Share the Wealth – October 20, 2017

Registered Investment Adviser Caleb Lawrence 

The major averages enter the final hour with modest gains on generally better than expected data, notwithstanding GE or General Electric’s huge earnings miss, more on that in a minute.

Existing Home Sales snapped a string of declines in September beating expectations with a .7% gain to 5.39 million units annualized. The median price slipped to a 5-month low of $245,100 but remains 4.2% higher than a year ago. Month’s supply held steady for a 5th month at 4.2. On a regional basis the hurricane ravaged South fell for a second month down .9%. The West reversed much of the previous month’s loss with a gain of 3.3%.

Like Tesla that missed its Model 3 delivery targets by 83% leading to a material share price plunge as one would expect, Tesla managed to finish the day up nearly 2%. Along comes GE who misses earnings by nearly 50% leading to an 8% plunge in its share price, as one would expect. While not quite as resilient as Tesla, GE enters the final hour about even, because nothing seems to matter anymore.

An analysis of McDonalds share price by Michael Lebowitz at Real Investment Advice shows the chicanery of corporate share buybacks, something that was considered stock price manipulation, and for good reason, until a rule change in 1982. While share buy backs have moderated some since early 2016 due to the burdensome corporate debt levels they have engendered, it’s worth noting that they peaked in late 2007 after a dramatic increase that year. The reality using McDonalds as an example, is far from unique and very common following several record years of debt and cash flow funded buy backs. Despite a 12% decline in revenue since 2012, McDonalds Earnings Per Share advanced 17% over the same period. At the same time Generally Accepted Accounting Principles or GAAP net income fell 8%. This destroys the efficient management, cost cutting thesis, leaving share buybacks as the answer. The 20% reduction in shares outstanding, compliments of the buybacks enabled the company to improve earnings per share, what Wall Street cares about, even as earnings in Dollar terms were falling. Adjust earnings to reflect this decline in shares and earnings actually fell 7% a figure more in line with the 12% revenue and 8% GAAP net income declines. With Earnings half or the P/E or Price to Earnings ratio another benefit is achieved through the magic of share buybacks. Mr. Leibowitz notes a P/E Ratio of 25 post share buy backs. Without buy backs the P/E Ratio jumps to 30. Other items of note include shareholder equity falling from +15.2 billion to -2 billion compliments of the debt used to fund the buy backs that increased 112%. But don’t worry, it’s not considered share price manipulation any more, just good corporate governance in the name of asset stripping for the benefit of the insiders and to a much lesser extent shareholders.

Share the Wealth – October 19, 2017

Registered Investment Adviser Caleb Lawrence 

The major averages opened lower and enter the final hour with modest losses on the 30th anniversary of the original flash crash of late 1987 after mixed but not overly significant data.

Bucking the weak industrial production data, the Philadelphia Fed regional manufacturing index jumped 4.1 points to a very strong 27.9 in October on strength in the employment component that surged 24 points.

The latest Fed Beige Book on regional economic conditions showed more of the same moderate to modest economic expansion and tight labor markets, so long as you don’t count the 95 odd million folks that have given up on employment in the post crisis period as measured by the labor force participation rate. Districts impacted by the hurricanes showed notable stress, as expected. On the subject of hurricane driven economic impact. BlackKnight released its September Mortgage Report and noted significant jumps in delinquency data for Florida and Texas. The 9% national level increase in mortgage delinquencies pushed Texas from number 20 to number 3, while Florida increased from 22 to 5. I would imagine the data on Puerto Rico and the US Virgin Islands show similar substantial mortgage delinquency increases as well.

Share the Wealth – October 18, 2017

Registered Investment Adviser Caleb Lawrence 

Despite fairly significant negative data the major averages enter the final hour with small gains while the Dow Jones Industrial Average breaks above 23,000 to set a new record high.

Residential construction data missed big again as starts fell a much larger than expected 4.7% in September to 1.127 million units annualized. This marks the 5th decline in the last 6-months and with 3 consecutive declines is now considered a trend. Permits fell 4.5% over the same period to 1.215 million units annualized, a 4th decline in the last 6-months. This report will subtract from 3rd Quarter GDP or Gross Domestic Product. Admittedly the hurricanes had an impact here for the current month, but not the previous months.

Mortgage activity gained 3.6% last week as per the MBA or Mortgage Bankers Association. Purchase apps increased 4.2% while refi’s advanced 3%. The 30-year contract rate for a jumbo loan increased fractionally to 4.13%.

After a trail of malfeasance and criminogenic behavior that was truly, and continues to be, a sight to behold, though nobody meaningful actually went to jail for some reason. The State of California has finally figured out that Wells Fargo is a criminogenic enterprise. After State Treasurer John Chiang tore the bank a new one over its latest scandals and the disclosures that followed in a letter that would have been funny were it not for the trail of folks victimized by the bank in the process. Adding that management fostered systematic corruption and the venal abuse of Wells Fargo customers. Amongst other choice quotes in the letter. That said the Treasurer has limited tools to go after bad actors such as this as it is really a Federal matter. What should be crystal clear at this juncture, and in fact Mr. Chiang pointed this out in his letter, is the need for real change. Given the lack of appropriate criminal punishment for the banksters in the post crisis period, and that the corporations own the politicians, lock, stock and barrel. I won’t be holding my breath.

Share the Wealth – October 17, 2017

Registered Investment Adviser Caleb Lawrence 

Another day of minimal volatility trading sends the major averages into the final hour about even despite generally positive but questionable economic data.

Import prices increased .7% in September on another large gain in energy prices pushing the year ago change to 2.7%. Export prices advanced .7% for the month and 2.9% from a year ago. I always thought that it was interesting that the Fed regularly cites transitory forces when talking about low inflation, but fails to mention the same transitory forces that cause higher inflation. Ala the aforementioned energy price data.

Industrial Production increased notably in September to .3% on strength in high-tech and utilities production. Capacity utilization increased fractionally to 76%. That said industrial production has struggled to show material growth since May of this year and has spent most of this time contracting. In contrast to the regional Fed indexes that have more or less consistently shown considerable strength this summer.

The National Association of Home Builders or NAHB Index gained 4 points in October to 68. Particular strength was noted in the Midwest and South, apparently 2 substantial hurricanes don’t slow enthusiasm for home shopping. The Western region slipped 3 points to 76.

More quiet trade, contradictions, and another short list of items to add to the “it just doesn’t matter column”.

This is Caleb Lawrence Registered Investment Adviser Scotts Valley Drive and Willis Road in the Scotts Valley Plaza, Suite 202 or call me toll free at 888-RICH PIG / 888-742-4744.

You can catch me on the radio at noon each business day as well on California’s central coast. KPIG 107.5 FM in the Monterey Bay or KPYG 94.9 FM in San Luis Obispo.

Advisory services offered through Caleb Lawrence Registered Investment Adviser Inc.