Real Growth or Cost Cutting and Buybacks boost EPS?

great post...you are hired.

 

I agree. Would like the cheerleading media on CNBC to do some real perspective analysis. There was a guy on Kudlow last night who tried to bring up this very issue about stock buy backs inflating EPS, and Larry cut him off... mostly due to time I think, but still I could tell what was coming and the point was NOT made. Last word to the bulls expecting 15k on the dow.

 

I don't know folks... the way I see it, is that I or anyone else could talk all day about this aspect of the fundamentals or that aspect, but ultimately, there's a reason why Jim Simons is the #1 hedge fund manager in the world, besting Soros and other more fundamentally based managers. Simons just sees numbers, statistics and patterns. He couldn't care less about where the S&P trades on an EV/FCF basis... he's cracked market code using the best minds on the planet...

I mean, I enjoy following the fundamentals, but they can be very deadly in the short to intermediate term, especially when liquidity and money flow dominate in periods of 'irrational' behavior. Note that 'irrational' here only has meaning relative to the fundamentals, but then again, one could make the argument that it is perfectly rational to expect overshooting in up or down trends by fallible market participants.

I think that's why Soros did so well over 30+ years, he had his fundamental outlook, but did not hesitate to get out when the price action caused his back to hurt...

The next generation of monster hedge fund managers will be hybrids using both high frequency trading/statistical pattern recognition as well as mixed fundamental/statistical models. Because that's the only way they will be able to handle all the cash that people are throwing at them and still beat the market nicely. I think only a few managers will have the vision to do diversify in such a manner though, the majority of them cling to their core style just because they know nothing else... The vast majority of the 100 or so largest hedge funds only have 1 core or maybe 2 approaches (long short equity, value, risk arb, event driven etc etc). A good example of someone who's diversifying rapidly is Tudor Jones. I'm not surprised, he's a phenomenal business man and trader.

 

http://hussmanfunds.com/wmc/wmc061106.htm

Some nice data on current S&P valuation in its historical context

 

Here is some commentary I put together a week ago:

It appears as though earnings for the S&P 500 are on track for a record 13th consecutive quarter of year-over-year, double-digit growth. Earnings in the 3rd quarter of 2006 are on track for a 16% to 17% growth over the same period in 2005. According to information compiled by Reuters, “of the 319 S&P 500 companies that had reporting earnings through October 27th, 73% have beaten forecasts and 15% have missed forecasts.”

While this is an impressive figure, it becomes truly remarkable when also considering that the U.S. gross domestic product only increased at an annual rate of 1.6% in the 3rd quarter of 2006. This is the lowest rate of growth since the first quarter of 2003.

So where is all of this earnings growth coming from if it isn’t being produced domestically?
•Share buybacks: Standard and Poor’s reported that companies in the S&P 500 repurchased $116 billion of their own stock in the 2nd quarter of 2006 following the repurchase of $100 billion of stock in the 1st quarter, and $104 billion in the 4th quarter of 2005. As the number of shares decrease, the earnings per share increase (all else equal). Merrill Lynch’s David Rosenberg suspects share buybacks have reduced shares to the point of increasing earnings per share by as much as 33%.

•Sector Specific Growth: Materials, Financials, and Energy are the three sectors that are driving the earnings growth of the overall index. The Materials sector alone is expected to increase earnings by 48% on the heels of higher commodity prices.

•Margin Expansion and Globalization: Revenue growth is close to 10% year-over-year meaning that to increase earnings, companies must be cutting costs by shifting more of the production internationally.


----Please let me know what you think!!

 

Here is some commentary I put together a week ago:

It appears as though earnings for the S&P 500 are on track for a record 13th consecutive quarter of year-over-year, double-digit growth. Earnings in the 3rd quarter of 2006 are on track for a 16% to 17% growth over the same period in 2005. According to information compiled by Reuters, “of the 319 S&P 500 companies that had reporting earnings through October 27th, 73% have beaten forecasts and 15% have missed forecasts.”

While this is an impressive figure, it becomes truly remarkable when also considering that the U.S. gross domestic product only increased at an annual rate of 1.6% in the 3rd quarter of 2006. This is the lowest rate of growth since the first quarter of 2003.

So where is all of this earnings growth coming from if it isn’t being produced domestically?
•Share buybacks: Standard and Poor’s reported that companies in the S&P 500 repurchased $116 billion of their own stock in the 2nd quarter of 2006 following the repurchase of $100 billion of stock in the 1st quarter, and $104 billion in the 4th quarter of 2005. As the number of shares decrease, the earnings per share increase (all else equal). Merrill Lynch’s David Rosenberg suspects share buybacks have reduced shares to the point of increasing earnings per share by as much as 33%.

•Sector Specific Growth: Materials, Financials, and Energy are the three sectors that are driving the earnings growth of the overall index. The Materials sector alone is expected to increase earnings by 48% on the heels of higher commodity prices.

•Margin Expansion and Globalization: Revenue growth is close to 10% year-over-year meaning that to increase earnings, companies must be cutting costs by shifting more of the production internationally.


----Please let me know what you think!!

 

Interest data Gunner, confirms Jeff's thoughts and my suspicions too. Wow, 33% boost to eps growth from stock buybacks?... As the market roars higher I start to wonder if I should think of the USA as a commodity economy and not a tech/services economy, lol.

Another point to add, is that forecasts are for ~6% eps growth in 07'. So to all the bulls buying today, I ask you: would you pay north of 20x forward P/E forthe S&P with this kind of a backdrop?

 

At this point it doesn't matter. What does matter is the higher the market goes the more people who are forced to chase it. CSCO the buyback king comes out after the close

 

Ok but this is really what is going on.

The debt markets are so heavy on liquidity that they have to be used. This wonderful financial system of fractional reserve banking with a central bank is the cause.

Hence there is tons of printed dollars floating around and more to come. The liquidity HAS to be taken advantage of by paper pushers because if too much of hits the masses, the real inflation will show itself and we have a major global crisis (US is far from the only nation with this fraudulent system).

Companies nowdays are using the debt markets heavily. They either issue dividends or start buying back stock. Now it may seem that this is coming from straight cash of the balance sheet, but anyone who knows finance, understands that it's more about capital management.

And yes, this is exactly how the middle class is subdued into lower class and the poor are made poorer, while the special rich who get early access to this newly printed money utilize it to grab assets before inflation even halfway materializes.

As for the cost-cutting phenomenon, it's nothing more than buerocratic crap that allows the higher & middle management to get bigger bonuses. Long term thinking of investment into human resources is viewed badly, hence gotta think short term. Too many managers trying to preserve their job first and foremost, while paying little attention to actually doing something right for the company.

It may seem complicated and confusing, but it is not. All of these trends, as well as the problems with education, government financing, politics, etc. are all leading into one direction. It's happened before and it will happen again.

 

...Shhhhh..the FBI gonna come for you..or maybe the Homeland Security Agents....good analysis though...