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Arnold Landy
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Arnold Landy is a registered investment advisor, managing clients' funds since January, 2006. His previous careers include: small business owner, analyst for "The Value line Investment Survey," urban planner/analyst for State of New Jersey, school teacher in Jersey City, carny at state... More
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    Stock buybacks do not automatically produce higher stock prices, although in recent years they have become popular and their very announcement often has kicked share prices upward. A buyback does raise earnings per share by lowering the number of shares outstanding; and each investor's shares then represent ownership of a greater proportion of the company than before. However, the company is theoretically worth less overall than before, having spent whatever cash was required to do the buyback. And the necessarily weakened balance sheet justifies a lower PE ratio for the shares than would have been the case had they retained the cash. That's why leveraged companies typically have lower price-earnings ratios than their financially stronger competitors: as Southwest Airlines (NYSE:LUV), has a stronger balance sheet and a higher PE than Delta (NYSE:DAL), which has a stronger balance sheet and a higher PE than United (NYSE:UAL). While other factors, i.e. growth prospects, are even more important, a weaker balance sheet does tend to increase the volatility of earnings (especially if the buyback causes debt to be incurred or retained) and tends to reduce the price-earnings ratio.

    Value is realized from the buyback only as a stock subsequently trades at a higher price, for whatever reasons, because each investor then benefits from having bought back shares (collectively, through the buyback) at lower prices than the current price.

    However, if the share price subsequently falls below the buyback price, the buyback then has made the investor worse off because he/she would have participated collectively, along with the other shareholders, in buying back shares at higher prices than the current price, which would be a loss in value to the company and its shareholders, rather than a gain.

    Legendary investor, Warren Buffett, in touting Berkshire Hathaway's (NYSE:BRK.A),(NYSE:BRK.B) hefty investment in IBM (NYSE:IBM), has repeatedly cited the latter's aggressive share buyback program as a major positive. Indeed, IBM has shrunk its total number of shares by about 50% over the past eighteen years, and its stock price, dividends, and earnings per share have risen over that period of time. However, since the stock price peaked in March, 2013 @ $215 , IBM's buyback program has become a double-edged sword for its shareholders, who collectively have been paying more for the bought back shares than the recent price of the stock ($140).

    Nov 03 1:51 PM | Link | Comment!

    Initial claims for unemployment insurance are turning downward, implying that the US labor market is about to shake off its recent weakness. After rising near 400,000 during the end of the second quarter, the most recent weekly figure has fallen to 353,000 and the four-week moving average dropped to 367,000. The most recent figure appears to be free of any distortions from recent changes in auto assembly schedules, and there were no unusual work disruptions or major seasonal adjustment factors.

    To put this data into perspective, in 2007, at the end of the last boom, initial weekly claims were running in the low 300 thousands, and then soared to the mid 600 thousands during the depths of the last recession. A year ago, with the economy recovering, initial claims were running just above 400,000. So, we have seen steady improvement since mid - 2009, with some faltering during the second quarter of this year, as economic growth slowed.

    Initial claims for unemployment insurance is an important component of the Conference Board's Index of Leading Indicators. Among those indicators it has a relatively short lead time signaling changes in the economic growth rate. So, look for continued drops in initial claims in the next few weeks to signal an imminent pickup in economic activity and job growth.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: economy
    Jul 27 7:52 AM | Link | Comment!
  • Austerity or Stimulus: the Recent Evidence
    The 2009 Obama stimulus package had a positive effect on our economy, although  there is no telling exactly how much.  Obama's economists argued that Congress needed to enact it in order to prevent the unemployment rate from soaring above 8%.  Of course, after enactment the rate actually rose above 10%, at its peak.  We just do not know what the rate would have been in the absence of stimulus.  At this point, the stimulus package has run its course and we are left with its $800 billion cost added to our national debt.  And one can argue that an economic recovery already was in the cards in 2009, stimulus package or not, since the recession officially ended in June, 2009, just four months after passage of the stimlus package and well before much of the stimulus money had been spent.  While we can presume that the stimulus muted our economic decline, we must now ask the follow-up question:  How much better off are we today, compared to the counterfactual?  Nobody knows the answer.
    One reason that I supported Obama's stimulus package was that the country was in a panic and we needed something positive to believe in.  The stimulus package stemmed the panic and raised the economy's animal spirits, somewhat.   In addition to actually saving some jobs (especially through direct aid to the states),  it helped the economy because the public  believed it would.  The placebo effect.   But will it work the next time?  The public seems to think that we are still in recession and that our government's efforts have failed to turn around the economy.  I recall hearing of a poll that found that more people believe that Elvis is alive than believe that deficit spending boosted our economy.  So, next time we have a financial crisis, or even a recession, there likely will be little support for Keynesian stimulus.  And, lacking widespread faith that stimulus actually works, its enactment during future recessions may have little positive effect on animal spirits in our economy.
     Regarding Europe, austerity (raising taxes while cutting public spending) seems to be contributing to an economic slowdown.   But, it is hard to separate out the effect of austerity alone, since it has been accompanied by a dimunition and, possibly, reversal of capital flows as countries are unable to borrow as much from outside their borders as previously.  Loan money is no longer flowing into Ireland and Spain to finance their real estate bubbles.  Likewise, capital flows into Greece are diminishing as the government curtails its spending and indivduals and businesses become motivated to send their capital beyond its borders.  So, Greece's decline is unavoidable, but it is hard to say how much is due to tax increases and government cuts, as opposed to the severe tightening of its capital infusions.   The German economy, too,  is slowing, even with no sudden changes in fiscal policy, tied as it is to the Eurozone.
         The best test of the impact of austerity lies in a comparison of the US with the UK.  Both countries control their own currency, both dealt with their credit contractions, but the UK switched to austerity after its last election, while the US has put off tax increases and meaningful spending cuts until at least 2013.  So far, growth in the US is marginally higher and is starting to accelerate, while the economy in the UK remains moribund.  Austerity or stimulus?  So far, the US appears to be on the preferred course.  Let's see what 2012 brings.  The jury is still out.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: Economy
    Dec 02 8:57 AM | Link | Comment!
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