Friday, February 24, 2017

Today's Links

1--We're About to See the US and UK’s Global Power Decline

It will be difficult for the US to remain a super-power under a leader who is an international figure of fun and is often visibly detached from reality. His battle cry of “Fake News” simply means an inability to cope with criticism or accept facts or views that contradict his own. World leaders who have met him say they are astonished by his ignorance of events at home and abroad.

This cannot go on very long without sizeably diminishing American global influence as its judgement and actions become so unpredictable. Over the last three quarters of a century, countries of all political hues – dictatorships and democracies, republics and monarchies – have wanted to be an ally of the US because it was the most powerful player in world affairs....

Despite its vastly expensive armed forces, the US has failed to win wars in Afghanistan and Iraq or to obtain regime change in Syria. In all three wars, it made serious mistakes and suffered important setbacks. ...

As presidential candidate Trump presented himself as an isolationist, claiming to have opposed the wars in Iraq and Libya. He had taken on board, as Hillary Clinton had not, that the American public does not want to fight another ground war in the Middle East. But Trump’s appointment of two senior generals – James Mattis as Defence Secretary and HR McMaster as National Security Adviser – tells a different and more belligerent story. Already, there are steps being taken to create a Sunni Arab coalition, led by Saudi Arabia and the Gulf monarchies and in cooperation with Israel, to confront Iran.

2--Surprise: Earnings Actually Drive Stocks --One of the reasons behind the market’s big rally is a surprisingly good earnings season

Fourth-quarter earnings are expected to log an increase of 4.6% from the same period a year ago, according to FactSet. That would mark the second consecutive quarter of year-over-year growth. And it would put the prior earnings recession of five consecutive quarterly contractions further in the rearview mirror. The last time the market had back-to-back quarters of earnings growth was in the fourth quarter of 2014 and the first quarter of 2015....

As for the overall market, corporate tax reform, infrastructure spending and fiscal stimulus have helped push the Dow Jones Industrial Average up about 13% since the election.

Rising valuations shouldn’t be dismissed. The S&P 500 has a forward price/earnings ratio of 17.6, the highest multiple since 2004 and above the averages of the past five, 10, 15 and 20 years.

Even with earnings growing again, that valuation can’t be justified without corporate tax reform and stimulus. The higher the market goes, the more dependent it is on success of Donald Trump’s policies.

3--Don't bet too heavily on buybacks--Investors bullish about a Trump capital expenditure boom must realize that buybacks, one of the bull market’s drivers, may suffer

Weak corporate investment has been one of the economy’s great flaws. An expected boost in capital spending—driven by rising confidence, stronger profits and tax reform—is one reason the stock market has soared.

But investors are confusing the benefits that rising spending would bring to the economy with its short-term impact on the stock market. A boom in corporate investment could be a drag on stocks.

As the economy struggled to grow, companies lacked the confidence to write big checks, except when they bought competitors. Instead they have been purchasing their own shares furiously. Companies in the S&P 500 have spent more than $2.5 trillion on share buybacks in the five years through 2016’s third quarter, according to FactSet. In the third quarter of 2016 alone buyback champs Apple Inc. and General Electric Co. repurchased $11.5 billion worth of their shares combined.

Yet the third quarter marked the second consecutive period of declining buybacks compared with a year earlier. In dollar terms, the drop was the largest since 2009, and it could get worse if more cash is diverted to new factories and equipment....

And then there is the market’s rich valuation, which teeters precariously on top of earnings growth driven by share buybacks. The stock market’s valuation is now in the 96th percentile of all observations in the past 135 years based on a cyclically adjusted measure used by Yale professor Robert Shiller. Even if buybacks stay strong, they produce less bang-for-the-buck. A company now has to spend about $1.34 of its earnings to repurchase as many shares as $1 did in February 2012. So, even as dollars spent have dropped, the number of shares repurchased has fallen even more.

That matters because the 5.3% in annualized, cyclically-adjusted earnings per share growth since 2009 would be less than half as much if not for gross buybacks. With so little earnings growth, it is no surprise that most of the S&P 500’s 17.1% annualized price gain since the bottom in 2009 has come as a result of valuation rather than real earnings growth or inflation. Justin Sibears of money manager Newfound Research calculated that a larger portion of the current bull market’s returns have come from valuation gains than any since the 1920s bubble. Perhaps not coincidentally, the Shiller price-to-earnings ratio is at the same level as observed in July 1929.

Is there a rosier scenario for buybacks? They could surge temporarily, much as they did back in 2005, if the Trump administration gives companies a tax holiday on the more than $2 trillion in unremitted corporate profits held overseas. As a share of market value, that is even higher than the Bush-era tax holiday.

The positive view of a boost in capital spending is that it will earn high future returns. That may be true, but earnings growth would be depressed a bit in the short-term as buybacks slow and earnings are hit by increased depreciation and amortization expenses, which are the result of higher capex.

Investors are forgetting that what’s good for the economy isn’t always good for stocks.

4--Eurozone Finally Finds Itself Free of Deflation-- January consumer prices were 1.8% higher than a year earlier

For the first time in almost four years, none of the eurozone’s 19 members was in deflation during January, an encouragement to the European Central Bank in its long struggle to lift inflation to its target and keep it there.

5--Veterans Say Organizers Concealed Saudi Sponsorship of Their Trip to DC to Lobby for Changes to 9/11 Lawsuit Legislation...

Lobbyists May Be Planning to Kill 9/11 Suits Against Kingdom by Restricting Lawyers’ Compensation

Senior Leader of Military Order of the Purple Heart Working for Saudi Lobbyists for $100,000 Fee

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