The Long Term Investor

HAPPY BIRTHDAY to you.....happy birthday to you....Happy birthday BULL MARKET. How time flys, we are now TEN YEARS into the Historic BULL MARKET that began in March of 2009. I remember many people two, three, four, and even five or six years in wondering if it was time to get back into the markets again. EXCEPT for those that held through the collapse or had the LUCK to get back in early, EVERYONE ELSE missed out on some portion of the BIG GAINS.

The 10-year anniversary of the bull market is coming

https://www.cnn.com/2019/03/03/investing/stocks-week-ahead-bull-market/index.html

(BOLD is my comment and opinion of important content)

"New York (CNN Business)1. Ten years gone: In March 2009, the US economy was in the midst of the Great Recession.

The government had just reported that more than 650,000 jobs were lost in the prior month. The Dow and S&P 500 were each down more than 50% from their October 2007 peaks.
And there seemed to be no end in sight to the doom and gloom on Wall Street and Main Street.

Flash forward 10 years, and it's been mostly blue skies for investors since then. Thanks to steady economic growth and a surge in corporate profits, the Dow and S&P 500 are up more than 300% since they hit bottom on March 6, 2009.
But now that this bull market is approaching its 10-year anniversary, some are wondering how much longer the rally can last. Stocks have soared so far in 2019 following the tumultuous fourth quarter of last year.
That's led to new questions about whether stocks are too pricey.

The S&P 500 had been trading at 18 times 2019 earnings estimates before stocks cratered last fall. That multiple fell as low as 14 following the huge sell-off. But it's now at 16 after the index started 2019 with a 12% pop.
"What's happened in this rally is that valuations have crept back up," said Hugo Rogers, chief investment strategist with Deltec. "Stocks were oversold last year but now they are no longer cheap."
Earnings growth is expected to slow this year after a strong 2019. That's partly due to the fading effect of corporate tax cuts. But economic weakness in Italy and Germany, worries about Brexit and slowing growth in China and India are causes for concern, too.

All of that could hurt earnings for huge multinationals in the Dow and S&P 500 — companies like Apple (AAPL), Caterpillar (CAT), Coca-Cola (KO) and Procter & Gamble (PG).
And even though the Federal Reserve has already signaled that it will probably not raise interest rates this year, the US economy — and corporate earnings — may start to slow because of the lag from prior rate hikes. The Fed has boosted rates seven times in the past two years. That will hurt companies with a lot of debt in particular.
"The markets may be topping out," said Randy Swan, CEO of Swan Global Investments. "The damage from the Fed's rate hikes could already be done."
Of course, it's fair to point out that bull markets aren't like a carton of milk. They don't have an expiration date. Stocks could keep climbing as long as earnings and the economy are growing.

But complacency may be setting in as investors continue to ignore risks.
"With the benefit of hindsight, it seems all too obvious how and why trouble struck," wrote strategists at DWS. "Most recessions and bear markets are not like that — they tend to catch central bankers, investors and even economists by surprise. All this argues for a bit of caution."
2. Jobs, jobs, jobs: Last month, analysts watched the US jobs report for signs of damage from the partial government shutdown. But employment growth in January was surprisingly strong. The US economy added 304,000 jobs — the 100th straight month of gains.
Another solid report could juice markets, which finished February on a positive note. The Dow increased 3.7%. The S&P 500 finished up 3%, and the Nasdaq ended up 3.4%.
Good economic news would add to investors' optimism. They're already feeling good about the likelihood of a trade deal between the United States and China, as well as the Fed's decision to pause interest rate hikes.

3. Retail's haves and have-nots: The verdict is in from last year's holiday shopping stretch: There's a widening gap between retail's best and worst performing companies.
A flood of top retailers reported uneven results this earnings season. Some, including Walmart (WMT), TJX (TJX) and Best Buy (BBY), thrived. But L Brands (LB)-owned Victoria's Secret, JCPenney (JCP) and Gap, inc. (GPS) struggled.
Department chains Macy's (M) and Nordstrom (JWN) faced pressure in their full-price divisions. But those companies found strength through their discount stores.
Target (TGT), Kohl's (KSS), Kroger (KR) and Costco (COST) all report earnings this week. Target has become a formidable competitor to Amazon (AMZN) and Walmart because of its lineup of trendy private-label clothing, and its sharp focus on trying to win over moms and dads. Costco has also succeeded because of its low prices on groceries and household basics, and through the popularity of its trademark Kirkland Signature brand.

4. Coming next week:
Monday —Salesforce (CRM) earnings
Tuesday —Target, Kohl's and Ross Stores (ROST) earnings, US ISM non-manufacturing index
Wednesday — Dollar Tree (DLTR) and Abercrombie & Fitch (ANF) earnings, Fed Beige Book
Thursday —Kroger, H&R Block (HRB), Costco earnings
Friday — US jobs report"

MY COMMENT:

First.....If I hear that crap about the economy faltering due to the FADING EFFECT of corporate tax cuts I am going to PUKE. I guess I will be puking a lot going forward since this is a common line in the DOOM & GLOOM media. I call total BS. The reduced corporate tax levels will continue to JUICE the economy and particular individual businesses for as long as the politicians keep there dirty little hands off the tax laws.

As to the rest of the world economy, yes there may be some impact if the rest of the world is doing poorly, but for AMERICAN companies, even those that sell world wide....we will be the only game in town for growth and profit for investors. Our strong businesses will prosper while the rest of the world sits and watches and tries to figure out why. AND...from what I see...they will never figure out "what and why" drives business success.

Jobs and job growth are doing GREAT. There is NO inflation to speak of. Wages continue to rise. Productivity is UP. We are in the early stages of an economic turning of the wheel with OLD, unable to adapt businesses, like the old retailers and food companies being replaced by younger more dynamic companies that will be household names for decades. This is EXACTLY how a dynamic capitalist economy is SUPPOSED to work and grow.

