This Cisco CEO Interview Reveals What Is Fueling Stock Gains - Mike Swanson (12/09/2016)
This interview with the CEO of Cisco appeared on CNBC Wednesday.
It shows one of the factors fueling the recent stock market gains with the trend analysis pointing up.
Over the past few years a huge portion of the buying of stocks inside the stock market has come from corporations themselves engaging in stock buybacks.
To do this though they have borrowed money by issuing junk bonds and going deeper into debt.
This doesn't really help long-term shareholders and investors, but does fuel temporary technical analysis stock gains and insiders have used them from time to time to dump and liquidate.
Stock buybacks increase earnings per share growth by reducing the number of shares outstanding, but this creates a "profits without prosperity" as explained by an award winning article published by the Harvard Business Review, because it does not come with revenue growth or any real company expansion.
It creates an economy that seems to grow thanks to financial engineering.
This is why GDP is growing while global world trade is shrinking.
This dichotomy between an illusion of growth and masses of people not benefiting from it is really what has fueled the rise of global populism and the victory of Donald Trump.
There is a story in today's Wall Street Journal titled Hooked on QE: Hedge Funds See Dangerous Addiction in which dozens of top hedge fund managers worry about this.
Here are some quotes:
What does a market do? It’s a voting mechanism,” said Michael Hintze, billionaire founder of hedge fund CQS, which runs around $12 billion in assets. “Instead you’ve got this 800-pound gorilla out there who’s hoovering up assets.
“There’s a misallocation of capital and an opportunity cost to the real economy,” added Mr. Hintze, whose portfolio is up 30% this year, ranking it one of the world’s top-performing hedge funds. “It means GDP is not growing as much as it might.”
Some put it even more strongly.
“It’s definitely destructive of economic growth,” said Crispin Odey, founder of Odey Asset Management, which runs $8.2 billion in assets.
Those side effects include “envy and distress” within society, “as people think ‘I can’t get out of where I am,’” said Andrew McCaffery, group head of solutions at Aberdeen Asset Management, who looks after $170 billion in assets.
Ultralow interest rates mean the large part of the population with few financial assets begins to despair of how to generate income to fund retirement, he said.
“People see a developing black hole,” he said. This “increases the sense of there being little to lose for many” people.
Full story here.
However, we have seen a big rally in the stock market since Trump's election on the basis that Trump is going to make serious changes that will bring growth by lowering taxes and increasing infrastructure stimulus spending. He also has advisors that want to end zero rates and QE style money printing programs.
That would mean more profits for banks and so bank stocks are soaring.
He also wants to get corporations to bring their money back into the US.
He'll put a small tax on that money and use it to help fund his programs.
But this CSCO CEO interview reveals that if he does it he will use that to do more stock buybacks and financial engineering games like M&A - which CSCO was a master of in the 1990's. He won't actually hire more people, but he will do things to make his stock go up.
In July the stock buybacks began to taper off dramatically and the stock market started to die out and trade like a dead money penny stock.
Now it is trading like the stock buybacks are about to come back to life with corporate money brought back into the US.
Another thing that has happened is that oil prices have gone up in the past few weeks, which has helped oil stocks start to rally too.
That has helped put a bid in the corporate junk bond market for the time being, which also helps companies issue more bonds for stock buybacks.
So yes I do think Trump's programs will help generate economic growth, but they haven't even been implemented yet.
People do buy ahead of growth, but right now the rally is also being pushed up higher with hopes of more stock buybacks.
But the money is flowing into a new leadership groups that is causing the past fad stocks to lag and be left behind.
This is why stocks like FB, NFLX, AMZN, AAPL, and GOOG have merely gone sideways so far while biotech is falling again!
Which in turn is causing most traders to lag the market, because so many people are obsessed with owning these fad stocks.
So this rally is turning into a panic buy with traders jumping in to buy in fear of missing out.
Many stocks are blasting off like GS while the past fads FADE!!!
The stock market has now reached an insane valuation level as described by Robert Schiller in this video.
From a valuation standpoint this is not a good time to buy stocks with the idea of holding them for years on out as investments (the best times to invest are after declines and bear markets), but is a great time for traders.
A hedge fund manager cannot lag the market and so he must chase and buy.
I personally covered short positions I had the day after the election and did big buying in Trump favored sectors. I sent an immediate alert on this to my private Power Investor members.
But I have even been surprised by the extent of the rally, especially when the DOW took off Wednesday afternoon.
It now has the feeling of turning into a stock market bull market blow-off phase with panic manic buying fueling it.
The thing is now with the Trump win and the talk of people like this Cisco CEO the bull people have something to believe in and they will get even more manic.
I posted an interview I did with Jim Goddard on the sector rotation going on yesterday.
To listen to it go here.
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