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Corporate Buybacks
The Market Bull 2018

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Despite escalating levels of confrontation with respect to trade wars and our allies in general. The major averages moved sharply higher in early trade entering the final hour with large gains.

It’s been said that for every action there is an equal and opposite reaction and various government policies frequently come with unintended consequences. The 1929 Republican sponsored Smoot-Hawley Tariff Act is a case in point as it sparked a trade war that ultimately saw global trade fall by 66% from 1929 through 1934, extending and exacerbating the Great Depression in the process. Our emerging trade war is of course no exception. In the face of tariffs and of course higher input costs BMW and Tesla have both announced plans to shift production to China. BMW went on to announce price increases for its vehicles at the same time.

The June Consumer Price Index or CPI advanced .1%, slightly below consensus. On a year ago basis this series is up 2.8% on double digit gains in energy and gasoline prices.

A recent study by Michael Olenick over at INSEAD concluded that corporate share buybacks, while beneficial to the executives in the short-term amount to corporate suicide over longer time frames, due to a failure to enhance shareholder value. To quote from the report. “When share repurchases increase debt and reduce spending on innovation and R&D it directly affects a firm’s long-term ability to survive and grow in a disruptive and uncertain business environment”. Indeed this has been the pattern now for quite some time. Other observations noted that once a company starts buying back a sum of its stock above 50% investment performance starts to suffer materially, while those companies that buy back 20% of their shares or less have the best investment performance.

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.

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