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Share the Wealth – June 12, 2018

 
 
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Registered Investment Adviser Caleb Lawrence

The major averages enter the final hour mixed on little news of significance. The May Consumer Price Index or CPI gained .2%. On a year ago basis prices increased 2.7%, slightly below the long-term average of 3% for this series. Trumps tariffs should prove fairly inflationary going forward but to date most of the price gains have come from energy costs.

Prior to 1982, publicly traded companies were prohibited from buying their own shares as it was considered market manipulation, and rightly so. For the 1st 20 or so years corporations didn’t jump on the bandwagon in large numbers. In the post Great Financial Crisis period however, corporate interest in share buy backs ballooned. The first really significant example was to cover up falling revenues and earnings a few years ago as falling earnings and fewer shares outstanding, if balanced correctly, can be made to show stable or even increasing earnings per share, which is of course what the analysts focus on. But also to support the share price and indirectly executive compensation as much of it is stock based, grants, options etc. Along comes the SEC or Securities and Exchange Commission with a study that shows low and behold that company executives use share buy back announcements as an opportunity to sell shares at a higher price. The study noted that selling volume increased by a factor of about 5 in the days immediately following the announcement. Short term gain at the expense of long-term innovation.

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