{"id":1130510,"date":"2019-07-22T11:15:52","date_gmt":"2019-07-22T16:15:52","guid":{"rendered":"https:\/\/dailyreckoning.com\/?p=107796"},"modified":"2019-07-22T11:15:52","modified_gmt":"2019-07-22T16:15:52","slug":"expect-buybacks-to-sustain-markets","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1130510","title":{"rendered":"Expect Buybacks to Sustain Markets"},"content":{"rendered":"

This post Expect Buybacks to Sustain Markets<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

With uncertainty swirling around the financial markets right now, many are warning about a financial storm brewing and how to navigate through it.<\/p>\n

Let\u2019s consider the storm elements in the world right now. The ongoing trade war is obviously a major concern, which is nowhere near being resolved. Growth is slowing in many parts of the world and central banks are preparing to begin cutting rates again.<\/p>\n

Geopolitical tensions are also rising again, especially in the Persian Gulf. Late last week, Iranian forces seized a British-flagged tanker in the Strait of Hormuz, one of the world\u2019s most important chokepoints. Britain has demanded the ship\u2019s release.<\/p>\n

On the U.S. domestic front, we are facing government dysfunctional, trade war uncertainty and a looming debt ceiling deadline. A deal will likely be reached, but that is not a guarantee. If a deal isn\u2019t reached, the federal government would run out of money to pay its bills.<\/p>\n

That\u2019s why you should consider the tactics of Warren Buffett along with the strategy used by some of the most skilled sailors.<\/p>\n

Buffett, one of the most successful investors in history, has made billions by knowing how to steer through storms. One of my favorite Buffettisms has to do with keeping your eye on the horizon, a steady-as-she-goes approach to investing. It also happens to relate to sailing.<\/p>\n

As he famously said, \u201cI don\u2019t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.\u201d<\/p>\n

What that means is that you should carefully consider what\u2019s ahead and choose your course accordingly. Buffett doesn\u2019t strive to be a hero if the risk of failing, or crashing against the rocks (in sailing lingo), is too great.<\/p>\n

In a storm, there are two possible strategies to take. The first one is to ride through it. The second is to avoid it or head for more space in the open ocean. In other words, fold down your sails and wait it out until you have a better opportunity to push ahead.<\/p>\n

While there is no perfect maneuver for getting through a storm, staying levelheaded is key.<\/p>\n

We are at the beginning of another corporate earnings season, which is the period each quarter when companies report on how well (or poorly) they did in the prior quarter.<\/p>\n

The reports can lag the overall environment but still give insight on how a company will be positioned in the new quarter. But to get the most out of them requires the right navigation techniques.<\/p>\n

This season\u2019s corporate earnings results have been mostly positive so far. But what you should know is that Wall Street analysts always tend to downplay their expectations of corporate earnings going into reporting periods. That because corporations downplay them to analysts. It\u2019s Wall Street\u2019s way of gaming the system.<\/p>\n

When I was a managing director at Goldman Sachs, senior members of the firm would gather together each quarter with the chairman and CEO of the firm, Hank Paulson, who went on to become the Treasury secretary of the United States under President George W. Bush.<\/p>\n

He would talk with us about the overall state of the firm, and then the earnings figures would be discussed by the chief financial officer.<\/p>\n

This would be just before our results were publicly disclosed to the markets. There was always internal competition amongst the big investment banks as to what language was being provided to external analysts about earnings and how the results ultimately compared with that language.<\/p>\n

You couldn\u2019t be too far off between \u201cmanaging expectations\u201d of the market and results of the earnings statements. However, there was a large gray area in between that was exploited each quarter.<\/p>\n

When I was there, it was very important for Goldman to have better results than immediate competitors at the time like Morgan Stanley, Merrill Lynch or Lehman Bros.<\/p>\n

It was crucial to \u201cbeat\u201d analysts\u2019 expectations. That provided the greatest chance of the share price rallying after earnings were released.<\/p>\n

The bulk of our Wall Street compensation was paid in annual bonuses, not salaries. These bonuses were in turn paid out in options linked to share prices. That\u2019s why having prices rise after fourth-quarter earnings was especially important in shaping the year\u2019s final bonus numbers.<\/p>\n

Here\u2019s what that experience taught me: There\u2019s always a game when it comes to earnings.<\/p>\n

Investors that don\u2019t know this tend to get earnings season all wrong. However, successful investors that take forecasts with a grain of salt will do better.<\/p>\n

Years later, I realized this was also Warren Buffett\u2019s approach to analyzing earnings. As he has told CNBC, \u201cI like to get those quarterly reports. I do not like guidance. I think the guidance leads to a lot of bad things, and I\u2019ve seen it lead to a lot of bad things.\u201d<\/p>\n

We\u2019ll have to see how earnings season turns out. But good or bad, markets are finding support from the same phenomenon that powered them to record heights last year: stock buybacks.<\/p>\n

Of course, years of quantitative easing (QE) created many of the conditions that made buybacks such powerful market mechanisms. Buybacks work to drive stock prices higher. Companies could borrow money and buy their own stocks on the cheap, increasing the size of corporate debt and the level of the stock market to record highs. Corporations actually account for the greatest demand for stocks..<\/p>\n

And a J.P. Morgan study concludes that the stock prices of U.S. and European corporations that engage in high amounts of buybacks have outperformed other stocks by 4% over the past 25 years.<\/p>\n

Last year established a record for buybacks. While they will probably not match the same figure this year, buybacks are still a major force driving markets higher.<\/p>\n

And amidst escalating trade wars and all the other concerns facing today\u2019s markets, executing buybacks makes the most sense for the companies that have the cash to engage in them. If companies are concerned about growth slow downs in the future, there is good reason to use their excess cash for buybacks.<\/p>\n

What this means is that the companies with money for buybacks have good reason to double down.<\/p>\n

As a Reuters article has noted, \u201cthe escalating trade war between the United States and China may prompt U.S. companies to shift money they had earmarked for capital expenditures into stock buybacks instead, pushing record levels of corporate share repurchases even higher.\u201d<\/p>\n

So buybacks could prop up the market through volatile periods ahead and drive the current bull market even further.<\/p>\n

Of course, buybacks also represent a problem. They boost a stock in the short term, yes. But that higher stock price in the short may come at the expense of the long run. It\u2019s a short-term strategy.<\/p>\n

That\u2019s because companies are not using their cash for expansion, for R&D, or to pay workers more, which would generate more buying power in the overall economy. Buybacks are not connected to organic growth and are detached from the foundation of any economy.<\/p>\n

But buybacks could keep the ball rolling a while longer. And I expect they will. One day it\u2019ll come to an end. But not just yet.<\/p>\n

Regards,<\/p>\n

Nomi Prins
\nfor The Daily Reckoning<\/em><\/p>\n

The post Expect Buybacks to Sustain Markets<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

This post Expect Buybacks to Sustain Markets<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n

Stock buybacks could see markets through potential rough seas ahead…<\/p>\n

The post Expect Buybacks to Sustain Markets<\/a> appeared first on Daily Reckoning<\/a>.<\/p>\n","protected":false},"author":46,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[3096,366,818,722,3097,1419,463],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1130510"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/46"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1130510"}],"version-history":[{"count":1,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1130510\/revisions"}],"predecessor-version":[{"id":1130511,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1130510\/revisions\/1130511"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1130510"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1130510"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1130510"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}