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.