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Sunday, March 3, 2024

Will We Hold It Wednesday – S&P 1,900 Edition

SPY 5 MINUTEWow, what a rally! 

Or, perhaps I should say Wow!  What?, A rally???  It's a small distinction but clearly the fact that we are having a rally will come as a suprise to pretty much everybody – except the 2 or 3 people who run the machines that made the 62M in volume we limped into yesterday.  

Not only is there no volume but MORE than 1/2 the volume came in the last 15 minutes of the day and THAT volume was almost all negative.  It's the same pattern I've been warning you about all month (it's not June yet, is it?) and, as noted by Dave Fry on his chart – a very possible bull trap in the making.  

So who is actually buying stocks this year?  No one.  Well, no one human, that is.  Over 90% of the trade volume you see is high-frequency trading and most of the other 10% of the volume is Corporations buying back their own stock and buying each other with all the FREE MONEY the Fed is handing out:

Almost $160Bn worth of buybacks in the first quarter of this year is a stunning amount.  That's twice as much as Corporations paid in taxes!  If we figure the average S&P company pays 20% of their (non-hidden) profits in taxes, then that means that 40% of these companies' earnings is being used to buy back their own stock.  That is just bat-shit CRAZY!

They could be hiring, they could be opening new stores, buying new equipment, reasearching or developing but nooooooooooooo – they can't find anything better to do than buy back their own stock?  

Boy, the economy must really suck if there's no better use of cash than that.  Last time buybacks peaked out (and I bitched about it then too!) was Q3 of 2007, at $135Bn.  At the time, I thought it meant the Gobal economy must be in big trouble if Corporations had nothing better to do with their money.  

Now, M&A I approve of – in fact, when MSFT announced their ill-fated $40Bn buyback and dividend in October of 2008, my comment to our Members was:  

MSFT– Yeah, they should cancel that $40Bn buyback and take out a small loan and buy AAPL and GOOG!

Had MSFT followed my advice at the time, they could have bought Apple for 1/6th the current $538Bn market cap ($89.7Bn) and Google for 1/4 of the current $381Bn ($95.3Bn).  Had MSFT followed my advice in October of 2008 and used that $40Bn to borrow another $145Bn(ish) to buy out AAPL and GOOG, they would have a $774Bn profit today (1,935% less borrowing costs), which is more than double the value of their entire company!   

Instead, they used it to buy their own stock at $26 ($215Bn) which is now $40 ($332Bn) – blowing $657Bn in potential gains (84%) had they used their money more wisely.  

This is why people hire outside consultants like me to help them make decisions – when you are inside a corporate culture, you sometimes can't see the forest through the trees!  

Why do companies buy back their own stock?  Well, SOMETIMES it does make sense.  When AAPL was at $400 last year, I advocated they take their entire $140Bn of cash reserves and use it to buy back their whole company ($322Bn at the time), because their was no better use of their cash than that.  AAPL is up 50% since then for a $161Bn gain (115%) on the cash – wouldn't that have been worth paying the taxes on?

 

Warren Buffett buys back his stock, but only when it gets cheap – priced below a certain threshold.  That's the way to buy back stock – not like a drunken sailor – buying at the top of the market when no one else is (volume-wise).  So it's not the buy-backs Warren or I object to per se – just the timing.  In the Retail Buyback chart above, most of those companies have now made money – but not really since they could have held that money and bought twice as many shares back a year later – when we crashed

Of course US companies suffer from the same problem that most Americans have – they don't save anything for a rainy day anymore.  Also, buying back their own stock makes their earning look better than they actually are (less shares to divide the earnings into).  Buybacks increase the dividends paid to the top shareholders (often the people making the buyback decisions) and, of course, support the value of the stock – which is great for the options the management holds.

Is it good for the shareholders?  Hardly ever.  It's just another one of those shell games being played by the top 0.01%, who take your money and move it around until it goes into their pockets.  

Did you really buy MSFT so they could take the money to buy back their own stock?  Is that how you expected them to "grow"?  This is what's wrong with America – our Corporate "Leaders" are only concerned with lining their own pockets – a disease they caught from the Banksters who support and control them.  

As to the markets today, I already put up a note in our Member Chat this morning to short oil (again) at $104.25 (already +$300 per contract) and the Dow (/YM) at 16,700 (already up $350 per contract) so the Egg McMuffins are already paid for this morning (9:05).  Yesterday's ABX trade is even cheaper today than it was yesterday – I still love that one and, later today, we have our Live Trading Webinar (Members Only this week) at 1pm (EST) – where we will finish off our Buy List for the 2nd half of 2014.

From last week's Buy List:

All 3 of those trades were on the Webinar I invited you to attend, FOR FREE, last week!

Hoping to see you at today's Webcast…

 

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