Thursday, August 25, 2016

Extra links

1---Dividends Are What Matter Now-- Many investors turn to high-yielding shares as interest rates slide, but risk could increase

The data highlight the stampede into dividend-paying stocks in response to the plunge of interest rates in recent years. Many investors now are supplementing slumping fixed-income payouts with high-yielding shares, a strategy that some analysts warn could expose buyers to the risk of large capital losses that could wipe out years of income.

That risk appears particularly acute in part because earnings, historically the strongest driver of stock-price gains, are in retreat and valuations are above long-term averages. Many companies are paying more in dividends than they are earning, a practice that analysts view as unsustainable for the long term....

The problem: There is only so much that companies can raise their payouts to shareholders if their profits aren’t keeping pace. And right now, U.S. corporations are struggling to boost profits.....

The S&P 500 index is near its highest level ever, remaining there even as the earnings of the companies that make up the index fell for the fifth consecutive quarter during the April-to-June period, according to FactSet.

“There are a number of companies that are being supported by the low interest-rate environment that either need to step up the fundamental earnings growth or risk lower stock prices going forward,” said James Tierney, chief investment officer of concentrated U.S. growth at AllianceBernstein Holding AB 0.09 % LP.

At the end of June, the annual dividend level of the S&P 500 components was the highest in quarterly records going back to 1936.


With dividends up and earnings down, companies are handing out an increasing amount of their earnings in such payouts to investors. During the second quarter, that measure was at its highest since 2009, according to S&P.

“I tend to think that there will come a point when dividend growth will be slowed if earnings and sales don’t improve,” said Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence.

The divergence between earnings and dividends is showing up among companies such as Exxon Mobil Corp. XOM -0.64 % and Wal-Mart Stores Inc. WMT -1.40 %

Exxon’s earnings dropped to a total of $2.52 a share for the most recent four quarters from $5.62 a year earlier. The firm paid out $2.94 in dividends during those four quarters, a rise from $2.80 in the year-earlier period. The shares have gained 13% this year....

The correlation between S&P 500 earnings and dividends at the end of June was at 0.37, down from 0.90 in March of last year. It is this last metric that is causing market watchers to caution that the dividend gravy train can’t last forever.

If companies keep devoting more and more of their earnings to dividends, they will eventually reach the limits of what they can pay. At that point, many fear the relationship between stocks and earnings will re-establish its traditional hold on the market, with lower earnings resulting in lower stock prices.

“There’s not an unlimited ability to increase dividends forever if the earnings don’t follow at some point,” said Mr. Tierney of AllianceBernstein.

2---The Federal Reserve Needs New Thinking--- Its models are unreliable, its policies erratic and its guidance confusing. It is also politically vulnerable

...A simple, troubling fact: From the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of Federal Open Market Committee decisions. (POMO?)....

The Fed is suffering from a marked downturn in public support. Citizens are rightly concerned about the concentration of economic power at the central bank. Long after the financial crisis, the Fed holds trillions of dollars of assets that would otherwise be in private hands. And it appears to make monetary policy with the purpose of managing financial asset prices, including bolstering the share prices of public companies. .....

3--Years of Fed Missteps Fueled Disillusion With the Economy and Washington

Once admired globally for their command of the economic system, central bankers now are blamed by the left and right for bailouts during the financial crisis and for failing to foresee and manage forces suffocating the global economy in its aftermath.

Populist protest movements called “Fed Up,” “End the Fed” and “Occupy Wall Street” lashed out at the bank’s policies, and in the case of End the Fed, its very existence. Lawmakers of both parties want to subject it to more scrutiny or curb its powers.....

confidence in the central bank’s leadership has dropped. An April Gallup poll found 38% of Americans had a great deal or fair amount of confidence in Ms. Yellen, while 35% had little or none. In the early 2000s, confidence in Chairman Alan Greenspan often exceeded 70%....

First, officials missed signs that a more complex financial system had become vulnerable to financial bubbles, and bubbles had become a growing threat in a low-interest-rate world.

Secondly, they were blinded to a long-running slowdown in the growth of worker productivity, or output per hour of labor, which has limited how fast the economy could grow since 2004.

Thirdly, inflation hasn’t responded to the ups and downs of the job market in the way the Fed expected. (100% bullshit)

“What was missing to me was the in-depth understanding of how much risk and leverage had grown in the financial system and basically how lacking in resilience the financial system as a whole was to this kind of shock,” Mr. Williams said in a recent interview.....(They have all the data, but they didn't know how leveraged the system was? Right.)

Fed models didn’t pick up on a broader economic slowdown already in train by 2004 because the people running the models also didn’t recognize productivity growth was entering an extended slowdown.

In the long run, an economy can expand only at a rate sustained by the growth of its labor force and the productivity of its workers. During the 1990s, output per hour surged, in part because companies poured money into new technologies and machinery. Many economists assumed the high-tech economy would keep fueling rapid productivity growth, but it didn’t, for reasons economists still don’t fully understand....In the decade from 1994 to 2003, U.S. output per hour worked rose annually by an average 2.8%. Since then it has grown at 1.3%, including just 0.4% since 2011....

A slow-growing economy can’t bear high interest rates, and so the Fed also hasn’t delivered as many rate increases as it said it planned. In June 2015, officials estimated their benchmark short-term rate would exceed 1.5% by the end of this year. It remains below 0.5%.

“They have held out the prospect of tighter money, and that has had a discouraging effect on demand to a greater extent than would have been ideal,” said Lawrence Summers, a Harvard professor and former Treasury Secretary. “They have lost credibility by constantly predicting tightening that, out of prudence, they didn’t deliver...

Inflation is the third ingredient in the Fed’s self-doubt. For years it has been largely unresponsive to the ups and downs of unemployment, defying the conventional view that inflation rises when unemployment falls, and vice versa. Unemployment surged during the financial crisis, but inflation didn’t fall much, as Fed models suggested it should. And when joblessness fell, inflation didn’t move up much, either. (ridiculous...Now they claim that they don't know how to create inflation)...

(Preparing the public for more of the same--)-

Still looming is potentially the biggest reversal of all in the modern conventions of central banking. If another recession hits, it isn’t clear the Fed has the tools available to mend the economy, a subject Ms. Yellen could address in Jackson Hole.

Traditionally the Fed cuts interest rates in a downturn. With its benchmark short-term rate near zero, it can’t be pushed much lower. If recession hits, the Fed will likely resort to unpopular tools used after the financial crisis, including Treasury-bond purchases and more promises to keep short-term rates low far into the future.

“We should be extremely worried,” Mr. Summers said. “We are essentially on a fairly dangerous battlefield with very little ammunition.”

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