ALL IN ALL.....things look......NORMAL to me. YES......the economy and economic growth do not have an expiration date like a carton of milk. Just because ten flips of a penny are heads does not change anything about the odds on the 11th flip. The past ten years is totally irrelevant to the next one, two, five, ten years. It is ALL ABOUT individual business growth, business management, product marketing, and dominating the world with our products. It is ALSO ALL ABOUT....the IDIOCY of our politicians....the greatest danger to the AMERICAN ECONOMY.....as usual. ( I dont want to say that "people" are dumb, but the politicians are of course a sycophantic proxy for the people that elect them) I believe the greatest indicator of the future economy will be the willingness of the AMERICAN PEOPLE to buy into the SOCIALISM (GLOBALISM) that seems to be all over the media lately.

 

"Thanks to steady economic growth and a surge in corporate profits, the Dow and S&P 500 are up more than 300% since they hit bottom on March 6, 2009." (from article above)

MY COMMENT:

CAN you imagine those that started investing ten years ago, they have experienced 300% growth in just ten years. In a way I FEEL SORRY for them since they are very spoiled and now have a VERY skewed impression of investing. Going forward they are always going to have doubt, frustration, fear, panic, and many other emotions since they have been so spoiled in their first ten years and many will now have UNREALISTIC EXPECTATIONS..

AND.....did ANYONE predict a ten year BULL MARKET, with 300% gains in ANY media article, or TV show, or anywhere else in 2007, 2008, or any time before 2009? OR...during the 2008/2009 collapse? I DOUBT IT. These sorts of EXPLOSIVE and UNIMAGINABLE market times are my reason for being a LONG TERM INVESTOR. You HAVE to catch these HIGH GAIN time periods to match or get anywhere close to the unmanaged averages over your lifetime. ANOTHER perfect example is the gains of the past ten weeks. After the dismal November and December of 2018, how many predicted the past ten weeks of gains? The unmanaged indexes are certainly going to capture these sorts of gains since they are NEVER out of the markets. ARE YOU.....?

 

STRANGE DAY today with the strong open, and than the mid day fade, with the end of the day semi-recovery. HERE is a "little" article about the day. Looks like there is really no explanation.....not that there needs to be one.

Dow fell 207 points but ended off the lows of the day

https://www.cnn.com/2019/03/04/investing/stock-market-today-dow/index.html

(BOLD is my comment and opinion of important content)

"Stocks went into reverse just before lunchtime on Wall Street Monday. But nobody could figure out why.
There weren't any major earnings or economic reports that came out. Yes, there was a big drop in construction spending for December. But it was largely expected. And it was an "old" report whose release was delayed by the government shutdown.
Still, the Dow, which was up as much as 130 points shortly after the market opened, was down 400 points by mid-afternoon before cutting those losses nearly in half. The Dow finished the day with a 207-point drop.
Boeing (BA), the biggest component of the Dow and the best stock in the blue chip average so far this year, was one of the worst performers, falling nearly 2%. UnitedHealth (UNH), McDonald's (MCD), Walgreens (WBA), Verizon (VZ) and Nike (NKE) were among the biggest drags on the Dow too.

Paul Nolte, a portfolio manager with Kingsview Asset Management, told CNN Business that he thinks investors are growing tired of talk about an imminent agreement on a trade deal between the United States and China and want more specifics.
"This is, what the 38th time, that we are 'close' to a trade deal?" Nolte quipped. "You can only cry wolf so many times. We need something more tangible than we're close."

Mike O'Rourke, chief market strategist with JonesTrading, told CNN Business he agreed. He said investors may simply be looking for an excuse to sell considering that the Dow, S&P 500 and Nasdaq are all sporting double-digit percentage gains this year.
"We've gone up sharply on the potential for a deal. But now that the finish line is in sight people are selling the news," O'Rourke said, adding that a pullback is healthy since the"behavior of the past couple of months was atypical."

Market slide is much ado about nothing
But Steve Chiavarone, global allocation portfolio manager and equity strategist with Federated Investors, said the sharp pullback Monday is puzzling because most of the economic headlines are still good. He said Monday's sell-off was merely "noise."
He pointed out that bond yields have pulled back now that it looks like the Federal Reserve is not going to raise rates again this year. Earnings for the fourth quarter were mostly solid. And if the trade war does end, then the profit picture could improve further.
What's more, economists are expecting another solid month of jobs growth when the employment report for February is released Friday.

Others argued that investors are just growing nervous for technical reasons, namely that some of the major market indexes have recently topped round number milestones, such as the Dow crossing 26,000 and the S&P 500 passing 2,800.
"We've tested some of those October and November highs," said William Delwiche, investment strategist with Baird. "It's purely technical and that's probably why we started to see a little loss of momentum."
But William Lynch, director of investments at Hinsdale Associates, summed up the mystifying midday move down best.
"I have no idea why stocks fell. I don't have a clue. I'm as perplexed as you are," he said.
Sometimes stocks just go down, especially after they've enjoyed a strong run. It's as simple as that.""

MY COMMENT:

I like the end quote that...."I have no idea why stocks fell, I dont have a clue". That is one of the most refreshingly honest things I have seen in a while. Probably sums up the REAL thinking on the street in spite of all the EXCUSES and EXPERT BS everyone was spouting through the day in the media and on TV.

 

TRADE WAR 2.0. Really dont consider this a major event or concern. I actually find it a positive that SOMEONE is finally trying to do something about our trade imbalances around the world and ACTUALLY act in the best interest of the country for once. We are generally such WIMPS when it comes to any sort of negotiation.

(BOLD is my comment and opinion of important content)

Trump plans to scrap preferential trade treatment for India

https://www.reuters.com/article/us-...ntial-trade-treatment-for-india-idUSKCN1QM007

"WASHINGTON/NEW DELHI (Reuters) - U.S. President Donald Trump looked set to open a new front in his trade wars on Monday with a plan to end preferential trade treatment for India that allows duty-free entry for $5.6 billion worth of the country’s exports to the United States.

Trump, who has vowed to cut U.S. trade deficits, has repeatedly called out India for its high tariffs, and U.S. trade officials said scrapping the concessions would take at least 60 days after notifications to Congress and the Indian government.

“I am taking this step because, after intensive engagement between the United States and the government of India, I have determined that India has not assured the United States that it will provide equitable and reasonable access to the markets of India,” Trump said in a letter to congressional leaders.

India is the world’s largest beneficiary of the GSP program and ending its participation would be the strongest punitive action for the South Asian nation since Trump took office in 2017.

The U.S. Trade Representative’s Office said removing India from the Generalized System of Preferences (GSP) program would not take effect for at least 60 days after the notifications, and would be done through a presidential proclamation.

