Search This Blog

Saturday, November 18, 2006

Twilight Zone Stock Market

I haven't posted anything on the economy lately. I guess that's because there are so many others who are more eloquent and educated than I am. They also have a better finger on the pulse of the markets and news. I'm a dillettante in investing and economics, while these other guys have day jobs doing this. That's why I don't have very much original to say about the subject.

The links to the right are the ones I trust to be least conflicted about reporting what's really happening in the economy - as opposed to watching CNBC.

Anyhow, I was lying half-asleep the other morning and an odd thought crept into my head about the market and its unusual bouyancy (Dow making new highs) in the face of some very difficult macro conditions (housing meltdown, auto manufacturers collapsing, etc). I say 'odd' because the stock market is not usually something one would expect to be swirling in my cortex at 3:30 AM

Interestingly enough, the bond market and copper futures are unmistakably forecasting a hard landing. Copper being such an excellent leading indicator of economic health that it's known as "Dr. Copper"

Of course CNBC is ignoring the grown-up investors: copper and bonds. Rather than keeping the public informed, they're doing the rah-rah cheer for speculative fools and the general public - which are probably one and the same :)

Anyway, on to my groggy waking-moment theory: What I thought might be helping to keep the market bouyed up is share buybacks. There has been record-breaking share buyback activity taking place by companies with cash on hand - as opposed to using the cash for acquisitions or investment in new equipment (capital expenditures, or "capex"). Not exactly an original idea - here's the original idea:

The reason behind the unusual level of share buybacks as opposed to paying dividends or capex spending: Sarbanes-Oxley. Among the provisions of "Sarbox", as it's called is this (from Wiki): "Significantly longer maximum jail sentences and larger fines for corporate executives who knowingly and willfully misstate financial statements, although maximum sentences are largely irrelevant because judges generally follow the Federal Sentencing Guidelines in setting actual sentences"

My basic waking thought process being that these guys can no longer cook the books in association with Arthur Andersen. The only way they can make the earnings per share look good in this challenging macro environment is to have fewer shares floating around the market. So they buy them (at these high frigging market prices) with their shareholder's (my!) cash.

Then they get great big stock options that they can exercise today, bonuses today, and pay raises today. Meanwhile the company that I've invested in is cash-short as we begin the painful slide into a recession. Anyway, that's my hypothesis, and not being an insider (or even very competent at reading shareholder reports), I have no way of proving it or disproving it.

No comments: