Oxstones Investment Club™1. The Stock Market Is Not the Economy
Was chatting with Minyanville Professor Conor Sen this morning about the market and how all the headlines are Fed/QE/QE2/Gold/Silver, etc. All of those are important things, of course. But as has been demonstrated over the past two years, they have nothing to do with the stock market. Neither does the economy.
The economy remains terrible in terms of two key components: employment and wage growth. But those are clearly not market factors. Meanwhile, companies such as IBM (IBM) continue to announce shareholder enhancement actions that those who are overly focused on macroeconomics are missing out on: the company is tacking on a 15% dividend increase and added $8 billion to its stock repurchase program. As Conor noted, neither of those actions will benefit the larger economy, but they will benefit the IBM shareholder.
I wish the economy were better. It’s not. But the economy right now has nothing to do with stocks. There is a credit boom underway that will inevitably transition from corporate credit to stock prices as companies refinance at low rates and use cash on hand to increase dividends and buy back shares. There are many stocks that are undervalued on a fundamental basis with legitimate business models that not only can survive high unemployment and stagnant wage growth but actually profit during these conditions. The dispersion I am seeing in the stock market — some stocks that look attractive technically and others that do not — is likely indicative of this economic separation.
2. Shareholder Enhancement Activities, A Survey
Many people I speak with don’t believe that the credit boom we are experiencing is really making it through to stock shareholders. This is understandable since many stock investors and traders continue to view the stock market in terms of the broader economy. But perhaps this quick survey of conference calls from yesterday will help illustrate what we are talking about in Number Two above:
“With regard to our share repurchase program, we’ve been active in the marketplace and are well on track to achieve at least $2 billion and $2.5 billion in share repurchases over the course of the full year.” — Coca-Cola (KO)
“As noted in this morning’s press release, the Board of Directors approved a new $250 million authorization to repurchase shares of common stock.” — Humberto Alfonso, The Hershey Co. (HSY)
“With respect to distributions to share owners, we paid $500 million in dividends, reflecting a 10.6% increase per share announced during the quarter, continuing the UPS tradition of more than four decades of raising or maintaining our dividend. The company also spent $500 million to repurchase approximately 6.8 million shares.” — United Parcel Service (UPS)
“In early March, we announced that our Board increased Kroger’s share repurchase authorization by $1 billion. We intend to use this authorization during 2011 to create shareholder value.” — Michael Schlotman, Kroger (KR)
Good lord, even the Cheesecake Factory (CAKE) is repurchasing shares.
“We are also targeting at least $100 million toward share repurchases in 2011, $50 million of which we completed during the first quarter.”
And when companies aren’t specifically announcing shareholder enhancement initiatives, analysts on the conference call are asking questions about them, such as in this exchange between Jason Gursky, and Bruce Tanner of Lockheed Martin (LMT).
Q: Jason M. Gursky: Just a follow-up to that question. You’ve got $3.9 billion in cash. You’ve spoken about having $2 billion in excess cash. You’re getting set to generate roughly $3.5 billion in free cash this year. At what point are we going to see an acceleration of money coming back to shareholders, either through share repurchases or through an increase in the dividend?
Bruce L. Tanner: Yes, Jason, I’ll try that one as well. As I said to Rich’s question previously, I think the first quarter was probably a little lighter than it might otherwise have been had we not seen the potentiality at least of the government shutdown occurring. I still feel very strongly that we are going to follow suit for what we’ve done in the past relative to both share repurchases and dividend increases. We always take a look at the dividend increase in our September board meeting. That is our expectation, is that we’ll do that again during that timeframe so you won’t see anything happen sooner than that. And repurchases – without getting into specifically what we’re going to do on a monthly or quarterly basis, Jason, I think the history of what we’ve done in the past speaks for what we’re going to do throughout the rest of this year.
3. To Illustrate…
Again, while shareholder activities are terrific for shareholders, they have little impact on the key economic issue we face, unemployment. The chart below, via Bloomberg, illustrates the dilemma facing the Federal Reserve, which Fed Chairman Ben Bernanke will no doubt comment on in his press conference this afternoon at 2:15 pm.
