“Debt Gone Wild” – Debt Funded Stock Buybacks Soar
I penned an article recently discussing the many measures that corporations have used in recent years to ”beat” Wall Street estimates. Of course, the beating of Wall Street estimates, so adamantly adored by mainstream media, always ignores the fact that estimates are continually reduced so that companies to ”beat” them. This is the equivalent of moving the ”target to the arrow.”
This ”target moving” can be clearly witnessed by the quarterly movement in estimates over time. Dr. Ed Yardeni regularly publishes the trend in earnings estimate revisions over time. From the initial to the final estimates, the overstatement has been roughly 33% on average.
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Most importantly, notice that during the two ”great bear markets,” starting estimates continued the previous trend of ”bullish hopes” that were quickly quenched by ”bearish realities.” In other words, Wall Street never saw the coming ”bear markets” and led investors to their demise.
With estimates once again being ratcheted down to meet current economic realities, it is not surprising that forward expectations remain extremely optimistic. ”Hope” springs eternal.
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But, therein lies the problem. If we assume that an investment into the S&P 500 index was made at the beginning of this year, the valuation was 16.26x earnings based on the then estimated earnings of $126.57 for the year. As of June 2015, that valuation rose to 17.20x earnings, a 5.8% increase. The problem is that the valuation rose not because of a substantial increase in the ”P,” but due to a decrease in the ”E.”
Given the deterioration in the profit picture, by the time the end of 2015 arrives, the valuation of that investment is likely to be even more unattractive.
This brings me to the current problem. It is not just the deterioration in earnings that is concerning, but also the ”quality” of those earnings. While there has been a consistent droning of articles and analysis suggesting profit growth is still strong, it is how those ”profits” are being achieved that is concerning.
As I suggested above, corporations have been using a variety of measures from cost cutting to
Source: http://www.philstockworld.com/2015/06/22/debt-gone-wild-debt-funded-stock-buybacks-soar/
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