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Share the Wealth – May 14, 2018

 
 
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Registered Investment Adviser Caleb Lawrence 

The major averages failed to hold their early gains on little news. Trumps tough talk on trade, particularly with the Chinese, took a step back recently with an announcement that the President would now help Chinese telecoms company ZTE back from the brink after shutting it out of US markets previously, supposedly due to extensive Chinese job losses.

The National Association of Realtors or NAR reports that real estate prices gained 5.7% in the 1st quarter, on a year ago basis, beating the 4th quarters 5.3% advance. By region and the West continues to set the pace with an 8.1% gain. Looking at the top 10 major metropolitan areas and 5 showed price declines for the quarter, though all remained higher than a year ago, New York only just. For the 1st quarter New York registered the largest decline at 1.6%, followed by Los Angeles 1.4%, Boston 1.3%, Washington .7%, and San Francisco. On the plus side the largest quarterly gains were seen in Denver up 6.5%, followed by Chicago 2.2%, Miami 1.5%, and Las Vegas 1.3%.

One of the primary drivers of the major averages in the last few years have been corporate share buybacks using not only free cash flow, but also prodigious quantities of debt. Much of the benefit gained by share buy backs naturally accrued to those making the buyback decisions, namely the companies own executives, per a recent report by Society General. That went on to note that 2018 has seen all-time record buy back announcements pushing 850 billion, far higher than the 700 odd billion seen in 2007 just before the previous crisis. Unsurprisingly buy backs tend to boost a company’s share price and prior to 1997 this practice was patently illegal, because it is blatant share price manipulation. Of course, the downside to this is yet another record debt bubble, this time on the corporate side. A bubble fueled by covenant light junk bonds and other hinky debt deals that will bite investors hard should the party come to its inevitable end ala 2008.

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