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The truths and myths of buybacks
Capital Markets
<p>Editor's note: This post is excerpted from Advisor Perspectives.</p> <p>Buybacks are not the result of the Fed's zero interest rate policy (ZIRP) or quantitive easing policy (QE). Buybacks became prevalent more than 10 years ago. They were more significant as a proportion of the stock market in 2005-07 than they have been during most of the past 3 years. The trend towards buybacks was underway well before 2008 when ZIRP and QE entered the investment community vernacular.</p> <p>Buybacks were often discussed and widely disliked 10 years ago. Skeptics used the same arguments then that are also used today. None of this is new. The excerpt below is from 2005.</p> <p>The affect of share reduction on EPS was significant 10 years ago, as share count declined almost 10%. That hasn't been the case in the past several years, with the share count back unchanged since the end of 2009.</p> <p>This brings up the biggest myth about buybacks: that they are responsible for most or all of the recent growth in corporate earnings per share (EPS).</p> <p>Between 4Q 2010 and 2Q 2015, annualized EPS for the S&amp;P rose 23%; profits rose 20%. In other words, higher profits accounted for nearly 90% of the growth in EPS; the remaining 10% was the affect of the reduction in share count (data from S&amp;P).</p> <p>Why is there so little difference between profits and EPS growth? The effect on shares outstanding of net buybacks has been minor: a reduction of about 2% since 2010 (TTM basis). That shouldn't be surprising: remember, the dollar amounts spent are small relative to market capitalization and almost half of the buybacks are offset with issuance.</p> <p>You didn't need this data to reach the same conclusion; logic would have also told you that profits are primarily driving higher EPS. Employment growth is now the best since the 1990s; compensation growth is the highest in 6 years; consumption growth is the highest in 8 years. Why would anyone expect there to be no sales growth under these conditions?</p> <p>This story originally appeared in Advisor Perspectives.<br /> Photo: Thomas Hawk</p>
Daily Scan: Asian shares slump; Eurozone PMI surges to new highs
Capital Markets
<p>Updated throughout the day</p> <p>November 23</p> <p>After putting on a valiant effort to finish deep in the green – or red, if you’re in the mainland – Chinese shares finally succumbed to the IPO dread on Monday with the Shanghai Composite slumping 0.56% and the Shenzhen Composite tanking 0.75%. Hong Kong’s Hang Seng Index meanwhile continued to be ravaged by falling energy shares, leaving the benchmark index down 0.39% for the day. As for the rest:</p> <p> Hang Seng China Enterprises Index: -0.70%<br /> Straits Times Index: -0.38%</p> <p>It wasn’t just Hong Kong that was hit by a slump in energy and metals shares, the U.K.’s FTSE 100 has so far slid 0.26%, while Germany’s DAX and France’s CAC dipped 0.21% and 0.68% respectively. Wall Street also looks set to take a hit, with S&amp;P minis signaling a 0.12% drop right out of the gate.</p> <p>Here’s what else you need to know:</p> <p>German private sector defies economic worries. Growth in Germany's private sector accelerated in November, a survey showed on Monday, suggesting Europe's biggest economy is defying worries over a slowdown in China and the emissions scandal at car maker Volkswagen. The PMI rose to 54.9 from 54.2 in October. Reuters</p> <p>Eurozone growth and job creation hits new high. Things are looking good over in Draghi country, Markit’s Flash Eurozone PMI Composite Output Index came in at 54.4 – 54-month high – while its Flash Eurozone Services PMI Activity Index came in at 54.6 – also a 54-month high. The Flash Eurozone Manufacturing PMI meanwhile surged to a 19-month high of 52.8. Markit does acknowledge that France remains a little weak though, with both manufacturing and business activity in the region growing at their slowest pace in months. Markit</p> <p>Pfizer gets board approval for $150B Allergan purchase. The deal, the largest ever in the healthcare sector, will create the world's biggest drug maker. The deal would reportedly involve Pfizer paying with 11.3 of its shares for each Allergan share. CNBC</p> <p>UK PM diverts $18B to defence.David Cameron will today pump an extra £12bn into strengthening Britain’s defences against Isis and Russia, but the bill will be met by spending cuts elsewhere with police, welfare and business grants in the line of fire. Financial Times (paywall)</p> <p>Singapore CPI falls 0.8%. Extending Singapore’s longest bout with deflation since 2009, the nation’s consumer price index fell 0.8% in October, much worse than the 0.4% contraction expected by analysts and also below the previous month’s 0.6% decline. Core inflation however is up 0.3%, giving the region a little ray of light. Straits Times</p> <p>Belgian cops arrest 16 in anti-terror raids.  A total of 22 raids were carried out on Sunday across Brussels and Charleroi. Suspected Paris attacks gunman Salah Abdeslam remains at large. BBC </p> <p>Many missing after deadly Myanmar landslide.  