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Daily Market Update – January 30, 2014 (Close)
One nice thing about the market is that it doesn’t always hold a grudge.
It can lose 200 points one day and give indications of having totally forgotten about that blow out the very next morning.
For investors that often leads to confusion because human nature prefers to see continuity and slow transition. The market, on the other hand, although it is very much a product of human behavior, doesn’t always respond in the way that we are able to grasp.
Sometimes life would be much easier if we were all able to just move forward and not be weighed down by the past and our own prejudices. On the other hand, while we may occasionally take steps backward, for the most part we are forward moving beings. The market is anything but, although the past year it has behaved in a human fashion, by only taking small steps backwards and otherwise forging ahead.
Lately, however, the market has been acting like a human in the midst of a tail spin with predominant steps backwards and only an occasional gasp of life.
Was today’s 50% recovery of yesterday’s 200 point decline a gasp or a return to life?
That split in behavior, going from a forward charging entity to one that is tentative at best and manifests great nervousness with news doesn’t generate very much short term confidence.
Wouldn’t you rather know whether something is in the throes of a death spiral or simply taking a needed rest before continuing with a vibrant life?
The underlying components of the stock market, that is the companies that comprise the market are expressing some pessimism regarding their own future prospects for growth. Record level share buy backs are reflective of record levels of cash, but also of an inability to recognize opportunities to use that cash in a constructive fashion. A number of companies, such as Caterpillar and Cisco have been accused of having buyback programs that have been purchasing shares at values much too high,just so the cash wouldn’t be on the books and to use that cash to artificially prop up share price by simple supply and demand laws.
Since cash basically has a P/E of just 1, while it may be non-intuitive, may actually serve to keep a lid on share price. The more cash you have relative to your market capitalization the lower your P/E will be.
The reason that Cisco and Caterpillar’s actions are important is that in the past share buybacks were viewed as a reflection of the company’s opinion that its shares were bargain priced and was a sign to the rest of the world that investment in those was a good idea.
Now you can’t be quite as certain, although the optics of the situation result in better earnings per share and in the short term may move shares higher on that basis, as well as a shrinking supply of shares floating in the face of stable or increasing demand can still send shares higher.
As this week is coming to an end and earnings have been somewhat better than the previous week, hopefully we will end on an up note for a change and see some acceptable combination of rollovers and assignments.
However, placing lots of trickle down hope on the basis of earnings from Facebook and Netflix and other such companies that really don’t add great economic value across the spectrum is probably not a good idea.
While cutting edge is great for growth and creation of new markets, it’s still retail, construction, infrastructure that really moves us forward with confidence.
I can’t wait to be able to Tweet out that kind of good news when it actually happens and maybe increase GDP at the same time.
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