The preferential trade treatment brings “actual benefit” of just $250 million a year to India, however, a government source said in the capital, New Delhi, adding that it hoped the planned withdrawal would not lead to trade hurdles.

“GSP is more symbolic of the strategic relationship, not in value terms,” added the source, who declined to be identified ahead of a news briefing by the Indian trade ministry.

It was not immediately clear what retaliatory action authorities in India, which is due to hold general elections this year, would take.

Trade ties with the United States were hurt after India unveiled new rules on e-commerce limiting the way internet retail giants Amazon.com Inc and Walmart Inc-backed Flipkart do business.

The e-commerce rules followed a drive by New Delhi to force global card payments companies such as Mastercard Inc and Visa Inc to move their data to India and higher tariffs on electronic products and smartphones.

“India has implemented a wide array of trade barriers that create serious negative effects on United States commerce,” the USTR said.

“Despite intensive engagement, India has failed to take the necessary steps to meet the GSP criterion.”

India’s top GSP exports to the United States in 2017 included motor vehicle parts, ferro alloys, precious metal jewelry, building stone, insulated cables and wires, said business grouping the Confederation of Indian Industry, which had lobbied against the withdrawal of preferential treatment.

Most of the exports were intermediate goods not produced in the United States because they are low in the manufacturing value chain, it added.

The U.S. goods and services trade deficit with India was $27.3 billion in 2017, the U.S. Trade Representative’s Office said."

MY COMMENT:

WHATEVER........but, I am sure you will see the usual gnashing of teeth and crying over this in the media for at least a day or two than they will move on to the next "crisis".

 

YEA-HOO.......accounts up about .03% today versus the SP500 down (-.11%). ANY BEAT of the SP500 is a good day.

SP500 year to date +11.28%
DOW year to date +10.63%

TOO BAD we are not at the end of the year with these figures. Good stuff. This week is a little breather in the markets so far. Or, as we used to say, perhaps a little bit of consolidation going on in the markets this week. With the past two days under our belt we may be set up for a nice close to the week over the next three days. Kind of a DULL week so far, not that it is a bad thing.

 

AMEN SISTER........

Why Stock Investors Shouldn't Watch Business TV

http://fortune.com/2019/03/06/stocks-business-tv/

(BOLD is my opinion and represents my opinion of important content)

"This column is Part 3 of a 3-part series discussing how investors can avoid acting irrationally. Read Part 1 and Part 2."

"Investors are prone to two opposing but equally debilitating fears: the fear of missing out when times are good, and the fear of loss when markets are volatile. These two fears have a zero-sum relationship with rational decisions. The more you are dominated by these fears, the less rational you are.

So what can we do, as investors, to move toward maximum rationality? Here’s one piece of advice: Turn off the TV.

We rarely turn on business TV in our office. Stock market movements throughout the day are completely random. The same actors that are influencing the up-and-down ticks of individual stocks–actors whose goals and time horizons may have nothing in common with yours–are driving market movements. I feel for TV producers who must provide a continuous narrative to explain this randomness.

Business TV presents additional dangers to your rationality: It reprograms you to think about the stock market as a game. In encouraging you to play that game, it puts you at risk of nullifying all the research you’ve done, as you let your time horizon dwindle from years to minutes.

It also threatens to strip from you the humility that is so needed in investing. Business TV guests who provide their opinions on stocks have to project an image of infallibility (the opposite of humility). Again, I sympathize with them – they are there to market themselves and their business, and thus they must project the image that they have an IQ of 200, holding forth on every possible topic.

You are never going to hear from them the words that are the essence of investing: “I don’t know.” Being unable to admit uncertainty is dangerous, because it may cause you to stop thinking about investing in terms of probabilities. If you start thinking that the future has only one path, you may ignore other paths and thus other risks in your portfolio construction. If you tell yourself that you’re an expert on every company, then your circle of competence has no boundaries and your overconfidence may take you to places (and into investments) where you have no place being.

Also, since “I don’t know” is not part of their vocabulary, business TV guests will confidently answer questions that should never be asked, such as “What will the economy and stock market do next?” If you have been investing long enough, it is hard not to develop opinions (hunches) about what the stock market and economy will do next. However, good money managers work diligently to extinguish these hunches from their investment process, because those hunches lack repeatability.

If you get the next leg of the stock market or economy right, that’s just dumb luck – nothing more and nothing less. Economic and stock market behavior, especially in the short term, are very random. God forbid your recent forecasting success goes to your head, because your ability to predict what will come next is not much different from your predicting the next card to be turned up in blackjack.

Be an investor, not a forecaster
My colleagues and I used to identify with our self-proclaimed “I am a long-term investor” brethren. However, over time this phrase has morphed to mean “I am a buy-and-hold (and never sell) investor.”

Also, the term long-term investor, in our view, is a bit redundant, since there is no such thing as short-term investing in the stock market. If you are investing in stocks, then your time horizon should automatically be long-term; otherwise you are just a trader deceiving yourself into thinking that you’re an investor. However, investing is not just about the holding time horizon. The analytical time horizon is just as important.

To us, being investors means having an attitude with which we look at stocks and process information. We buy businesses that happen to be listed on public exchanges, but our attitude toward them would not be much different if they were private. We view all news, be it quarterly guidance (whether it’s “great” or “disappointing”), upgrades or downgrades by analysts, or any headline crossing our screens in the context of one question: How does this impact the value of the business?

This perspective is liberating, because you start to process the news flow very differently. You develop a resistance to the distractions of the everyday news dump. Quarterly earnings stop being about “beating” or “missing” guidance. Ultimately, this simple question, “How does it impact the value of the business?” filters out 90% of the noise and puts us on a solid investment footing."

MY COMMENT:

So simple and so very TRUE. Of course, tomorrow I will have the business shows on in the morning as usual. BUT.....I NEVER....I will say it again....NEVER react or trade or invest on anything that I seee or hear on that morning stock market and world news. I usually watch to get up to speed on the news events of the day and after an hour or two move on. ACTUALLY, all the morning stock shows are ENTERTAINMENT......not investing assistance and often not even news. Like any TV show it is ratings that drives the show and it is ratings that the producer is looking to produce.

