company's long-term prospects; in fact, quite the opposite. As Fitch Ratings said in a report on Thursday, "leveraged share buybacks and other shareholder friendly actions are an ongoing risk to bondholders as borrowing costs remain historically low."
So will this continue this year? Well, last year was a record year for such repurchases, and 2017 is expected be more of the same.
"We forecast corporations will purchase $800 billion of U.S. equities in 2017 through share buybacks" net of issuance, Goldman Sachs analysts wrote in a Jan. 4 report. That's up from $644 billion in 2016 and $561 billion the year before, the bank's data show.
Analysts have high expectations for this year's share buybacks in large part because of the change in the U.S. government. The officials who are taking control are expected to ease corporate taxes, prompting companies to bring back money that's stashed overseas to avoid the current levies. Much of this money may go to repurchasing shares.
Simply put, corporations are borrowing long term to buy their own stocks faster than they can issue new stocks. This is coming at the end of a decade-long borrowing binge which saw corporate debt in the US rise by three-quarters to $8.4tn.
Money market obligations, which include short-term company borrowings, lift that figure to $11.3tn. Only the market for US Treasuries has climbed at a faster pace.
The legacy of this debt has stretched corporate balance sheets for all but the top echelon of S&P 500 companies with large cash holdings.
$2 Trillion of that corporate debt will mature over the next five years.
Comments
Longish thought. So corporate debt goes down and the market
goes wild. Even though they are putting the chicks under the hen. And can look innocent in the next economic collapse. And fully funded. Out of banks?
Personally, I have a surprise bill in Canada to pay in $$CDN and no stamp. Just those life things. And I will do that ASAP and close (repatriate) that $$ to US and be rid of HSBC for the second time. Nested in a CU US-side. I hope that precludes money seizure.
Hey! my dear friends or soon-to-be's, JtC could use the donations to keep this site functioning for those of us who can still see the life preserver or flotsam in the water.
Stock buybacks: It's a form of insider trading that was illegal
until the Reagan administration. It artificially moves the stock market and it's all for the benefit of the stock owning class. A good idea for people is to check the insider trading data to see which companies exec's are buying or unloading shares.
I think a part of the rise in the stock market is "borrowing" from the first two quarters of 2017 and is unsustainable if true.
One probable reason the FED is keeping interest rates so low - in addition to giving the 1% a chance to rake in megabucks - is to trash large pension funds that are "guaranteed benefit" plans. These funds, which millions of Americans count on, need a rate of return of approx. 7.5% to meet their obligations. Since Wall St wants defined contribution plans and not defined benefit plans for Americans, holding the interest rates low makes it impossible for the California pension authority or the Central States pension plan, to meet the promised payouts and they will probably have to cut benefits. This softens up support for these traditional pension plans and gives the arbs of Wall St a potential opening to enrich themselves by the change in pension type for new enrollees.
"The justness of individual land right is not justifiable to those to whom the land by right of first claim collectively belonged"
Does This Mean What I Think It Means?
?
They want guaranteed revenue not guaranteed cost or responsibility?
That's certainly a nice way of saying they want to take money and not fulfill their obligations, ain't it?
“Tactics without strategy is the noise before defeat.” ~ Sun Tzu
Here's my opinion:
A defined benefit plan means I pay in a certain amount each payday and upon my retirement I get a contracted-for XXX amount of dollars per month.
A defined contribution plan means that I pay a certain amount each payday and either the financial advisory group, or me if it's set up that way, invests the money and if the stock and bond markets perform well, and the advisors are honest, I get a certain percentage of the principle each month or can elect to take a lump sum of the money that I paid in plus the profit(or loss) from over the years. There's no implied amount at the onset what you'll be getting.
I hope someone will correct me if I am in error.
The Central States Pension fund, which is the retirement fund for many Teamsters and some others, is in real trouble due to low return on their investments in large part due to the interest rate suppression by the FED. The states of Illinois and New Jersey are also said to be having difficulty in paying their retirees the contracted monthly pension.
Wall St wants "you pay your money and see what you may or may not get upon retirement" instead of you pay your money and you know ahead of time what your pension will be.
I like people to be able to plan their retirements based on what they've been promised.
"The justness of individual land right is not justifiable to those to whom the land by right of first claim collectively belonged"
Toxic Combination
All these stock buybacks will probably result in another stock market crash. This situation, in combination with repealing Dodd-Frank, will create a very toxic economic environment where the "little guy" will lose what little he/she has.
I took most of my 401K out of the market
last February, so I've missed this latest run up with the biggest chunk, but that's OK. My financial guy keeps telling me I should put some back in but with the Dow as high as it is now, no thanks. I do not have enough to lose any of it again.
