|
|
MAKING CENTS OUT OF THE NEWS
Blog #13
(April 8th, 2010)
Look Behind the Headlines
By Tom McAllister, CFP®
Wall Street has been on a tear! As we watch the market approach recovery highs, we at McAllister Financial remain optimistic about the market’s prospects for the remainder of the year. Still, it’s important to point out, not everything in the financial news is as rosy as it seems. Here are a few examples:
What is called the “consumer confidence index” rose to 52.5 in March. This statistic, because it beat the estimates, was treated gleefully on Wall Street and in the media. But here is the reality: In recessions, the Consumer Confidence Index tends to average 71.0; during expansions, it averages 102.0. The current numbers pale by comparison.
Many pundits have pointed to the big 7% jump in stock buybacks this quarter. Companies’ buying back their own stock is widely and, I think, erroneously viewed as being a major fund-flow driver of the equity market. In theory, the corporations see the current market price of their own stock as a bargain relative to the growth they expect in the future value of their company. Here’s the rub: The vast majority of companies are buying back their stock for a different reason. They have stock options due to expire, and they want to avoid the dilutive effect that tends to have on stock price. What’s more, companies’ deploying cash for buybacks at this early stage of an expansion may mean those companies perceive a poor return from new investments they might otherwise have made.
There is one constructive trend I see, though. Companies are beginning to pay out more of their retained earnings in the form of dividends. There were $5.1 billion in net dividend increases in the first quarter, the most since late 2007. Even this statistic, though, is down 21% from two years ago.
There’s a particular attitude or view that seems on its way to becoming entrenched among Americans: The government can be expected to resolve all the problems in the economy. This view has certainly been strengthened by the fact that the Fed and the Treasury broke the boundaries between the private and public economy in bailing out the banks, the auto sections, and the housing companies, continuing in these efforts despite a record $1.5 trillion deficit.
With no other goal, it would seem, than to allow the residential real estate market to clear at lower prices, the government now intends to permanently reduce the mortgage balance for all homeowners who are “under water” and unemployed. Homeowner mortgage borrowers are also going to be recipients of taxpayer assistance.
The problem ahead is that the bond market may no longer be in a position to finance all this largesse. With the 10-year yield now approaching 4%, a crucial week lies ahead, as investment markets are being asked to digest $82 billion in sales of debt securities.
Those who believe government help can continue to support stock market recovery need to look around. The financially responsible segment of the general population is becoming increasingly angry at having to finance those who handled money less responsibly. The theme of emerging class warfare is beginning to appear in the media, and it’s a very real threat.
While we believe the stock market is fairly valued today, at least some stocks’ attractiveness has been compromised by the recent rally. An ounce of caution may be in order for the near term….
|
| |
| |
______________________________________________
| |
Click To Print This BLOG