I will disagree with one little, minor, part of the article.....the statement that there is no such thing as a "short term investor". THESE DAYS, there are many "short term investors". AND...it is NOT a good thing. People jumping in and out of stocks while thinking they are "INVESTORS". NO, they are speculators, traders, or worse. It is amazing to me how many of the brokerage and investing commercials you see these days on TV, NEVER use the term "INVESTOR". The term used is just about always "TRADER" or "STOCK TRADING". This trading mentality is pushed by the brokerages as though this is the path that should be followed by the average person. It is a SUBTLE use of language to produce a certain mind set and resulting behavior. I would bet that the average person now equates having a brokerage account with "trading". SO SAD......and TOO BAD for their net worth, not to mention sanity.

I ALSO STRONGLY agree with the observation in the article about the phrase LONG TERM INVESTOR .........."over time this phrase has morphed to mean “I am a buy-and-hold (and never sell) investor.” I dont think this MORPHING is random either, for years now, every time I see someone say they are a long term investor, it is thrown back in their face that they are a buy and hold and never sell lunatic. BALONEY, as a long term investor I manage my account by watching the fundamentals of the companies that I own and if one falters I sell it. My goal is to hopefully never sell, but if the time comes that it is necessary I sell without the slightest hesitation and make a lateral move into some other business.

 

DONT SEE this happening at all. I would put the odds of a Treasury crash and hyper inflation at "0". We are still at the lingering edge of the deflationary depression situation that started in 2008/2009. I see ABSOLUTELY no current issue with inflation. The ONLY time in my life that we had significant inflation was in the late 70's early 80's. I remember that time very well and in my mind the primary cause of the inflation was significant escalating, rolling, wage increases which snowballed. The odds of any sort of wage driven inflation at this time in my opinion is "0". In fact we are experiencing the opposite, wage deflation, due to the massive influx of legal and illegal labor flooding the country.

HOWEVER......if hyper inflation did occur I would presume that hard assets would be desirable. BUT, in that sort of crisis environment, I would not assume anything, and all bets would be off. I would assume that in that situation, we would see the collapse of order and society, in which case hard assets would not be particularly relevant one way or another.

 

There have been a lot of articles that I have seen lately about companies doing stock buy-backs. I tend to AGREE with those that think they are NOT a benefit to regular shareholders. DO NOT create shareholder value. AND, that they benefit the company executives at the expense of company business, R&D, dividends, and other things that the money could be used for. HERE is a good article on the issue that summarizes the various aspects of the issue. As usual....

(BOLD is my comment and my opinion of important content)

Share Buybacks May Be Bad —
Just Not for the Reasons You Think

https://www.institutionalinvestor.c...May-Be-Bad-Just-Not-for-the-Reasons-You-Think

"Loews Corp. CEO Jim Tisch faces a constant dilemma. When his company’s shares are cheap, he agonizes about whether to sound off about it — or stay quiet and just buy back a bunch of stock.

Last year, Tisch mostly did the latter, repurchasing more than 20 million shares, or some 6 percent, of Loews stock for about $1 billion. On the company’s fourth-quarter earnings call in February, he called buybacks “one of the best ways to create value for all our shareholders.”

For decades Tisch, who with his extended family owns more than 30 percent of Loews, has bought gobs of shares in the conglomerate founded by his father and uncle, eminent value investors and philanthropists Larry and Robert Tisch. Goosed by buybacks, Loews generated a return of some 17 percent from 1965 through 2018, versus 10 percent for the S&P 500. Just since 2008, Loews has reduced its share count by 41 percent.

The rest of corporate America seems to have taken a page from the Loews playbook. S&P 500 companies have been buying back dizzying amounts of stock, hitting a preliminary record of $797.9 billion in 2018, more than 70 percent of the index’s combined earnings, according to S&P Dow Jones Indices. The fourth-quarter total of $214.5 billion buybacks represents the fourth consecutive quarterly title topper.

Analysts call the stock repurchase phenomenon “staggering,” and sober investors talk of an out-of-control “buyback craze.” Media outlets regularly report that the same repurchases are pumping high-octane fuel into the current bull market, perhaps building up a dangerous bubble.

“What we see here is mindless short-term thinking,” says Dennis Kelleher, president and CEO of Better Markets, a Washington, D.C.–based advocacy group that promotes financial reform and transparency. “All these stocks didn’t magically become cheap last year. All they are doing is shoveling a tax windfall out the door.”

Lately, a new, and noisier, breed of critics has waded into the fight: populists.

Big share repurchasers are suddenly being branded as Public Enemy No. 1 by politicians, market reformers, and other activists, who blame buybacks for underinvestment in plant and equipment, low productivity, and stagnant wage growth — not to mention rising income inequality.

For all the foment, stock buybacks are not crack. Yes, they are spreading like an epidemic, but they aren’t new, and select companies have sound reasons for employing them — and it’s not always to enrich their executives.

As buyback critics sharpen their pitchforks, it’s increasingly clear that they are eager to make hay for blatant political ends — expanding the shareholder rights and corporate governance discussion to include worker pay, health care, and social justice. This isn’t wrong per se, but it’s missing the really juicy stuff.

The anti-buyback crowd doesn’t dwell on the clear evidence that companies that buy back their own shares tend to do so at the worst possible time. How is that different from ill-considered job-destroying mergers?

They also mostly ignore the way some companies use buybacks to artificially increase executive compensation.

“It’s almost the definition of stock manipulation,” says Better Markets’ Kelleher. “There should be a high bar for companies to engage in stock buybacks.”


Populist-driven anti-buyback fervor is sweeping the presidential campaign trail — on both sides. Senator Elizabeth Warren of Massachusetts, who is running to be the Democratic presidential candidate, has called buybacks “a sugar high” for corporations.

Senators Chuck Schumer of New York, the Democratic Senate leader, and Bernie Sanders of Vermont, another 2020 would-be presidential candidate, decried the rising tide of buybacks in a joint New York Times opinion piece in February and said they would introduce legislation to rein it in.

Their bill would prohibit companies from repurchasing shares unless, among other things, they paid their workers at least $15 an hour.

“If corporations continue to purchase their own stock at this rate,” the two Brooklyn natives warned, “income disparities will continue to grow; productivity will suffer; the long-term strength of companies will diminish.”

