BNN Appearance – October 20, 2015

My latest appearance on BNN Television Market Call

BNN Link

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“Returning Money to Shareholders” – a Good or Bad Idea?

Watching BNN today, I noted an analyst who recommended Home Depot because, among other positives, the company had been “returning cash to shareholders by way of share buybacks”. A quick look at the valuation of the company – currently 14 times book value – told me everything fallacious about that statement that I really needed to know. Can you see it yourself?

The company is not returning cash to its shareholders at all. It is buying 7 cents of its own cash in the bank and paying $1.00 out of its own treasury for that 7 cents. That means that each and every shareholder is being diluted, not enhanced, but diluted, by 93 cents for every dollar that the company has spent repurchasing its own stock. The “winners” in this deal are the shareholders that have wisely sold their shares to Home Depot and thereby avoiding being diluted themselves. A look at the SVA chart of HD on our client website shows in fact that the book value per share is falling – not rising, but falling – creating negative value for shareholders.

Now, because there is a sort of fad these days that says that buying back stock (returning cash to shareholders) is a good thing, the share price of HD has managed to hold up for the time being, but there will come a day – there always does – when existing shareholders discover that they, too, should have been selling to HD as well, because what has been happening is that the book value – your pillow of fundamental value at night – is getting thinner and thinner. 

And the same goes for any company that is selling for a multiple of book value in the market. These companies should be issuing stock and increasing the book value (and cash on hand for expansion) for their shareholders, not p—ing their money away to suit the fashion of the times.

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The Wheels are Coming Off the American Wagon

From the spate of news reports on the state of the US economy, I sense that the wheels are coming off the (hoped-for) endless ride. The employment numbers were just not all that promising, and the trade numbers are suggesting that the US dollar is too high. I am sure that the US authorities would like to see higher interest rates and a lower dollar, higher rates so that if, as, and when a real slowdown [read recession] comes, they have something to fight it with besides monetary stimulus, and a lower dollar to help American business. Of course, what they might wish for and what is possible are two different things altogether.

The failure of the Fed to raise rates when they “had a chance” is a testament to the reality that there really was no chance, despite Janet Yellen’s loud protests to the contrary. That then raises the question, if there really is not strong “recovery” for 2016, then what should we expect? For my part, I look at the financial condition of Japan (awful), Europe (next to awful, especially some countries such as France and Italy), China (perhaps over the Atrill Curve peak and in need to debt reduction), and the US (right on the cusp of their own “black hole” (see Black Hole Economics on this blogsite). I do not see daylight!

I am inclined to be a buyer of gold and gold stocks at the present time, as I think that perhaps they have been in the doghouse for too long and may be about to emerge. Politically, strength in gold prices is an affront to central bankers everywhere and a rebuke of their own incompetency. Both cases are true – they are incompetent, and deserve rebuke. With Japan’s economy on the verge of collapse, and Europe in a mess, gold could shine without US dollar weakness. An about-face and an implementation of additional Quantitative Easing in the US would, I suspect, have a powerful impact on gold prices – and I think that one is coming.

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No Inflation Here, Boss

Putative inflation, as measured by standard methods, remains muted. But I use the term ‘putative’ (“supposed”) advisedly. As I have noted before, if you want to know what inflation is doing, ask the lady of the house, or the one who actually spends the money on a day-to-day basis, to see where and how far it goes. Inflation is far from muted on that basis. My wife and I were a bit dumbstruck, for instance, by a notice from the TD Bank (and Aeroplan) that the cost of using those reward miles has just shot up by a stunning 20%. It is a safe bet that credit card awards do not show up in the inflation statistics but virtually everyone with a credit card gets credit card points awards and they are worth a lot less now. The keepers of the sacred statistics may tell us one thing, but the grocery store tells us quite another. And so – it thus justified – interest rates should remain ultra-low, but the prime beneficiaries of low rates are the governments whose balance sheets remain in an horrific condition. And, please observe, those who are arguing forcefully that rates should not be raised by Yellen & Co. continue to be the agents of governments everywhere, starting with Christine Lagarde, managing director of the IMF, who sees – all too clearly – just how weak the balance sheets are of the vast majority of [European] governments.

So…no inflation? In your dreams.

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Japan Continues its Race to the Bottom

As of September 9th, the economic news out of Japan remains bleak, but you wouldn’t know it from looking at their stock market. Japanese GDP contracted at an annualized rate of -1.2% (April-June) versus an estimated rate of -1.0%. Capital spending (CAPEX) declined by 0.9% versus the original estimate of -0.1%. On the political front, Mr. Abe won a second term and he “wants to spread the felling of recovery to every nook and cranny on Japan”. From that, you can read “even more quantitative easing lies ahead”.

As against that news, China is aggressively stimulating to kickstart what is increasingly becoming a moribund economy. However, that news lifted the Japanese stock market up by some 7.7% on the day in the hopes that strength in China will spill over into Japan which has definitely been mauled by the weakness in China.

My ‘take’ on all of this is that the insolvency-induced slowdown of Japan is having its effects on the real economy but the flight to equities to escape the effects of its ‘mathematical bankruptcy’ (a solvency ratio of lower than .289 for the entire economy) continues unabated. The currency collapse and general economic malaise is all well and good to talk about while wringing your hands, but money has to go somewhere and the stock market (hard assets) remains the only place to go.

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General Motors Struts It’s Stupidity

I see that GM plans on buying back stock to fend off the unwanted attention of several shareholders who are/were thinking of filing suit against the company for building up a “cash hoard” instead of giving all of its profits (“returning cash”) to shareholders. Rather than face its tormentors in court – as the company should – it has knuckled under to pressure (including one bozo who demanded a seat on the board (for what reason he merited one, I don’t grasp).

This is the same company that went bust back in 2008-9 and had to go crawling to the governments of Canada and the US for bailout money. And now it is determined to pay out its cash cushion just to fend off greedy speculators rather than face them down in open court and call them what they are, leaches on the face of the capital markets.

Worse than that, when we measure the balance sheet strength of GM today using the SVA “Stability Ratio” as the fundamental measure of balance sheet quality, it turns out that the quality of the GM balance sheet today is only somewhat better than the GM balance sheet in 2008 before plunging into bankruptcy. Indeed, given the highly cyclical nature of the auto business, the Stability Ratio of today would only be rated as reasonably but far from unduly strong. We would certainly not consider that the company is a hoarder of cash!

Looking at the valuation of the company in the stock market, I see that despite the apparently rosy outlook for profits that the stock market is refusing to pay up to the usual highs that the stock enjoyed before 2008-9, and if one of the reasons is that management is willing to back down to any two-bit hyena than it does not merit anything more as the financial risks are too great to bear in another cyclical slowdown.

From my point of view, we can look on this company and happily eschew its stock for any kind of investment – and that is our stance. “Interesting but…”. Put yourself in the shoes of the governments who bailed them out, and the unions who still rely on the success of this company, and the reaction to this story is – or should be – a lot different!

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Japanese Consumer Confidence Bites the Dust

I almost feel sorry for the unfortunate Japanese authorities who keep trying to push on the Quantitative Easing string only to find out that the problem isn’t money or lack thereof. A deeply insolvent national balance sheet – and getting worse – is killing the country, and still their monetary authorities (and prime minister) just don’t get it. 12 months in which consumer spending has been flat (3 months) or down (9 months) should be sending a massage … but apparently not.

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