Friday, March 10, 2017

Today's Links

The working men and women of this country are working more jobs and more hours, and they’re still barely hanging on. Beneath those fingertips, they can feel that middle-class dream – the American dream – slipping right away from them. It’s time for President Trump to do something about it.

1--This Crazy, Expensive Stock Market Is for Speculators, Not Investors -- The aging bull market is being sustained by optimism, and perhaps already becoming euphoric

Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria—Sir John Templeton

Eight years ago today, investors were more pessimistic than they had been in many decades. Stocks had crashed back to where they stood almost 13 years earlier, banks were failing and comparisons to the Great Depression of the 1930s were routine. It was a great time to buy.

Fast forward to 2017 and the S&P 500 has stormed up 255% from the March 2009 low, money is pouring into shares, confidence is high and stocks expensive..

The reason for caution is the high valuation of every dollar of earnings, even as profit margins are high compared with history and companies have a lot of leverage. A return to historically lower margins or valuations would hurt, while adding debt becomes harder the more companies have.
Still, valuations have been higher, notably in the 2000 bubble, when they went to levels never seen before on every widely used measure. There’s little sign of dot-com-era excesses—Snap’s IPO pop excepted—but the period has become the standard comparison for today’s valuations.

2--Corporate Insiders Haven’t Been This Uninterested in Buying Stocks Since Ronald Reagan Was President -- There were 279 insider buyers in January, the lowest in records going back to 1988

Corporate executives are buying their own firms’ shares at the slowest pace in at least 29 years, the latest sign of uncertainty as the bull market in U.S. stocks enters its ninth year.

Share purchases and sales by executives are parsed by investors searching for signals about what insiders expect from the market. Sales can show wariness about valuations, while purchases can signal confidence that more gains lie ahead.
Insider buyers have been scant. There were a total of 279 insider buyers in January, the lowest number going back to 1988, according to the Washington Service, a provider of insider-trading data and analytics....

While many investors expect corporate earnings to pick up in coming quarters, reflecting the continuing U.S. economic recovery and Trump administration tax-cut and deregulatory plans, the strong market gains mean that investors are paying more now for expected corporate earnings than at any point in over a decade.
The price-to-earnings ratio of the S&P 500 based on analyst forecasts for the next year is near 17.7, the highest since 2004, according to FactSet....

This year, executives at regional banks whose stocks have soared since the U.S. presidential election are among the biggest insider sellers.  ...

“The fact that we’ve gotten more selling is a sign of concern that maybe the market has gone a little too far too fast,” said Ed Clissold, chief U.S. strategist at Ned Davis. “We wouldn’t be surprised if there was a modest pullback given how far the market has run.”...

Historically, the most powerful signal from insider activity comes when executives ratchet up buying to benefit from a stock-market rebound. The number of insider buyers surged to nearly 3,200, the second highest on record, during November 2008, in the depths of the financial crisis, according to the Washington Service

3--Stock Buybacks Are So Yesterday -- Companies are acting like there are better things to do with their money than buy back their shares

The bull market just turned eight years old, and one of its defining characteristics has been how little capital spending there was by companies. Where in the past companies have responded to a strong stock market and low interest rates by stepping up capital spending, over the past several years they have invested little in new equipment.
Instead, they bought their own stock, reducing the number of their shares outstanding and  helping to drive earnings per share higher. Data released by the Federal Reserve on Thursday show that nonfinancial corporations retired a net $2.2 trillion in equities over the five-year period ending in 2016. In many cases they borrowed money to do the buybacks, pushing up corporate debt levels.

But the data also suggest a shift is underway. In the fourth quarter, nonfinancial companies bought back a net $323 billion in equities, at a seasonally adjusted annual rate, half as much as in the previous quarter and the lowest amount since the second quarter of 2014.
And unlike the third quarter, companies’ capital spending surpassed their cash flows, which is a return to normal. Companies usually borrow to spend, betting the payoff from the investments more than pay off the debt.

It is still early going, but there may be a real change here. Share repurchases are hard to justify when stocks are expensive. Rising wages make buying labor-saving equipment more attractive. And if President Donald Trump gets the the tax-cut and spending legislation he wants, the economy could get a bump that companies will want to be ready for.
Investors are now betting on companies with a growth strategy. Here’s guessing companies will happily oblige.

4--Strong Jobs Market Is a Risk to Growth --Employment has been stronger than the economy, and that can be a risk if GDP growth picks up

The major reason hiring has been so strong, even as the economy has been stuck in a rut, is that productivity—how much the average worker can produce in an hour—has been weak. One reason is that companies were cautious about capital spending, including investing in labor-saving equipment, since the recession.

Even lukewarm growth has forced them to hire in order to meet demand. Faster productivity isn’t something that can be turned on like a switch: Even if companies jump start their capital spending plans, it takes time to put new equipment in place and to train workers to effectively use it.

So if Congress hands Mr. Trump the sort of legislation he is hoping for, and the economy accelerates as a result, companies may need to hire at an even faster rate to meet demand. Because the job market has led the economy, employers will need to meaningfully raise wages to attract and retain the employees they need.

Put differently, with only a slight lift to GDP, the economy could end up running hotter than the Fed wants. Its natural inclination would be to cool it. That might not be something Mr. Trump likes

5--Jobs Report: Wages Will Set the Tone for Fed -- Friday’s jobs report shouldn’t prevent the Federal Reserve from raising interest rates at next week’s meeting

Higher wages along with steady job gains and more people quitting their jobs suggest companies are being forced to compensate their employees more, not only to retain people but also to attract new talent. That should help keep pushing overall inflation higher and give the Fed more confidence in raising rates at a more regular pace.
And there is evidence that wages are rising even more rapidly than the Labor Department’s data would suggest. The Federal Reserve Bank of Atlanta maintains its own wage-growth tracker, which monitors wages of continuously employed people while ignoring those of people who jump in and out of the workforce. This metric suggests wage growth has been higher than that of average hourly earnings.

Furthermore, the Atlanta Fed shows people who take new jobs are earning higher wages than those who stay put with their employers. Average wage growth for job switchers was 4.2% in the second half of 2016, compared with 3.3% for so-called job stayers, according to the Atlanta Fed. This makes sense, particularly as more people are quitting their jobs now for better opportunities, which is more common than in earlier parts of the recovery. But the gap between stayers and leavers at the end of last year was among the widest since 2006.
January’s weak wage data were likely an anomaly. If that is the case, a hawkish Fed should be on display at next week’s meeting and beyond.


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