Scarcely more than a week later, Republican Senator Marco Rubio of Florida joined in with a series of tweets: “Why are profits not being invested into company or new companies?” He tweeted out a promise to introduce a bill to make the tax treatment of buybacks similar to that of dividend payouts: “No tax advantage for buybacks over dividends.”

Stock market indexes sold off after Rubio’s tweet. And pundits quickly took to the air to remind the public of value-destroying buyback train wrecks like General Electric Co. and Sears Holdings Corp.

“Buybacks have just become super-politicized,” said David Larcker, a professor of accounting at Stanford Law School and director of Stanford business school’s Corporate Governance Research Initiative.

Perhaps everybody should exhale. Sure, the Trump administration’s $1.5 trillion 2017 tax overhaul, which cut corporate rates to 21 percent from 35 percent, has helped push buybacks to record levels. But share repurchases have been mounting now for a decade and are fed by myriad factors, ranging from changes in U.S. tax rates and policies to a constrained economic recovery and a low-interest-rate environment.

The noise surrounding buybacks is to the point where it is drowning out serious discussion of stewardship, corporate governance, executive compensation, and alleged stock price manipulation. Hedge fund wags at AQR Capital Management LLC even published a study entitled “Buyback Derangement Syndrome.”

Still, a couple of things need to be cleared up.

Buybacks are not a meaningful factor in the surging stock market. “That’s baloney — the bull rally is confidence in the economy,” says finance professor Charles Elson of the University of Delaware. “Over time the markets are efficient.”

Indeed, it’s easy to overstate the market impact of buybacks. A chunk of the repurchases — how big is open to debate — is made to offset the dilution of options and restricted stock grants. A company’s overall share count remains the same as the acquired stock is shunted into Treasury or retired, balancing out the grants and exercised options.

The share repurchases that concern most people are the discretionary ones authorized by company boards beyond the amount required to offset dilution. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, calculates that overall, S&P 500 year-over-year share count reductions amounted to 3.7 percent in the fourth quarter of 2018. That’s significant, but not enough to fuel a rally of consequence.

Silverblatt found that 19.3 percent of S&P 500 companies reduced their shares by 4 percent or more in the fourth quarter, versus 17.7 percent in the third quarter, 15.6 percent in the second, and 13.6 percent in the first. So the buyback bandwagon accelerated in a meaningful manner as 2018 progressed.

Granted, buybacks and the announcements that accompany them may cause a temporary bump in a company’s stock market capitalization, but studies show that impact soon dissipates. “A company can support its stock short-term,” says Silverblatt. “Long-term the market decides.”

Ultimately, the relevant math is that in a buyback, a single share will rise in price, but only because it represents a larger slice of what is essentially the same pie, minus some cash spent on the buyback. The company’s overall stock market value arguably remains pretty much the same, if not slightly lower.

On the other side of the coin, articles breathlessly warn of the growing volume of buybacks. “That completely obfuscates the fact that the number of buybacks has gone up because the market cap has increased,” notes Matt Bartolini, head of SPDR Americas research at State Street Global Advisors.

A January report that Bartolini co-authored points out that the growth in buyback volume has closely tracked that of the market capitalization of the S&P 500 for the past 15 years. That said, the S&P 500 buyback yield — the value of buybacks divided by the index’s market cap — stood at a preliminary 3.79 percent in 2018, a level it has seldom flirted with since the financial crisis, according to S&P Dow Jones Indices.

Still, the U.S. is not running out of equities anytime soon.

Perhaps the biggest beef of buyback critics, at least from the asset allocation perspective, is that the money used to pay for buybacks would otherwise have been channeled to more productive purposes, like capital expenditures, R&D, acquisitions, or perhaps, God forbid, better worker pay and benefits.

The evidence doesn’t say so. Drawing on data from 1988 through 2016, Ric Marshall, executive director of MSCI’s environmental, social, and governance research team, examined 610 companies in the MSCI USA Index, which overlap with those in the S&P 500. Capital expenditures for the MSCI companies peaked in 1997 at 8 percent of assets, before steadily tumbling to less than 4 percent at the end of 2016. As for R&D, it peaked in 1998 at nearly 4 percent of assets, falling to just over 2 percent in 2016.

Stock buybacks, meanwhile, rose during that nearly 30-year span, roughly quadrupling to more than 4 percent of assets by 2016. (Dividends were, ultimately, more or less flat during the period, beginning and ending at 2 to 3 percent of assets.)

The takeaway: The decline in capital expenditures and R&D was far greater than the increase in buybacks. That suggests other factors were affecting capital expenditures and R&D — say, a declining industrial base, increased productivity, offshoring, or the shift to service-based and gig economies.

For buyback adversaries a good question to ask may be where companies can expect to earn a decent return on capital expenditures in our current environment, especially given the tepid economic recovery since the 2008–’09 financial crisis. “It’s not the case the more investment the better,” says professor Wei Jiang of Columbia Business School. “You only invest when there is positive net present value.”

The companies in large-capitalization indexes like the S&P 500 are often mature businesses, ones that no longer need large amounts of capital. “I don’t think there’s a lot of evidence that there are opportunities they are not pursuing,” says Steven Fazzari, a professor of economics and sociology at Washington University in St. Louis.

What buyback critics ignore is that when companies return capital, underutilized money gets handed over to investors to either spend or recycle into new capital-hungry ventures, a virtuous capitalist ecosystem.

“Do they really want the CEOs and managements and boards to be making all the decisions as to where that money is being deployed rather than returning it to investors to be reinvested?” asks MSCI’s Marshall. It’s almost as if critics feel more comfortable with a misguided, job-destroying merger than a robust buyback authorization.

Meanwhile, shareholders, management, and boards have all found plenty of reasons to view buybacks in a more favorable light than old-fashioned dividends.

Take the buyback-versus-dividend challenge. Most investors favor buybacks over more traditional payouts because they can treat the eventual profit as capital gains. Although the tax rates are similar, at either 15 or 20 percent in 2018, with buybacks investors get to determine when they sell their stock to take the gain, allowing them to postpone taxes in perpetuity or use capital losses to offset them at a time of their choosing.

For management, buybacks are a far more flexible way to return money than dividends. The share repurchase programs companies routinely authorize are discretionary — so they can generally stop buying on a dime, without public notice, and most investors will be none the wiser.

