September 27, 2015 at 2:49 am #44058
Lennar Corp. is the 2nd largest home builder in the U.S. It’s 2nd quarter revenue was reportedly up 24% over last year, based on a 10% growth in new home sales, and a 5% increase in the prices of those homes. After everything else, its quarterly profit was up 26%. Nice leading indicator, one might surmise.
Most of us here are old enough to understand just how historically low the current average 30 year fixed mortgage rate is at a mere 3.91% (I remember being happy to nail down something in the LOW double digits in 1979).
Because of low interest rates (“thanks” to the Fed’s effectively 0% interest rate), people are borrowing more, buying bigger homes, more expensive cars, and taking huge “advantage” of the current absurdly low interest rates. Corporations are doing likewise. According to Reuters,
Interest rates at near zero have increasingly prompted companies flush with cash to issue debt to fund share buybacks. Apple Inc, for instance, has issued $23.6 billion in debt this year despite having more than $200 billion in cash, part of its plan to buy-back up to $140 billion in shares by the end of March 2017. MetLife Inc., meanwhile, sold $1.5 billion in bonds in June to fund share buybacks, while having more than $10 billion in cash on its balance sheet.
Other companies are doing likewise. And why? Because they’re buying back shares of their own stock at what’s expected to be $1 TRILLION this year. That would be a record.
Problem? Yes, it brings stock prices up because there are less shares available. But the dark side of that is the fact that it also allows them to report much higher earnings per share – a MAJOR factor in how the economy is reported. How often have we heard about corporate earnings being up?! On the surface, it sounds good, but it gives the vast majority of us the impression that they’re doing well, when in actuality it’s really largely based on an accounting trick. Reduce the number of shares, and even if earnings don’t go up, you get to report higher earnings PER SHARE, compared to last quarter, last year, etc.
What’s also hidden in all that is that in order to buy back that $1 trillion worth of shares, Corporate America had to issue corporate bonds (i.e. DEBT) to the tune of $1.4 trillion last year, and we’re already past $1 trillion in corporate bonds issued THIS year, with four months left to go (September hasn’t been counted yet). According to a research firm by the name of FactSet, Corporate America spent more on buybacks last quarter than they actually brought in.
And they wanted to call Reaganomics “Voodoo Economics?!!”
So – is the U.S. economy “up?” It all depends on what the definition of “up” “is.” If you are even a bit as skeptical as I am, you might take a quick trip over to ShadowStats and see how the current economic indicators work out when figured the “old fashioned way” (i.e. the same way they were in the “old days” when some of remember a much more stable and prosperous economy). Caution: the stats on ShadowStats are not the work of some rank amateur like me. They’re the work of a highly respected economist who knows how the system works, and who’s been around long enough to know how the Consumer Price Index and Unemployment figures were actually calculated 30 years or so ago – before they changed the formulas to “show” better numbers. A lot on his site is subscription material. But there’s still a wealth of information available in the 2nd and 3rd columns of his site (linked above). Near the top of the 2nd column you can switch the chart between employment figures, CPI, and money supply, and see what’s REALLY happening, in just seconds. If you want to go deeper, try downloading (free) a copy of his “Update 2015″ (link near the top of the 3rd column), titled, “SPECIAL COMMENTARY 2015 – A WORLD OUT OF BALANCE – Year Past, Year Ahead and Hyperinflation.” In it he explains why his forecast for a catastrophe somewhat earlier than now did not occur (good, logical explanation, not just a butt-covering exercise when his “predictions” didn’t come true, like the end of the world some were predicting for this past Wednesday). But if you don’t want to go that deep, just the topic points from one of his subscription pieces ought to get everyone’s attention:
No. 755 GDP Revision, Broad Economic Outlook
September 25th, 2015
• Broad Economic Outlook Has Continued to Weaken; More-Difficult Times Loom
• Minimal Revisions Left the Second-Quarter GDP/GDI Story Intact
• Gross Domestic Income (GDI) Again Confirmed Stagnant First-Half Economy, Largely Consistent with Reporting of Industrial Production and Real-Retail Sales
• Surging Gross Domestic Product (GDP) Remained Nonsensical
Hang on to your wallets, don’t over-extend (in fact, pay down debt to the maximum extent possible while also spending what’s needed on keeping yourself alive and reasonably well if/when it all caves in). That’s the take-away I certainly get, despite the “news” we’re all fed.
[No, I don’t do all of that research in the top half of this post myself – heck, I don’t have the time or resources. But I do subscribe to one financial newsletter, which I won’t name because the person that originated the service many, many years ago, recently sold his majority interest, and I don’t fully trust the folks now in charge. However, they DO still do a great job of canvassing the financial landscape with some of the founder’s original researchers and other experts, thankfully. If the founder was still in charge of the publication, I’d highly recommend it here. But now days I find myself picking and choosing through their material – because too much of it is sales hype. Still, some of the research and “deep” news is still excellent.]
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