At least 104 bodies have now been recovered, with some estimates saying more than 100 people are still missing after a landslide at a jade mine in Myanmar’s northern Kachin state. BBC  </p> <p>China still defiant in South China Seas. China has defended its construction of infrastructure on disputed islands, adding that it does not intend to militarize the area. Chinese vice foreign minister, speaking on the sidelines of the Asean summit, also accused the U.S. of provocations. BBC</p> <p>SE Asia boosts economic integration. The Association of Southeast Asian Nations declared Sunday the establishment of an ASEAN Community. Its pact aims to turn the 10-member bloc into a single market and unified production base. Nikkei</p> <p>Kiwi migration data sets new record. Seasonally adjusted net permanent and long term visitors to New Zealand soared by 6,210 in October, beating the previous month’s 5,600 climb and posting a record net gain for the year. Migration to the region has been breaking records since August 2014. Forex Live</p> <p>U.K. calls in France to help hunt Russian sub. French patrol planes are scouring the seas off Scotland for a Russian submarine after Britain was forc
Daily Scan: Chinese shares climb; Commodity futures dive
Capital Markets
<p>Updated throughout the day </p> <p>November 23</p> <p>A potential Christmas treat from Mario Draghi sent Chinese stocks higher on Monday but a continued rout in energy and gaming shares left Hong Kong’s benchmark index slipping sideways. The Shanghai Composite is currently up 0.39%, while the Hang Seng Index is down 0.03%. Japan is shut for Labor Thanksgiving Day but as for the rest:</p> <p> Hang Seng China Enterprises Index: -0.29%<br /> Shenzhen Composite: +0.67%<br /> Straits Times Index: -0.11%</p> <p>Commodities meanwhile seem to be taking a spanking in the futures market. At pixel time, WTI crude is down 1.84% to 41.43 a barrel, while copper and gold are down 1.97% and 0.61% respectively. Soybeans – down 0.58% – have hit a six-and-a-half year low.</p> <p>Here’s what else you need to know:</p> <p>Blasts at Japan's controversial Yasukuni Shrine. The explosion happened at the Tokyo war shrine on Monday morning in what is suspected to be a politically-motivated attack. Firefighters found the ceiling and wall of a men's public bathroom south of the shrine burned. No one was harmed. Nikkei</p> <p>Singapore CPI falls 0.8%. Extending Singapore’s longest bout with deflation since 2009, the nation’s consumer price index fell 0.8% in October, much worse than the 0.4% contraction expected by analysts and also below the previous month’s 0.6% decline. Core inflation however is up 0.3%, giving the region a little ray of light. Straits Times</p> <p>Belgian cops arrest 16 in anti-terror raids.  A total of 22 raids were carried out on Sunday across Brussels and Charleroi. Suspected Paris attacks gunman Salah Abdeslam remains at large. BBC </p> <p>Many missing after deadly Myanmar landslide.  At least 104 bodies have now been recovered, with some estimates saying more than 100 people are still missing after a landslide at a jade mine in Myanmar's northern Kachin state. BBC  </p> <p>China still defiant in South China Seas. China has defended its construction of infrastructure on disputed islands, adding that it does not intend to militarize the area. Chinese vice foreign minister, speaking on the sidelines of the Asean summit, also accused the U.S. of provocations. BBC</p> <p>SE Asia boosts economic integration. The Association of Southeast Asian Nations declared Sunday the establishment of an ASEAN Community. Its pact aims to turn the 10-member bloc into a single market and unified production base. Nikkei</p> <p>Kiwi migration data sets new record. Seasonally adjusted net permanent and long term visitors to New Zealand soared by 6,210 in October, beating the previous month’s 5,600 climb and posting a record net gain for the year. Migration to the region has been breaking records since August 2014. Forex Live</p> <p>U.K. calls in France to help hunt Russian sub. French patrol planes are scouring the seas off Scotland for a Russian submarine after Britain was forced to call on allies for help because it has scrapped its own sub-hunting aircraft. Telegraph</p> <p>Died: Former South Korea president Kim Young-sam. The former leader, who replaced the last of the country’s military leaders, purged politicized generals and introduced a landmark reform aimed at transparency in financial transactions, died on Sunday. He was 87. CNBC</p> <p>You won’t believe this…</p> <p>China doctors old newspapers, 1984 style. China’s state broadcaster sought to rewrite history on Saturday, doctoring the layout of a 1982 edition of the Communist Party’s mouthpiece to remove a picture of a purged leader for a documentary. SCMP (paywall)</p> <p>World’s first cyborg rose built in flower power study. Researchers at Linköping University in Sweden have been building bionic roses that incorporate plant-compatible electronic materials. The experiment opens up a range of applications including energy harvesting from photosynthesis. Inquisitr</p> <p>The Fed has a leakage problem. University of California Berkeley professor Annette Vissing-Jorgensen has found that not only does the Fed constantly leak information, but also that it’s so predictably timed that one c