Contrast that with the brouhaha of a dividend cut at a large U.S. multinational, which could very well make the front page of The Wall Street Journal and is likely to send company shares diving.

There’s a little bit of unfairness in the comparison. Though most big companies use a combination of buybacks and dividends to return capital to shareholders, note that it’s only the former that have come under criticism. Nobody is eager to to denounce the quarterly dividend checks our parents and grandparents lived off of.

The buybacks are helping companies reduce their cash — something of a red flag for activist investors who are particularly sensitive to the meager interest being earned by such holdings. Example: Third Point’s 2017 targeting of Nestlé, in which Dan Loeb pushed increased productivity, asset sales, and enhanced share buybacks, and a more leveraged balance sheet for the food juggernaut.

Nestlé cut cash and equivalents to SFr4,500 million in 2018, from SFr7,938 million in 2017. A new share buyback plan, which the company says it was preparing before Third Point’s arrival, is expected to be completed six months early.

The irony of all this general happy talk is that stock buybacks have dark corners that critics could be exploring. For example, one thing that companies buying back shares certainly aren’t focusing on is the price they pay — a gob-smacking oversight in a discipline that, in the end, is all about dollars and cents.

CEOs like Tisch and, more famously, Berkshire Hathaway’s Warren Buffett, carefully calibrate purchases so as not to pay more than the stock’s so-called intrinsic value — its true worth — which is ultimately a subjective calculation.

Accordingly, Loews bought back a modest $134 million of stock in 2016, for an average price of $38.96, and $237 million worth of stock in 2017, for an average of $49.76 a share.

In 2018, Buffett, with $111.9 billion in cash on Berkshire’s balance sheet, purchased just a handful of shares over two short spans. In October he bought 202 class A shares at an average price of $310,762.79 and 589,955 class B shares at an average of $205.09. In December he bought 790 class A shares for an average price of $295,953.99.

“Obviously, repurchases should be price-sensitive,” Buffett wrote in his 2018 shareholder letter, released last month. “Blindly buying an overpriced stock is value-destructive, a fact lost on many promotional or ever-optimistic CEOs.”


Such optimists, however, seem to throw parsimony to the wind when it comes to buybacks.

For example, in 2000, the year that tech stocks peaked, S&P 500 corporate stock buybacks hit $150.6 billion, according to S&P Dow Jones Indices. By 2002, when the bear market bottomed, share repurchases fell to $127.3 billion.

History repeated in 2007, as share repurchases hit a then-record $589.1 billion. In 2009, a great time to buy amid the wreckage of the financial crisis, they fell to $137.6 billion.

Now buybacks have zoomed to some $800 billion. Do we really need to ask what happens next to these buybacks given the run-up? “Usually, they are poorly timed,” says Elson of the University of Delaware.

“It’s about the cycle,” notes Bartolini. “Companies have capital to return to shareholders at the top of the economic cycle.”

This leads to a natural question: Do buybacks increase shareholder value? Or, to use Buffett’s term, are they “value-destructive”? The answer is that it can be devilishly hard to answer.

“You have to do the valuation internally,” says Stanford’s Larcker. “It does force you to confront what a company is really worth. Is it credible or is it Pollyanna?”

In hindsight, unless a company utterly crashes or is taken out at a sky-high premium, it can become a question of judgment — do you compare returns to those of similar companies, to an index, or by some other metric? With a complicated company or conglomerate, it can seem like anybody’s guess.

Says Deutsche Bank insurance analyst Joshua Shanker, “It’s not a slam dunk that all of the purchases of stock have been accretive to value at Loews.”

Did we mention that companies use stock buybacks to artificially increase executive compensation? The evidence sure suggests some do — and here’s how.

Before 2014 heavy machinery maker Caterpillar used a formula for its executive compensation based on an equal weighting of 50 percent total shareholder return and 50 percent return on assets, according to a letter sent to shareholders by CtW Investment Group, which works with union pensions to investigate unethical corporate behavior. When management failed to meet lowered performance targets using that metric, CtW pointed out, the compensation committee switched to a different mix — just 25 percent total shareholder return and 75 percent earnings per share for Caterpillar’s 2014 to 2016 compensation cycle.

Caterpillar’s performance declined in 2014, but the company more than doubled its share buyback plan for the year, spending $4.2 billion on repurchases.

The company reported earnings per share of $5.88 for 2014, versus $5.75 for the year earlier, and commended management for effective cost control and execution. Without the buybacks, however, earnings per share would have declined by 2.5 percent, according to CtW calculations.

And then-CEO Doug Oberhelman’s compensation rose 14 percent, according to CtW. In 2016 the company announced that Oberhelman would be retiring the following year. Caterpillar did not respond to a request for comment in time for publication.

Partly as a result of Caterpillar’s machinations, says John Roe, head of ISS Analytics at Institutional Shareholder Services, shareholders have sought to force boards to fix the number of shares used in the calculation of compensation at the start of the year, or to otherwise prevent manipulation. “There is more of a focus on hygiene, for want of a better word,” he explains.

Companies like IBM Corp. disclose in their proxy statements the specific steps they take to limit the effects of buybacks on earnings-per-share–based compensation metrics.

Many more keep their methodologies under wraps, according to Julian Hamud, director of executive compensation research at Glass, Lewis & Co. “We have companies that don’t say anything at all,” he notes.

All the controversy surrounding buybacks may cause investors to overlook perhaps the most important dynamic at work. The only reason we’re debating stock buybacks is that companies are minting money as never before.

“The reality is that companies are only able to buy back shares because they are generating free cash flow,” says MSCI’s Marshall. “They are not diverting money — they are rolling in dough.”"

MY COMMENT

A very COMPLEX issue that is the subject of MUCH political posturing right now which will continue into the future. Of course, all the politicians, NEVER mention that......"IF"...buy-backs do benefit shareholders, that the average person with their 401K, or employee stock plan, or union pension plan that invests in stocks is benefiting. I am personally NOT convinced that this is a LARGER benefit to shareholders than other uses of these funds.