4. The Original Birther Conspiracy President… Chester A. Arthur
This morning President Barack Obama released his long form birth certificate and held a brief press conference to hopefully put to rest questions regarding his U.S. citizenship. President Obama in his press conference said, “We do not have time for this kind of silliness, we’ve got better stuff to do, I’ve got better stuff to do,” adding, “We’ve got big problems to solve and I’m confident we can solve them but we’re going to have to focus on them, not on this.”
It’s tempting to follow the punditry path that claims this is all part of the unique dumbing down of America by the mainstream media and evidence that our national discourse has devolved into little more than a circus sideshow that no longer has relevance to the real political issues facing this country, but that would ignore history and Socionomics, for the original Birther Conspiracy President was none other than Chester A. Arthur. The Wikipedia entry for Arthur notes that “During the 1880 U.S. presidential election a New York attorney, Arthur P. Hinman, was hired to explore rumors of Arthur’s foreign birth.” At first, Hinman alleged that Arthur was Born in Ireland, but after that failed to take root in the media eventually settled on Canada as Arthur’s original birthplace. See? America has always been dumbing itself down! It’s what we do.
The 1880 election came a mere seven years after the Panic of 1873 and onset of an international economic depression that affected both the U.S. and Europe. Unemployment peaked at 14% in 1876. Interestingly, 1879 is most often cited as the end-point of the depression, and the stock market enjoyed robust gains in 1880, just in time for the Arthur birther conspiracy theories to fall on deaf ears. As The Socionomist newsletter pointed out back in February 2010:
“The October 2003 Theorist forecast that “conspiracy theories will become more plentiful, and more people will believe them.”
[…]
Following Barack Obama’s victory in the 2008 primaries, the “Birther” movement questioned his U.S. citizenship and thus eligibility to hold the office. In early 2008, Cass Sunstein, appointed by Obama as director of the Office of Information and Regulatory Affairs, published an academic paper suggesting that the government ban conspiracy theories and quiet those who proliferate them. The paper’s abstract says, “The best government response [to conspiracy theories] consists in cognitive infiltration of extremist groups.”
5. Patterns of Social Unrest Complexity, Conflict, and Catastrophe
Speaking of Socionomics and social mood, a couple of weeks ago at the Socionomics Conference, John Casti gave a terrific talk on complexity and catastrophe and referenced a recent article he published in Vienna’s derStandard. You can read the translated version here. An excerpt:
“In a society like the USA that is sharply divided in terms of wealth, the rich lead a high-complexity style of life that doesn’t rely on government to supply common needs like parks, education, security or medical care. The “haves” can supply all these things for themselves. In fact, this high-complexity life-style strata of society is one that worries a lot about strong government, especially a government that would reduce its complexity by doing things like raising taxes. This attitude ultimately leads the have-nots to see the already low complexity of their lives become even lower, as a sense of living in an unjust system with shrinking opportunities creates feelings of alienation. Does this sound familiar? Rising food prices, growing youth unemployment and lack of adequate housing and education are exactly the surface causes of the revolutions taking place today in Africa and the Middle East. Question: When will it come to America? We’d like to be able to develop procedures for anticipating when that gap between the rich (read: high complexity lifestyles) and the not-so-rich (low complexity lives) will widen to an unsustainable level. “
http://www.minyanville.com/businessmarkets/articles/stock-sotcks-stock-market-stock-investing/4/27/2011/id/34188
Tags: Birther Conspiracy President, Cheesecake Factory (CAKE), Chester A. Arthur, Coca-Cola (KO), conflict, economy, employment, gap between rich and poor, Kroger (KR), Lockheed Martin (LMT), president barack obama, Rising food prices, shareholder activity, Socionomics, stocks, The Hershey Co. (HSY), U.S., unemployement, United Parcel Service (UPS), unrest, wage growth