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March 27, 2017 - What's Really Driving This Recovery? - The Answer!

| March 27, 2017
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Last week, the S&P 500 lost 1.44%, the Dow was down 1.52%, the NASDAQ gave back 1.22%, and the MSCI EAFE declined 0.07%.[1]

On Tuesday, March 21, the S&P 500 and Dow recorded 1% declines for the first time since Oct. 11, 2016.[2] By Friday, the S&P had posted its worst week since the election.[3] At the same time, 10-year Treasury yields fell and the dollar dropped for the second straight week.[4]

What happened?

As is typical, no one predicted this, which means no one knows what this week will bring either.  How does it make you feel to be paying market advisors to advise you on things they cannot see coming?  Yeah, me too!  

So what's really driving this recovery?

Two weeks ago I suggested that the current market recovery was built on nothing more than smoke and mirrors.  I told you one day I would write an update that focused on exactly what is driving this unprecedented stock market recovery.  Remember the question?  How does a stock market grow at double digits when the economy and middle class incomes have been stagnate for over a decade?

So here it is folks.  The answer!  Forward this email to everyone you hold near and dear, and enjoy!

The Fed’s uber-accommodative monetary policy has created an environment in which corporate bosses can borrow boatloads of money at historic low rates, which they then use to purchase their own company’s shares.  When a company reduces the number of outstanding shares on the market, stock prices move higher which provides lavish rewards for both management and shareholders.  

This unprecedented buyback binge has gotten so crazy, that buybacks finally exceeded profits in two quarters back in 2014. Here’s the story from Bloomberg:

“Companies in the Standard & Poor’s 500 Index really love their shareholders….Money returned to stock owners exceeded profits in the first quarter and may again in the third. The proportion of cash flow used for repurchases has almost doubled over the last decade, according to Jonathan Glionna, head of U.S. equity strategy research at Barclays Plc.”

It is “barrowed Buybacks” that have fueled one of the longest rallies of the past 50 years as stocks with the most repurchases have gained more than 300 percent since March 2009.” (Bloomberg)

Still not convinced?  Get a load of this quote from Morgan Stanley via Zero Hedge back in 2015:

 “In 2014, the constituents of the S&P 500 on a net basis bought back ~$430Bn worth of common stock and spent a further ~$375Bn on dividend payouts. The total capital returned to shareholders was only slightly less than the annual earnings reported… US corporations have essentially been issuing record levels of debt… to buy back record levels of common stock.”  (“Buyback Bonanza, Margin Madness Behind US Equity Rally”, Zero Hedge)

The simple truth is, over the last 8 years, the market has recovered ONLY because S&P 500 companies have BORROWED money to buy back their own stock.  Consequently, this has ARTIFICIALLY and TEMPORARILY served to inflate stock prices.  If you take the BORROWED money away, you take the stock buybacks away.  If you take the stock buybacks away – no stock market recovery!  Amazingly, this is all being done in plain sight.  No one is hiding it because everyone on Wall Street knows that the masses of people who fund 401k and IRA accounts aren’t watching, and, even if they were, none of them really understand the cause and effect of any of this stuff anyway.   

Still not seeing it?  Here’s another quote from Reuters in 2015, that stated spending on buybacks and dividends hit a new record and exceeded companies’ combined earnings by nearly $40 billion for the full 2014 fiscal year.

From the report…

“In the most recent reporting year, share buyback purchases reached a record $520 billion. Throw in the most recent year’s $365 billion in dividends, and the total amount returned to shareholders reaches $885 billion, more than (all) the companies’ combined net income of $847 billion.”

The analysis shows that among the 1,900 companies that have repurchased their shares since 2010, buybacks and dividends amounted to 113% of their capital spending, compared with 60% in 2000 and 38% in 1990.

It should be obvious to everyone that companies can’t spend more buying back shares and paying out dividends than they earn – at least not for long.  But that’s exactly what they’ve been doing, basically since 2009. 

In 2015, Goldman Sachs (and others) documented that in the U.S. S&P 500 companies bought back over $1 trillion worth of their outstanding shares.  That doesn’t even begin to count the dividends they paid out. 

Where did the money come from? 

In the first quarter of 2015, the 500 largest publicly-owned companies in the U.S. paid out more capital to shareholders (through dividends and share buybacks) than they earned from their business operations

So, there you have it.  For the last 7 years, our great stock market recovery has come as corporations have been BORROWING hundreds of billions of dollars (ultimately from tax payers if you understand how the Feberal Reserve Bank prints money).  And this corporate debt has been parceled out at historic low interest rates (rates that have literally never seen before), then these companies have used this cheap capital to repurchase shares in order to boost stock prices. 

All of this creates an appearance of a recovery, when in reality, what has actually taken place is a weakening in the capital structure of every single one of these major US corporations by an unprecedented piling on of billions and billions of very REAL DEBT.  (It’s worth noting that “highly rated U.S. nonfinancial companies” are now more leveraged than they were in 2007 just before the crash.)

But Jeff, you say.  You’re just a kill joy.  Aren’t you being too pessimistic? Can’t you just be happy that stocks are up? Maybe stocks would have risen anyway due to record high earnings and improvements in the economy. That is possible, isn’t it?

Nope. Not according to Morgan Stanley at least. Check this quote out:

“Since 2012, more than 50% of Earnings Per Share growth in the S&P 500 has been driven by buybacks, and growth ex-buybacks, has been a mere 3.3% annualized.

Did you catch that?  “More than 50% !“  In other words, more than half of the EPS growth in the stock market has been completely fabricated with BORROWED MONEY.  

It isn’t real folks!   

There’s your market summary in one damning sentence. No buybacks means no 7-year stock market rally. Period.  If it wasn’t for debt financial engineering and the Fed’s easy money, today, stocks would be in the same general location as the real economy…  Circling the plughole on its way to stagnation stinkhouse!

So here’s my question:   Why would anyone want to continue to trust debt drunk Wall Street and their financial tricked up stock prices to maintain their retirement (life) savings as they move through retirement?  The good news is, you don’t have to.  You can be protected from the coming debt collapse.  You can beat the system and make these fabricated stock price increases permanent for yourself by cashing out before the greatest stock market crash in history wipes middle class wealth from the face of the planet.  

Call me and I can show you real gains, permanent gains, with zero fees and a lifetime income - guaranteed!  Retirement grwoth and income you can count on.

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