As a SMALL long term shareholder, I am VERY concerned about the oversized influence of the "shareholder value at all costs" large shareholders (in my opinion semi corporate raiders) and all the various schemes they push through company boards with their threats. First and foremost to me being the current MANIA they push to divest and sell off various parts of companies to "create shareholder value". The real impact of this hollowing out of many companies is to concentrate the future of the company on ever smaller and smaller product lines that make many companies "one trick pony's" and in my opinion more subject to being yanked up and down financially. In my opinion there is great value in company stability, the ability to weather instability in some product lines, and functioning as more of a conglomerate versus being concentrated. ALTHOUGH, this obviously varies, depending on the company and their business.

 

I AM NOT an international investor, except to the extent that my AMERICAN companies do business outside the USA. OUR economy is BOOMING. The rest of the world, in my opinion remains mired in a mild to moderate deflationary depression. The EU, Japan, etc, etc. Around the world we see deflationary issues and problems. The form of government of many of these countries is NOT helpful in the least.

We have seen in the past with Japan how long these situations can last......15 to 20 years or more. I remember when Japan was the economic wonder and talk of the world. The Japanese were buying up everything in the USA. A few years later they were STUCK in what became a 15-20 year or more deflationary period. In my opinion the EU and many other countries around the world are in this same situation right now. It could last a LONG TIME. THAT is why I ONLY invest in AMERICAN companies.

Global economic slowdown looms, exposing outgunned central banks

https://www.washingtonpost.com/busi...ory.html?noredirect=on&utm_term=.c0be09f6aeaa

I will not put the article up, but it does contain a pretty good summary of the world economy as it stands right now. WE are the economic BRIGHT SPOT. The rest of the world.....my opinion.....SUCKS. The actions of the EU banks this week are part of the reason for the weakness in stocks this week. HERE is one little part of the article that just about sums things up:

"The mounting worries prompted the bank to cut its growth forecast for 2019 by nearly one-third to just above 1 percent. ECB President Mario Draghi also said he would maintain rock-bottom interest rates through the end of this year, several months longer than previously planned, and funnel more credit to banks in hopes of spurring business lending.


The move came less than three months after European authorities said the 19-nation euro zone economy no longer needed unusual help, capping more than a decade-long $3 trillion stimulus following the global financial crisis.


Thursday’s about-face sounded alarms about a global slowdown that caught officials off guard.


“It’s a highly significant move,” said Adam Tooze, a Columbia University historian and author of “Crashed,” a history of recent financial crises. “It’s a testament to the anemic quality of Europe’s recovery and the [failures] of the ECB that we’ve had to go through this roller coaster.”


For now, the United States remains an island of relative stability, though Federal Reserve officials in recent days have voiced concerns that the economic expansion could be fraying. The Dow Jones industrial average fell more than 200 points or nearly 1 percent on the European announcement."

CONSIDERING the EU for example.....the form of government in most of these countries (semi-Socialism), the highly negative impact of migrants, social turmoil, high taxes, government planing and control of the economy, central planing.......and.....everything else......they are in for a long long SLOG. MOST of these countries will NEVER cut taxes or take any of the steps that might actually make a difference.

 

HERE is a TRIO of articles that summarize where we are now and how we got here over the past ten years.

Many think the bull market will die soon. So where are we headed? Up

https://www.usatoday.com/story/mone...-wont-die-soon-despite-turning-10/3093502002/

AND

On bull market’s 10th anniversary, can stock investors shrug off latest gloom?

https://www.marketwatch.com/story/o...-latest-gloom-2019-03-09?mod=mw_theo_homepage

AND

The Bull Market Began 10 Years Ago. Why Aren’t More People Celebrating?

https://www.nytimes.com/2019/03/09/business/bull-market-anniversary.html

MY COMMENT

I AGREE that the continued subdued feelings and lack of enthusiasm for the markets is a GOOD THING. We seem to be in the ERA of the "weenie" investor. Afraid of their shadow. Always worrying about every little daily event. Never happy, even when the markets are up. Evaluating every little thing with the worlds largest microscope. AND......doing all the above with little to no real understanding or knowledge of investing, especially LONG TERM INVESTING. I will not be around, but it is a sure thing that in 30-50 years there will be massive gnashing to teeth and extensive media coverage of the UNFAIRNESS of some people having money to retire on after being lifelong investors and how the government needs to bail out the "unfortunate majority" that were too micro-focused on the day to day crap to get over their investing paralysis and.......JUST DO SOMETHING.

AND.....YES.....I am so tired of the media and political focus on the POOR YOUNG PEOPLE that had to experience the HORRIBLE impact of the 2008/2009 economic drama and how it has impacted their psyche and their lives and permanently scared them. BROTHER......those of us that came out of college in the 1970's somehow survived the gas lines, the inflationary era and absolutely awful economy of the late 1970's and early 1980's and the total MALAISE of the Carter era. The events of the 1970's and early 1980's FAR EXCEED anything that happened during the one year crisis of 2008/2009. GET A JOB, grow up, shut up, and move on. In REALITY, the media line on this stuff is just delusional baloney. I have kids in this generation and they and all their friends are now married, working, buying homes, investing, and moving on up just like every generation before them.

 

If you read this thread you know that I am a fan of a very simple investing plan for people that dont have the knowledge, interest, or inclination to worry about a stock portfolio. In fact I SHARE the same plan for my heirs as WARREN BUFFETT. My plan and advice to them ALL is simply put everything in a SP500Index Fund and let it ride for the LONG TERM. NO NEED for fancy allocations, or portfolios of funds, or target date garbage, no fancy advisors,or any of the other strategies that are pushed. In the LONG RUN.....the SP500 Index is it.

Warren Buffett to heirs: Put my estate in index funds

https://www.marketwatch.com/story/warren-buffett-to-heirs-put-my-estate-in-index-funds-2014-03-13

(BOLD is my emphasis and opinion of important content)

"If you follow the career of billionaire investor Warren Buffett, you likely have kept up on the succession chatter of late.

After all, Buffet is 83 now. Sooner or later, someone will take the reins at his firm, Berkshire Hathaway, and that person will pick up the mantle of his amazing performance over the years.

They will be tough shoes to fill. Buffett racked up nearly a 20% annualized return through 2012 from 1965, turning a foundering textile mill into a holding company for ventures that span the globe and run the gamut from consumer goods and newspapers to industrial giants and railroads.