Chinese brokerages under scrutiny
Capital Markets
<p>Is there a purge underway in China's financial industry?</p> <p>The Financial Times reports (paywall) that last week Wang Dongming, the outgoing chairman of Citic Securities, "was forced out of his position because of the insider-trading scandal involving senior executives", citing people familiar with the matter.</p> <p>Police questioned eight Citic executives at China's leading investment bank for illegal securities trading in August, of which four were criminally punished. The actions followed a stock market rout that wiped away $5 trillion in equity between June and August.</p> <p>In a latest twist,  shares in Hong Kong-listed Guotai Junan International plunged 15% in the first 10 minutes of trading on Monday, after the securities broker said in a statement to HKEx that it has not been able to reach its chief executive Yim Fung since November 18.<br /> Photo: Ged Carroll<br /> &nbsp;</p> <p>&nbsp;</p> <p>&nbsp;</p>
Weekend Scan: Belgium in lockdown for 3rd day; Pfizer, Allergan near $150B merger
Capital Markets
<p>U.S. markets start the holiday week on strong footing: Last week the S&amp;P 500 finished its strongest week in a year, gaining 3.3%. Markets seem to have found their footing now that virtually everyone has agreed that the Federal Reserve will raise rates in December. Unless they don't, which is a possibility if the jobs report for November is weaker than expected, says Jeff Gundlach, CEO at DoubleLine. The credit market is betting on a rise -- the two-year note rose to 0.9213%, the highest in five years. Thanksgiving starts Thursday and that means two things: Don't travel on Wednesday unless you must -- it's the busiest travel day of the year in the U.S. AND get on your shopping shoes -- Black Friday approacheth. It's make or break day for retailers.</p> <p>Here's what else you need to know:</p> <p>Brussels extends alert on "imminent threat." Belgium's prime minister Charles Michel has said the country will stay on the highest level of terror alert because of the "serious and imminent" threat of Paris-style attacks. Universities, schools and the metro will stay shut. BBC</p> <p>Pfizer, Allergan near $150 billion merger in biggest "inversion" deal to date.  The mostly stock deal would enable Pfizer to take advantage of a lower corporate tax rate overseas.  Wall Street Journal (paywall)</p> <p>GDP, existing home sales head up short holiday week in the U.S. The second estimate for 3Q GDP is expected to come in at 2.1%, up from 1.5%. Home sales are likely to slip to 5.41 million on a seasonally adjusted annualized basis from 5.33 million. Calculated Risk</p> <p>Adele "25" on track to break record for first week of sales. The new album, the first in four years, is on track to sell 2.5 million copies. No wonder the song bird skipped over Spotify and Apple Music. She doesn't need them. CNBC</p> <p>China still defiant in South China Seas. China has defended its construction of infrastructure on disputed islands, adding that it does not intend to militarize the area. Chinese vice foreign minister, speaking on the sidelines of the Asean summit, also accused the U.S. of provocations. BBC</p> <p>SE Asia boosts economic integration. The Association of Southeast Asian Nations declared Sunday the establishment of an ASEAN Community. Its pact aims to turn the 10-member bloc into a single market and unified production base. Nikkei</p> <p>U.K. calls on France to help hunt Russian sub. French patrol planes are scouring the seas off Scotland for a Russian submarine after Britain was forced to call on allies for help because it has scrapped its own sub-hunting aircraft. Telegraph</p> <p>Died: Former South Korea president Kim Young-sam. The former leader replaced the last of the country’s military leaders and purged politicized generals. He also introduced a landmark reform aimed at transparency in financial transactions. On Sunday at age 87. CNBC<br /> You won't believe this...<br /> The Fed has a leakage problem. University of California Berkeley professor Annette Vissing-Jorgensen says leaks are so predictable that you can actually play the market with them. Reuters<br /> Photo: Boaz Guttman</p>
International economic week in review; bearish tenor is growing, edition
Capital Markets
<p>The news continues to move in a bearish direction. Although the UK and Australia are in decent economic shape, neither country is setting growth records. And on the bearish side, Mario Draghi stated the EU recovery is weak and may need additional stimulus while Japan entered a technical recession for the second time in two years. And all this is occurring at time when the global growth juggernaut of China is slowing. Overall, the scales appear to be more and more tipped in a bearish direction.<br /> Mario Draghi’s speech was the most important news from the EU this week. He noted three risks to the EU region:<br /> First, the downside risks to our baseline scenario for the euro area economy have increased in recent months due to the deterioration of the external environment. The outlook for global demand, especially in emerging markets, has notably worsened, while uncertainty in financial markets has increased. Global growth this year will be the weakest since 2009.<br /> Second, even factoring in those headwinds, the strength of the underlying recovery is modest. Taking the Purchasing Managers’ Index, the present upswing which started in 2013 is the weakest euro area rebound since 1998. That is striking considering that we are in the early phase of a recovery, where one would expect to see a much more vigorous pickup. Deferred spending typically comes back on stream in a bulky way, aided by more favourable financing conditions.<br /> It is also striking considering the important tailwinds helping the economy along – not just our monetary stimulus, but lower prices for energy. None of those previous rebounds since 1998 could benefit from cheapening energy: in fact, oil prices have been a constant headwind blowing against previous recoveries. Moreover, in none of those previous upswings was monetary policy, measured by real EONIA rates, as supportive as it is now.<br /> Third, the recovery remains very protracted in historical perspective. It took between five and eight quarters for the countries now making up the euro area to recover their pre-recession level of real output after the slumps of the 1970s, 1980s and 1990s. During the recent recession – which was admittedly the worst since the 1930s – it took the US economy 14 quarters to reach its pre-crisis peak. If our current assessment is correct, it will take the euro area 31 quarters to return to its pre-crisis level of output – that is, in 2016 Q1.<br /> Exports have been an area of strength for the EU economy for the duration of the expansion; as a percent of GDP, they rose from .1% in 2010 to 2.1% in 2014. But weaker global economies obviously translates into lower trading volumes. Regarding overall growth, the EU region grew between a 2%-4% annual rate in the late 1990s and the latter part of the expansion ending in 2008. But growth during the current expansion is still below a 2% annual rate. This leads to his third point: weak growth means the length of time it has taken for the economy to return to previous levels has lengthened. This corroborates the impression of an overall period of economic weakness. Due to the increased downside potential, the ECB may increase stimulus:<br /> We cannot say with confidence that the process of economic repair in the euro area is complete. At the December Governing Council meeting we will thoroughly assess the strength and persistence of the factors that are slowing the return of inflation towards 2%. If we conclude that the balance of risks to our medium-term price stability objective is skewed to the downside, we will act by using all the instruments available within our mandate. We consider the asset purchase programme to be a powerful and flexible instrument, as it can be adjusted in terms of size, composition or duration to achieve a more expansionary stance. The level of the deposit facility rate can also empower the transmission of APP, not least by increasing the velocity of circulation of bank reserves. If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do
Daily Scan: Futures trade mixed; Belgium remains on lockdown
Capital Markets
<p>Updated throughout the day</p> <p>November 23<br /> (Note: all times HKT)<br /> Shares in Hong Kong and China are set to trade mixed Monday, with Hang Seng Index futures signaling a 0.29% jump right out of the gate and CSI 300 contracts pointing to a 0.56% skid over in the mainland. Japan meanwhile will be closed for Labor Thanksgiving Day.</p> <p>We’ve got an interesting mix of reports coming in today. Singapore’s inflation rate figures are scheduled for 1:00 p.m., France’s PMI data are set for 4:00 p.m., while German PMI and Hong Kong CPI are set to follow shortly at 4:30 p.m. ECB supervisory council president Danièle Nouy will also be speaking in Frankfurt at 6:45 p.m., while U.S. manufacturing PMI and existing home sales round up the day at 10:45 p.m. and 11:00 p.m. respectively.