THIS IS MY 154TH BLOG ON UNDERSTANDING MONEY
TOOLS
January, 2019
Time on my hands, time to write another blog.
What a trip in the stock markets over the past 3 weeks. We went from a ton of selling to
normalize stock values, to the government stepping in with the “Plunge
Protection Team”. As I write there
is an up-tick market. Why is this
happening, when we should be continuing on a down-trend market to equate to
what is happening worldwide and to earnings? The P/E for the DOW average is still around 20:1, or 25%
overpriced to historical averages.
The end of December the “Plunge Protection Team”, consisting of the
large banks and the Federal Reserve, set benchmarks one day for a DOW of
23,000, then the next days at 22,750.
Loved to watch the gyrations in trading patterns.
Let’s re-visit three things I always profess with some
common sense: Most things are “Cause and Effect”, “Debt Kills” (whether it is private debt or government
debt), and “Never Assume” anything.
The term “investing” today is too much a misnomer. It is “gambling” for the basic public,
and calculated risk taking for Wall Street. If you aren’t on the inside, you are “gambling” with your
money and retirement funds.
I base my “assumptions” on facts; I can still be wrong. The market the past few days has slowly
gone up, when the facts on corporate earnings for this year and trend lines
indicate downward pressures. (In
tech you have Apple missing it’s earnings and Samsung reported 4th
quarter earnings down 29%…macro economic uncertainties for future profits.)
From what I hear and know, US corporations are buying in
their stock. This does a few
things: 1) it shrinks the “float” of their daily traded stock, 2) it increases
the price of their stock and the markets go up, 3) this increases their
liabilities on a balance sheet as debt if they borrow the money, or decreases
their assets on a balance sheet if they use cash on hand or liquidate other
assets to buy stock.
If you are sitting with a ton of cash like Google or
Microsoft that is one thing, however if a company borrows money that is another
issue, and can be quite dangerous down the road. If a company is buying it’s stock at a high Price to
Earning’s Ratio it may see problems if the economic environment deteriorates
over the next two years, which I expect.
If you are one of the major US banks and a participant in
the Plunge Protection Team the effects could also be deleterious in the long
term. Why is it dangerous for
banks to step into the markets and buy stocks, as an executive order from the
government? If you answered the
following, you are probably in the ball park: 1) In 2008-2010 the government
mandated a “mark to market” valuation of real estate held on the books of
banks. That means that if the bank
held a loan basing the value at a certain price, they needed to adjust value
periodically. In 2008, the banks
went under as the value of real estate went down. The same could be said for other assets like stocks. And, 2)
These banks have less liquidity to lend money to businesses and Americans, as
they need to concern themselves with “capital requirements” regulated and
mandated by the Feds.
Buyers of stocks must consider the new Democratic
Congress. Higher tax
increases will be proposed. It
will be interesting to see if they can get the proposals through the Republican
held senate. I think little will
be accomplished the next two years.
Bottom line to this blog is that I believe we are in an
unrealistic stock market climate.
Few economists think this year and next will be great for earnings, and
a cycle down-turn is in store. Too
much has been aligned with President Trump and his abilities to accomplish what
he intended from the on-set, versus reality. Such things as the “trade wars” and tariffs are big talking
issues, but will not produce much positive effect, even when there is an
outcome produced.
NOTE: If there
is a term used in these blogs that you do not understand, please refer to
previous blogs as I cannot re-define with each blog I write.
Thank you.
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