So they're juicing the market with cheap debt used for buybacks. Can't go on forever, I'm not putting anything back into that market.
Thanks so much for these gjohnsit. No, they aren't always fun to read but they're indispensable for me now.
Only a fool lets someone else tell him who his enemy is. Assata Shakur
I'm backing out now.
Selling the high flyers and non-dividend payers.
I've seen lots of changes. What doesn't change is people. Same old hairless apes.
Did the same thing with my 401K.
No more for me in the stock market either, especially how it exists exists now. It's a rich man's con game and way too rife for corruption.
One of my best friend's became a stock broker and a couple of us played around with stocks for a few years. In the end despite all the "hot tips" and having gotten sucked in (for a short time) to the adrenaline rush of watching stocks, I came out at what I went in with, or less. It led even to said friend eventually leaving that world because he didn't like the emotional baggage of spending each weekend worrying about how stocks would fare come Monday morning and losing friends' money.
I'm convinced the only way people make money in that world is through insider trading, no doubt. It is totally like casino gambling, which I loathe and see as a bane on society. It's an addiction like anything else. But we have professional help for drug abusers, alcoholics, eating disorders; none for hedge fund investors and stock brokers. They're just as diseased.
That said, if there was a way in which the stock market worked more like one of those GoFundMe functionaries, in which people who believed in an idea, project, product could also share in the profits as early donor supporters, then I think that is a good idea. But the current market is way too prone to exaggerated shifts by wealthy assholes looking to tank some enemy or some such other gaming of the system, because the system is too fundamentally unsound and under-regulated.
Always laugh when seeing those experiments when a monkey picks stocks randomly, and does just as good or better than a broker.
As a progressive-minded/environmentally conscious person who despises predatory and monopoly corporate culture and makes a concerted effort to abide a philosophy that voting with one's money is the most powerful vote we have, I'm left wondering what the way to go is with my 401K. Municipal bonds? Solely green energy (but who can tell how legit the companies are with their commitment)? It's always a quandry when it comes to these things.
"If I should ever die, God forbid, let this be my epitaph:
THE ONLY PROOF HE NEEDED
FOR THE EXISTENCE OF GOD
WAS MUSIC"
- Kurt Vonnegut
I'm only in for the dividends.
Retirees are supposed to have bonds and CD's, but the FED has fixed it so that those pay zilch. If FDIC insured deposits paid 4-5% like they did when I was a kid, then my money would be there. As stated in this diary, the FED has kept interest rates near zero to accommodate stock buybacks.
As Congress keeps threatening to take away my SS, pension, Medicare and health insurance, I can't afford NOT to earn money on my savings.
I've seen lots of changes. What doesn't change is people. Same old hairless apes.
@lizzyh7 Be careful where you put
Be careful where you put the money you take out of equities. Fixed income has a high level of interest rate risk and cash substitutes return below the rate of inflation.
That is the scariest part
as all have pointed out here in responding to my post. While part of me wants to try to "get as much as I can" for the very reason that I feel in my gut my SS is GONE, I do not know where in hell to save any money that doesn't either feed the predators or risk my money to them. And I just cannot invest in some company to get returns because they're mostly unethical and I don't want to BE a predator either.
It's in a money market right now and while I try not to worry too much there I think about it most of the time. The financial guy that tells me everything is just fine, fine, fine just makes me mad really - I know these people do this for a living and most likely know more than I do, but with what I read here and other places I don't have enough blind faith anymore to just take his word for it. I've managed to save like hell and put a nice amount away as my mother and grandmother harped on for decades but it surely is not enough for what is coming down the pike. If I could stuff it in my mattress I would!
Only a fool lets someone else tell him who his enemy is. Assata Shakur
OT - Redacted Tonight
Looks like Warren a cinch for reelection
Oh Mitch! Stuck your head out of that carapace just long enough to issue a ponderous rebuke to Warren, Correta King, and every woman from the suffragettes to Rosa Parks to the BLM protestors. Have a lettuce leaf, Honey, and sink back inside. There's a good boy.
I assume you pre-shrink your charts to post them.
They are consistently just a size smaller than what can easily be read on screen, gjohnsit. I know it may have been necessary to compress them, given the site's prior design.
But now, there is more room. And that's a good thing. I'd love to see them a bit larger. They are really good charts, once deciphered, and always enhance your point.
Carry on… and thanks.
stocks at bullish extreme
@gjohnsit
The looting phase, while there's still a little circulating blood to squeeze out of The People caught between a rock and a stonewall...
Psychopathy is not a political position, whether labeled 'conservatism', 'centrism' or 'left'.
A tin labeled 'coffee' may be a can of worms or pathology identified by a lack of empathy/willingness to harm others to achieve personal desires.