</p> <p>Here’s what else you need to know:</p> <p>Brussels extends alert on "imminent threat". Belgium's prime minister Charles Michel has said the country will stay on the highest level of terror alert because of the "serious and imminent" threat of Paris-style attacks. Universities, schools and the metro will stay shut. BBC</p> <p>China still defiant in South China Seas. China has defended its construction of infrastructure on disputed islands, adding that it does not intend to militarize the area. Chinese vice foreign minister, speaking on the sidelines of the Asean summit, also accused the U.S. of provocations. BBC</p> <p>SE Asia boosts economic integration. The Association of Southeast Asian Nations declared Sunday the establishment of an ASEAN Community. Its pact aims to turn the 10-member bloc into a single market and unified production base. Nikkei</p> <p>Kiwi migration data sets new record. Seasonally adjusted net permanent and long term visitors to New Zealand soared by 6,210 in October, beating the previous month’s 5,600 climb and posting a record net gain for the year. Migration to the region has been breaking records since August 2014. Forex Live</p> <p>U.K. calls in France to help hunt Russian sub. French patrol planes are scouring the seas off Scotland for a Russian submarine after Britain was forced to call on allies for help because it has scrapped its own sub-hunting aircraft. Telegraph</p> <p>Died: Former South Korea president Kim Young-sam. The former leader, who replaced the last of the country’s military leaders, purged politicized generals and introduced a landmark reform aimed at transparency in financial transactions, died on Sunday. He was 87. CNBC</p> <p>You won't believe this...</p> <p>World's first cyborg rose built in flower power study. Researchers at Linköping University in Sweden have been building bionic roses that incorporate plant-compatible electronic materials. The experiment opens up a range of applications including energy harvesting from photosynthesis. Inquisitr</p> <p>The Fed has a leakage problem. University of California Berkeley professor Annette Vissing-Jorgensen has found that not only does the Fed constantly leak information, but also that it’s so predictably timed that one can actually use them to play the market. Reuters<br /> Photo: Boaz Guttman</p>
Leveraged loans signaling stocks are reaching a peak; this will 'end in tears'
Capital Markets
<p>In his most recent blog post, investor Jesse Felder raises the warning flag on leveraged loans -- which typically trade in synch with stocks. Leveraged loans are the grease of what has been a very hot mergers and acquisition market. But Feld says liquidity in the sector is waning. Overall issuance of leveraged loans is down 4% so far this year to $818.7 billion, according to Dealogic. Yet the stock market is still in party mode. This is worrisome. Feld notes that he isn't the only one to worry about this trend:<br /> Former Dallas Fed Chief, Richard Fisher, has warned about the growing risks in this area of the credit market for quite some time saying, “The big banks are lending money on terms and at prices that any banker with a memory cell knows from experience usually end in tears.” As the only member of the Fed with any experience managing risk, I value his opinion highly.</p> <p>The recent action in the markets suggests we may be getting closer to the point of, “tears.” And because leveraged loans are so highly correlated to stocks, I think equity investors would do well to take notice.<br /> Photo: Andrew Seaman</p>
The Week Ahead: US economic activity clues, ECB speeches
Capital Markets
Investors have plenty of numbers to digest before the Thanksgiving holiday on Thursday. In the U.S., there are data releases on inflation, housing and jobs as well as the second estimate of third quarter GDP.  In Europe, there is a raft of figures to guide ECB officials about the level of economic activity in the Eurozone; several bank members will deliver speeches this week --
Barron's weekend roundup: Value in emerging markets, stick with JGBs
Capital Markets
<p>After six years of slowing economic growth, Goldman Sachs is saying that the worst is over and emerging markets should bottom next year, Barron's reports. The U.S. investment banks expects China's slowdown to be offset by improvements in India, contraction in Russia to end this quarter, Eastern Europe to gain from improving economies in the Eurozone, and even Brazil’s slump to slow. Although Goldman won't come out as absolute equity market bulls, they do see value in emerging market currencies. They recommend going long the Indian rupee, the Russian ruble and the Mexican peso for the carry, and short offshore yuan, Korean won, Malaysian ringgit, or commodity currencies such as the Chilean peso. But, a significant devaluation of the renminbi might cause a re-think.</p> <p>Elsewhere, Barron's says some analysts now believe Japanese government bond (JGB) yields are heading toward the record low of 0.2% they set early this year. That, however, is not a sell-signal for international investors. Despite evidence that the economy is finally recovering, with private consumption rising and inflationary pressures building up, domestic savers will likely continue to support the JGB market. The reason is that a strong yen means that JGB returns are still higher than returns from overseas investments. Meanwhile, banks are reluctant to lend out excess deposits, preferring to park cash in government securities instead. JGBs have outperformed both U.S. Treasurys and German bunds in the past three months, according to Bank of America Merrill Lynch indexes.<br /> Photo: M M<br /> &nbsp;</p>