Quote from 2cents:
equities is hype lalaland anyway but... do u really think whole industry sectors across all of the G7+ economies could engineer stealth stock buy-backs to 'embellish' their PEs and ramp up their respective mkt indexes in concert?... all that for US mid-term elections?? like they'd all be supporting the bush admin? sorry, don't want to drag this into politics at all but just to say... doesn't sound v.likely to me...
reason equities are taking off across the planet is, fears that the world wld enter a global depression in the wake of the internet bubble burst, 9/11, enron etc have now eased, geopolitical tensions are somewhat easing from a few months ago although that may well change if bush gets a majority but even then, who knows, the appetite for more wars just isn't there it seems... rates are back to more normal levels except for japan but they'll get there... in any case unlike the last 2-3 years further rate movements will be both mild and slow which is equity-supportive... and the consumer IS buying and corporates ARE making profits in case nobody'd noticed...
My contention has nothing to do with politics (no idea where that comes from on your part) but everything to do with cooking the books for the benefit of the insiders (so that they may sell their shares at artificially inflated levels). Back in March 2005 when I was studying the said topic for CFA level II, Yahoo happened to announce $3 bil stock buyback plan over the next few years. Many were bullish on the stock then, and argued that the company insiders have a bullish outlook, because share repurchase plan always means the company thinks its shares are cheap, right? I did some EPS calculation along with others I was studying with and concluded it would improve about a nickel to a dime per share per year depending on the time period of the repurchase plan. Let's say they made 50 cents per share in 2005 - that's over 10% PE ratio improvement just by playing with the denominator. No changes in company fundamentals, no changes in free cash flow, no changes in the growth outlook, but their PE ratio, which the general public happenes to pay the most attention to because it is so simple, looks better than ever, or at least better than it did back in the year 2000. So, given that the company itself is buying back shares, the shares must be going up, and the insiders must been buying since then, right?
Maybe not:
http://finance.yahoo.com/q/it?s=YHOO
Yahoo is but the tip of an iceberg. Companies left and right are buying back their shares these days but what are the insiders doing? They are net sellers. They are pretty much transferring their shares to the company coffers, which are owned by the current shareholders but I don't suppose they are running any charities here. Because the capital market has a plethora of share buybacks, the growth in per share earnings of the overall market is being pushed up well above the growth in GDP as earnings are spread across fewer shares of stock. This is akin to changing the color of the stock certificate as to make it more marketable, a la Stock Operator. The bookkeepers merely found a new way to pump the stock up and everyone's is ganging up on it (and there's nothing "stealthy" about it, it is done out in the open but most people, even analysts that follow these stocks do not bother looking beyond the smoke screen, or don't bother letting the general public understand the mechanics behind it).
Granted the US economy has shown incredible resilience (as CNBC cahoots like to say) in the past few years but this market is currently being driven up by hope, and no matter how much I flip through macro economic factors there is nothing concrete about the softlanding scenario. I may buy an individual stock that's hitting the 52 week high, and avoid a stock that's at the all time low, but I don't buy into the market that's hitting the all time high after a dozen consecutive double digit earnings growth along with historically high profit margin - I'd sell into it and buy when fear dominates and climactic selling is exhausted. The sun rises to the top at noon then sets, but usually the hottest part of the day is around 2-3 PM. I contend that the market is no different.
Just my 2 cents.
