Mike explains why he believe the trend for stocks is downward, however; you have time to exit – as the market is being manipulated to the benefit of all investors – but investors should look to take profits and exit.
Are Share ‘Buybacks’ – Stock Market Manipulation ?
Many club members are invested in the stock market. Stocks have been in an 8-year secular bull market, however; I have recently seen some market sell off and with rising interest rates – it is certain the market will see a lot of downward pressure over the next few years.
That said, there is one market situation that I define as “manipulation” that will cause stocks to have a soft landing – which is good for all investors. This situation is the stock market’s biggest buying force and is the single largest driver of share purchases in November. It is called a stock buyback program.
In a stock buyback program, a company repurchases its own shares from the open market and that leaves the remaining shareholders with a bigger chunk of the company and increases the earnings they reap per share. Stock buy backs will exceed a staggering $1 trillion in 2018.
In fact, October was weak in the stock market because companies were barred from buying back their own stock and this is the main reason for the October rout. The reason they were barred from the buy back is they are unable to do so during the time frame around their earnings releases – due to regulatory laws.
Companies have been borrowing money at very low rates of interest to rebuy their own shares. Share buy backs average $3.3 billion per day with new companies announcing buy back programs daily !
Corporate executives and insiders are taking advantage of the stock buyback boom to sell shares they own while their companies are simultaneously buying shares. Here are just a few examples:
Mastercard CEO AJA BANGA 44.4 million.
Oracle Corp CEO: Safra Catz $250 million. The sales happened the day after the company announced a $12 billion share repurchase.
It is not a coincidence that Apple’s market cap exceeds $1 trillion dollars as it announced a $100 billion share buyback.
Harley Davidson announced a $700 million stock buyback and the day after announced a plant closure in Kansas City.
Wells Fargo is spending $25 billion on share buybacks at the same time laying off thousands of workers.
There are thousands of examples of this.
It is common for executives to act in their own self-interest and use buybacks to cash out of their stock holdings. In many cases executives are selling while telling the public their stock is cheap to buy. This is perfectly legal under the current rules!
The fact is, however; these share buy backs do not create a single job or new investment in capital like factories or corporate infrastructure. In fact, share buybacks is where the majority of profits have been going – from corporations (whose tax rate, under Trump, was dropped from 35% to 21%).
There is nothing illegal about share buy backs. That said, I disagree with it as it does very little for the economy, however; my focus here is to provide guidance to our members.
Many other developed countries have much more restrictive stock buyback programs that require much more disclosure but in the USA that is not the case. This is the type of game that is rigged in favor of the superrich and will never be changed.
I alert members to ensure they are informed, can take advantage of trends – and benefit.
So here is my guidance:
With a rising interest rate environment – your 401ks, your IRAs and your stock positions are likely to show a downward trend, however, this share buyback program will make it a very soft landing and gives you several months to exit out of the stock market as share buybacks are creating “artificial” stock purchase demand. Mutual funds have seen a net outflow of $87 billion this year from retail investors (year to date). The share buyback keeps the stock market going – even as many retail investors are exiting because the buybacks exceed the retail money exiting the market. In fact, buybacks are the largest source of demand for shares.
i want members to take note that the stock market is trading at about 18x times earnings which is at historically high levels and any investor should be wary of being invested in the stock market at this time.
Don’t be fooled, as the trend for the stock market over the next few years is downward and don’t take the unwise advice of your financial adviser who may say “you are in this for the long term – so stay the course”. That will be a long slow walk to the poor house. Remember more than 85% of money managers underperform the market index.
If, however, the Federal Reserve reverses its position and lowers rates then the market will continue to show an upward trend but I believe this is unlikely.
In conclusion, I believe the stock market will trade at a flat level over the next several months and is being mainly supported by the share buyback program. In a rising interest environment, the trend for stocks is downward and this is a good time to take profits and trim exposure.
– Mike Lathigee
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