10/28/14…on stock buybacks, zero corporate tax rate, and dividends

Quote of the Day from the Friars Club Encyclopedia of Jokes: “Playing Shakespeare is tiring. You never get a chance to sit down unless you’re a king.” – Josephine Hull
Bloomberg Quote of the Day: “Too much of a good thing is just that.” – Brian J. Dent

Bloomberg Top Stories:
*Durable Goods Orders in U.S. Unexpectedly Fall for a Second Straight Month – Futures higher?
*European Stocks Rise With S&P Futures (?) as Krona Falls, Treasuries Pare Drop
*Money Markets Split With Economists on Fed Outlook for Increase in Charge
*UBS Rises as Investors Bet Legal Risks to Ease After $1.94 Billion Charge
*Riksbank rejects Calls for Unconventional Steps After Key Rate Cut to Zero – De-flation???
*Euro Outflows Reach Record Pace as ECB Policies Promote Exodus – ditto!
*Amgen Resumes Share Buybacks, Boosts Dividend as 2016 View Tops Estimates
*Ackman’s $5.3 Billion Allegan Bet Scrutinized by Judge in Valeant Fight
*Long National Nightmare of Ackman-Allegan Drags on in Court
*Petrobras Investors Lose Whether Oil Prices Rise of Fall – that’s Brazil!
*Draghi Dliemna Channels Piketty Inequality Concern as ECB Purchases Assets
*U.S. Ebola Monitoring Rules Toughened While Stopping Short of Quarantine-unlike Christy 
*African Nations Pledge 1,000 More Health Workers to Control Ebola Outbreak
*Don’t Park Your Tractor in Houston, U.S. Capital for Heavy-Equipment Theft

Monday’s Market Summary:

A dull and meaningless Monday with only Dow Transports having anything to show for the effort, +0.7%. The rest trapped between -0.2% and +0.1% (and some of that was only thanks to generous rounding!). This after opening lower peaking around 11am EDT, then struggling the rest of the session. No information value! Only thing was the VIX which barely closed lower at a still bearish 16.04 -.07, but the high end of the range was at 17.87! Note there has not been a high below 17 since 10/6! Given that new 12-month high of 31.06 on 10/15, it is not safe to re-enter the water…er market! A/D’s and Breadth told us nothing but after being below 90 for six straight sessions after peaking at 1,043 (ouch!) on 10/15, new 12-month lows roared back to a bearish 136 from 82, while new lows remain feeble at 161. Total NYSE Volume (just 3.14B shares, and trades on the NYSE floor (760M w/ 130M after the bell), not conducive to anything. True, those real trades were 50M above the 12-month average but look at average for October: 875M!!!

Total NYSE Volume plunged – is this the end of the October high volume? Just 3.06B shares vs 3.76B vs 3.74B vs 3.96B vs 3.3B vs 5.05B vs 6.06B: average volume for October is 3.6B, or about 600M more than the recent average. Shares traded on the NYSE floor – affectionately referred to by TB as REAL volume: for October it is 890M shares!!! This to plunged to 718M, just about the 12-month average, vs 919M vs 802M vs 815M vs 742M vs 1.07B For comparison purposes, for the prior 12 months it is a historically weak 709M shares…but thus far in October, 881M shares – from 895M Thursday – including that HUGE 1.22B share day – highest since 9/19. The lowest was 10/6’s 696M share session. April 30 – September 30 we had just SEVEN 800M shares…for October so far? 14 (this is no time to be superstitious!), including FIVE 900M+ share days.

A/D’s were slightly negative: NYSE: -1.3x vs +1.6x vs +3.3x! vs -2.2x vs +4.5x; Nasdaq -1.1x vs +1.3x vs +2.7x vs -2.8x vs +2.9x; Breadth was little changed and mixed: NYSE -2.1x vs +1.8x vs +3.4x vs -3.7x! vs +5x!!! Nasdaq +1.1x vs +1.9x vs +5.7x!!! vs -2.9x vs +6.3x!!! vs +5x!!! New 52 Week Highs slightly higher at 161 vs 142 vs 171 vs 161 vs 129 – their range for the year is 39-580!!! New Lows sharply higher at 136! vs 82 vs 89 vs 68 vs 56. The 2014 range is 24-1043!!! S&P VIX slightly lower again and remains below those bearish extremes that had a high of 31.06 (highest since 11/28/11!!!) closing at 16.04 -.07 with a range of 16.00-17.87 compared to 16.09-18.06. Remains very bearish and well above 9/18’s 12.03 The average of the past 12 months is 13.94, with a low of 10.32!…high close 26.35 on 10/14!

U.S. bond market closed little changed again weak with the long bond remaining over 3%, and off their recent 12 month low yields (10’s 2.09%; 30’s 2.87%; and long TIP 0.83%), 10’s closed at 2.26% +1/16; 30’s 3.04% +3/32; and the long TIP 0.96% +1/16. Ah, but weaker overnight: 10’s 2.26% -1/32; 30’s 3.05% -1/4; and long TIP 0.97% -1/16.
Libor update: 0.233% 3 mos.; 0.323% 6 mos., both steady and just above new record lows! The Fed Funds rate has averaged 0.09% and is steady at 0.08-0.10%. T-Bills range from 0.01%, one-month, to just 0.10% one year!!! Foreign bond yields mixed and little changed overnight; (Benchmark is 10yr): Germany 0.88% +1; UK 2.22% +1; France 1.29% –; Italy 2.55% –; Spain 2.11% -2; Portugal 3.33% -4; Greece 7.28% -3. 10/16’s close was 8.54%! – cycle low: 5.42%; Crisis high: 12.57%. Japan: 0.45% -1.