That compares to a 9.4% return on the Standard & Poor’s 500 Index SPX, +0.97% — quite a run. And while investors have long made the pilgrimage to Berkshire headquarters in Omaha to hear Buffett and his managers speak, they probably weren't prepared for his latest remarks on investing. He flatly endorsed a simple portfolio of inexpensive index funds for his own survivors.

Put your money in index funds and move on, he told them. Seriously, you'll do better. In fact, he said, that's what I plan to do with my own money once I am gone.

Here's the quote, from page 20 of his most recent annual letter to Berkshire shareholders, dated Feb. 28. After all of his Berkshire shares are distributed to charity, take the cash, Buffett says, and just buy index funds:

My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.

What's fascinating about this letter isn't that he favors passive investments. That much we already knew. Nor that he believes in stocks, as a 90/10 split clearly implies.

Ignore the chatter

What's fascinating is that he doesn't want his executor to keep the money in Berkshire, where presumably his influence would continue on for at least a few years. Nor does he want his surviving family to bother with Wall Street and active money managers.

Again, from the letter:

Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.

It's an interesting notion, considering that Buffett himself owns a 400-acre farm. He admits up front he knows nothing about farming, but as investments go it isn't among the most sophisticated he's ever had to analyze.

The farming comparison, however, is right in line with how long-term portfolio investing really works to ensure that your retirement happens. You have to presume from the start that planting seed means, in time, a crop will grow.

There might be bad weather. There could be a crop failure one year or the next. There are certain costs of doing business, mostly predictable and best kept low.

And, largely, there's nothing to do. Like crops in the field, a long-term, mostly stock investment cannot help but produce a reasonable return — assuming you don't overthink it and don't spend willy-nilly in a vain attempt to make it grow faster.

Some will argue that Buffett's advice is a case of "do as I say and not as I do," and that's a fair criticism. For instance, on Berkshire's behalf he holds a small number of stocks in a limited number of sectors. One academic analysis of his Berkshire investments found a median holding period of one year.

'Do as I say'

But listen carefully to what Buffett is saying in his letter. Frictional costs are huge and, for investors in aggregate, devoid of benefit. He really is saying "do as I say, not as I do" because you and I aren't Warren Buffett.

The researchers put it this way:

Warren Buffett's record by the start of our sample period strongly suggests he is a gifted trader. His success in subsequent years in generating abnormal returns doesn't in itself imply market inefficiency. Rather such returns can be construed as compensation for his extraordinary talent and acquisition of private information.

Do you have access to the same private information as Warren Buffett? Do you have his level of investing skill? Does your financial adviser?


If the answer to these questions is "no," just buy a portfolio of index funds and be a farmer about it. You'll do better than most, avoid losing money pointlessly to high-cost active managers and certainly do well enough over time to retire with more.


It's what Buffett is doing for his own family."

MY COMMENT

YES.....it really is that simple. This is ALL that the vast majority of investors actually need to do with their money for the LONG TERM.

 

STORY OF THE DAY in the little article below. ACTUALLY, story of the past 35 years. Someone should tell the FED that there has been NO inflation to speak of for the past 35 years. YES, there have been periods of NORMAL inflation that is necessary and good for the economy at times over the past 35 years. In my view that normal inflation is about 2%. In addition we, for the past ten years have been lingering on the "deflationary depression" side of the inflation scale. Even today with nice wage increases and a ten year BULL market, etc, etc, are unable to hit 2% inflation. I SEE nothing happening with inflation for a long time due to increasing productivity, the influx of legal and illegal workers holding down wage pressure, and the ever increasing mechanized society with robotics and other non-human means of producing products and services

https://www.breitbart.com/economy/2019/03/12/inflation-remained-tame-in-february/

Inflation Remained Tame in February

"Inflation finally picked up a bit in February after three consecutive months of flat prices. But on an annual basis, price increases have slowed.

The Consumer Price Index rose 0.2 percent in February, the Labor Department said Tuesday. Compared with a year ago, the Labor Department’s Consumer Price Index is up 1.5 percent. On a month-over-month basis, prices have been flat since November.

Despite the monthly gain, this represents a slowdown in year-over-year price gains. In January, prices were up 1.6 percent compared with the prior January. In December, prices were up 1.9 percent compared with the prior year.

The Fed says it aims at a 2 percent target, although it uses a different measure than the Consumer Price Index.

The low and decelerating price gains indicate that the larger budget deficit has not pushed up demand too much in the economy and tariffs on imports are not pinching consumer wallets."

MY COMMENT:

I have watched the FED chase after the INFLATION ghost for the past 35 years. They constantly WRENCH the economy up and down based on IMAGINARY inflation. There has been no "abnormal" inflation since the early 1980's when Regan did his tax reduction and along with his other policies kicked off a 20 year economic BOOM that ended about 2002 with the dot-com crash. It is INSANITY that the FED thinks they can guide or control the economy. It is further INSANITY that we, the investors, American people, politicians, etc, etc have allowed them to do so in light of their decades long record of abject failure controlling or predicting the economy.

For those that think inflation is such a problem.......point out to me one time period since 1985 that inflation has been an economic issue here in the USA. For those that are too young to remember the out of control inflation of the late 1970's and early 1980's....... (mortgage rates as high as 18%, 30 year treasuries paying 12-14% interest, money market accounts paying 12% interest, etc, etc).....are you afraid of inflation? Why? ANYONE under age 40 can not have any memory of out of control inflation since there has been none in their memory. INSANITY.

 

TomB16....your view is shared by many. I have argued this issue with many on another board for the last 10-15 years. After a few years my "token" response become the phrase........."YES, there is NO inflation". After many years, I just gave up. I STILL put the challenge out there for anyone........show me a period of out of control inflation over the past 30 years that had impact on the economy for some period of time that was significant.

 

On ANOTHER topic......BOEING....BA. I continue to own this stock and will with no change going forward. The current situation is simply IRRATIONAL panic on the part of mostly governments. That does not mean that there is or is not an issue. It means that it is too early to know without an investigation. I STRONGLY believe that this is a good time for shorter term traders with a time horizon of about a year to lock in some good prices. OBVIOUSLY we are probably not at the bottom for BA yet, but If I had funds and was a short to mid term person, I would probably be slowly buying the stock on the way down.