Telling
a tale...
Memories of the 2008
Great Recession persist. Despite a
glowing earnings season, improving employment statistics, and modestly better
wages and job security numbers, last month nevertheless harkened back to a time
of uncertainty with a report that corporations are still being too stingy when
it comes to capital expenditures (other than share repurchases) for new hiring
and wage increases, and consumers are playing it close to the vest when
considering discretionary spending or leaving their job to take another. Why move hundreds of miles, uproot family, to
take a job that might not be there tomorrow?
Most disturbing about
these "precursor" messages is the litany of businesses that are
falling behind or "going under" altogether.
Even though the record
stock market rally continues, it leaves in its wake a chronicle of those who
float successfully above the fray while a myriad number of "others"
are flailing courageously under water.
As I have written in
past missives, there is an extraordinary divergence between the empirical data
and the anecdotal accounts. Our view is
that the financial and psychological gaps between those who are doing well and
those who are not are widening and serve, at a minimum, as a discussion point
about containing an economic worst case scenario were it to occur. In the world of quantitative science and
statistical analysis, the inverse is often true whereby the "top" of
a market is most often a harbinger of the opposite happening from what the
consensus says.....a perfect correlation of negative consequences.
That's not to say that
economic data aren't moving in the right direction. After all, there has to be a reason for all
the optimism. And indeed, as noted
above, there is. But as bull markets go,
this one is getting extremely long-in-the-tooth and suggesting, ironically,
that all the euphoria might be masking a fate which historically happens at the
top of every bull market cycle.
....of
bubbles and illusions
Fortunately, we are not
ignoring nor denying the validity of the data but, rather, describing the
realities of how a portfolio manager assesses potential risks on behalf of his
client's portfolio allocation and acts with conviction not to let a calamity
unfold. Any indication that the market
is in its latter stages must be respected and acted upon.
One only need look, for
example, at price to earnings (P/E) ratios to glimpse the future. There has been a steady elongation in those
patterns which anecdotally are not being matched by sales and demand numbers
reported this past quarter. Were any economic weakness to occur then
there might possibly be an erosion in stock valuations commensurate to any
turnaround in the data....perhaps not explosively, but gradually over time.
Profitability has
already been reported to be outpacing the rate of share price performance. At whatever time that spectacular tempo were
to recede, we once again might expect a capitulation in the averages.
Just what are
businesses going to do with their new-found profits? Hire more people? Invest in research? Or continue to buy back their outstanding
shares in the public marketplace to support their stakeholders' price
expectations? Unfortunately, we have
already seen the answer to that "altruism" and it isn't the answer we
need. Sure, it is nice if you are a
shareholder in one of these companies.
There is nothing "wrong" or illegal with that behavior.
But as the Federal
Reserve moves to raise interest rates later this year, the biggest obstacle to
this type of repurchase activity is that it is going to cost a lot more money
to give the appearance of solvency and good governance than it has in the
past. The era of "easy money"
may or may not come to an end in the near future, but CEO's and their Board of Directors will
have to give serious thought to how they deploy their cash stash beyond the
mindless act of buying up their outstanding float simply to manufacture the
facade of a couple of good profit quarters.