Gold closed slightly lower, exactly reversing Friday’s gain at $1229.10 -$2.70, and is again below the 40/50 day m’a’s, following a new recent high of $1255.60, highest since 9/10/14. There have been just two prints below $1200 since 12/31/13 – 10/3 and 10/6 and soundly rejected! Last close above $1300 was on 8/15. 7/17’s session high was $1346.60, highest since March 19th!!! Res is the 40 day at $1230, the 50 day $1241, and the 200 day at $1284. Recent high was $1392.60 on 3/17, highest high since 9/4/13. Jan. 2’s low was $1181.40 – A MULTI-DECADE LOW!!! Overnight it is weaker at $1228.10 -$1.00. Silver still holding in low $17’s, after falling to $16.64 on 10/3 – lowest since 2/9/2010 and very close to $15.73, a multi-decade low!!!

Crude took a huge header early to $79.44 – lowest since 6/29/12, then came back to close at $81.00 -.01?!?. 10/25’s high $84.83, low $79.78, had defined October’s range. There have been 28!!! handles since peaking at $107.73 on June 13th at $107.73 highest since 9/19/13 (a huge down session which put it in freefall. The record high of $147.27 was on 9/30/08, the low since on 12/30/11 is $74.95: $93.60 is the midpoint!!! Recent rally high and close are $110.70 and $110.53 respectively. RES at the 40 day ($88.92), then the 50 day ($89.99), and lastly the 200 day (98.40) – all declining fast! The range is now $79.78-$112.24 since 3/1/12. Overnight slightly higher at $81.39 +.39 in an inside session.

European equities higher, Asia mixed: UK +0.6% vs -0.6% vs -0.2% vs -0.9% vs +1%; France +0.6% vs -1.4%! vs +0.2% vs -1.3%! vs +2.1%! Germany -+1.6%! vs +1.4%! vs +0.4% vs -1.4%! vs +2%! Japan -0.3% vs +0.6% vs +1% vs -0.4% vs +2.6%! Hang Seng +1.6%! vs -0.7% vs -0.1% vs -0.3% vs +1.4%; Korea -0.3% vs +0.3% vs -0.3% vs -0.3% vs +1.1%! India +0.5% vs -0.4% vs +0.2% vs +0.8% vs +0.8%. U.S. equity futures higher: Dow +44 (range 86); SPX +5.50 (11); NDQ +16 (20).
Some random thoughts:

In Sunday’s MN Star-Tribune an article caught TB’s attention, praising stock buybacks…it was wrong and finally in the last few paragraphs commented on the alternative of raising dividends.
Knowing something about these over the last 42 years plus studying them in grad school, TB felt obliged to comment to the writer of ‘Buying back stock can be the best option’ – oh, really?

First, these are not your grandfather’s stock buybacks for two reasons: back in the day, a buyback meant ‘retiring’ the shares repurchased, thus giving the holder more bang for the buck (like averaging in); second, many of these repurchased shares today, since they are NOT retired, magically are used to offset dilution from exercising stock options, thus concealing their impact!

The best, and only defense for not paying dividends is their double taxation. Go back to the early days of Bush 43, when Larry Kudlow and Jim Cramer, urged Congress as part of the stimulus (sic) tax cuts to reduce the rate on dividends…arguing that 130 million people own shares. That much is true…but those benefitting from the cut are everyone but working individuals! Thus adding to the ‘wealth gap’ which neither believes exists. TB screamed but nobody listened to the fact that those workers are getting them in their IRA/401(k)’s, and thus will be taxed as ordinary income when withdrawn. Shows how stupid (or well compensated) our Congress is! No one raised this point!

Before we continue, TB will recall a conversation with Nobel-laureate Franco Modigliani, who favored a ZERO corporate tax rate. Why? Because no company with a good accountant pays taxes. Instead, they invest in bad investments, or do any number of tax-benefitting things that may actually be detrimental in the long run. Think GE, which hasn’t paid a dime in tax in years.

What about the loss of revenue you say? Well, since the average tax rate of the top 250 companies is less than 10%, that is not a high hurdle. Dr. Modigliani would have eliminated ALL subsidies, AND taxed dividends as ordinary income, thus eliminating the double taxation argument! He died a few years ago, with his daughter continuing the fight, and now some ‘informed’, honest members of Congress have re-introduced the idea. Now try to get past the subsidy ‘benefiters’! ADM’s subsidies exceed their bottom line if you can believe that!

Far and away, the vast majority of hard-working Americans should favor this and it would beat those ‘tax scofflaws’ (ok, opportunists), would look foolish – that alone is worth trying it!

Now back to those stock buybacks. The best argument is they give more bang for the buck – and they do: in the short-run! After all, fewer shares means a higher stock price, ceteris parabus…which it never is! The benefit is taken by short-term investors…hedge funds, etc. who pester management to do just that, rather than boost dividends. This runs parallel to the CEO’s thinking since he is no longer a long-run planner but managing for the short-run: his own tenure, or shorter!

Lastly, some years (a decade or more?) ago, TB read an article by a Goldman Sachs investment banker. He said that when he talked to management that was constructive on the outlook for the company but the stock was declining, he would encourage them to show their confidence and do a stock buyback: not once could he recall them taking him up on it.

Yesterday, on CNBC there was a discussion on stock buybacks. One defended them, the other cited WalMart and Apple, saying that the dividends should be increased…for different reasons: WalMart to temper the greed of the family who refuses to pay workers even a living wage and thus gets a huge subsidy in the form of food stamps and healthcare to employees (bet they weren’t opposed to the ACA!), and Apple which just keeps piling up surpluses while paying a puny 1.7% dividend…and creating more products of less and less value to shareholders.

Thus it appears that buybacks are most often used when the stock is above fair-value, and is an attempt to boost it higher. Not good for the long-term investor. But then…you decide!

Have a great day!

TB

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