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rickgthf
Senior Advisor

A little note on the stock market and the economy

I've been curious for awhile why the stock market was so strong even as the economy seems to be stuck in slow growth mode. The Fed's GDPNow model now estimates the 2019 fourth quarter GDP to be 0.3 percent, down from 1.7% third quarter.

  A radio interview with SEC commissioner, Robert Jackson, jr. yesterday shed some light on the cause, stock buy backs.  It turns out that contrary to expectations, the massive corporate tax cut hasn't led to anywhere near the capital investment, business expansion and wage growth predicted by the republicans when they enacted the tax cut.  Almost all the tax cut has been diverted into stock buybacks, $1.1 trillion in 2018 alone.

 And the reason is simple, corporate CEO's and other company officials see this as an opportunity to buy back the stock they receive as compensation and turn it into cash.   As they buy back this stock, it reduces the amount of stock available and drives the price up.  It also explains  why corporate CEO's are becoming so fabulously wealthy.

  The thing is, there's no end to it.  Next year's tax will just repeat the same cycle, un-invested cash will just get sucked out of these businesses resulting in no long term benefit to the economy.

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14 Replies
BA Deere
Honored Advisor

Re: A little note on the stock market and the economy

You let the cat out of the bag! Buy the Dow Index, sit back and watch it grow.   🙂

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timetippingpt
Honored Advisor

Re: A little note on the stock market and the economy

Rick, you probably should be far more concerned about the current emergency QE4 to manage overnight lending rates than worrying about what free companies are doing with their stock float. Why? Well it is pretty simple, all those trillions in stock buybacks just shifted cash. The money was invested in xyz, and now the money is invested in some other place. The Trillions still exist and most likely were reinvested in new start ups, or other investments that lead to growth, and likely a portion are invested in bonds, land, etc. The stock owners who sold are probably much more diversified and stable, maybe not, but condeming stock buybacks is really chasing your tail with no benefit even it you catch it. Besides, IF the company remains profitable the remaining stock holders get a bigger share. They take more risk to get more or less return. Pretty much a free market, good and bad being a given.

freedom1493
Veteran Advisor

Re: A little note on the stock market and the economy

If you sort it out like this, it is easier to understand:

Dow = "big" money (including foreign capital looking to park and buying the "big names") 

NASDAQ = retail market

S&P500 = domestic institutions

****

There is a financial world beyond just America.  It is why you can have a slowed economy locally but still have a high Dow -- it's a flight to safety.

Canada just lost one of its most well-kn0wn companies because it is relocating its HQ to the U.S.   Reason:  More favorable business climate in the U.S. for corporations instead of the insane Liberal Canadian tax policies.

Canadian farmers' 3 biggest complaints on why they are failing financially: 

1)  Horrible harvest.  2) Trump's bailing out U.S. farmers/unfair advantage.  3) The carbon tax that is going to rain down on their heads the first part of 2020.

China's economy is withdrawing.  Manufacturing companies, especially clothing manufacturers, are fleeing China because of the trade war.  But they aren't coming back to America.  They are headed to Bangladesh, Vietnam and various other  countries where you only have to pay the people the equivalent of $0.20 U.S. an hour.

The EU financial system is in a death spiral because of their stupid economic policies, including negative interest rates and their failure to combine all their countries' individual debt into an equivalent of federal debt when they formed the Union.  Then add in the "Green Craze-ies'" immediate demands on no coal-driven power and no combustion-engine cars NOW!!  Don't forget the "Migrants" and their endless, vast money-sucking (Sweden has explosions almost every day now - Denmark just closed their border with Sweden because of the vast number of bombings).  There also is a HUGE fear over there that the European banking system is going to crash.  Add in a carbon tax and, voila, poof goes the money across the sea.   ....it is going to get real ugly real quick over there.  (popcorn popping)

Anyway, if you had a few billion Euros that you wanted to protect/hide from jealousy-driven, money-crazed liberals hunting cash, where would you park them?? 

A:  America -- but only until jealousy-driven, money-crazed liberals take the White House.  It has already been warned by various major companies that if Warren or another socio-communist takes the White House, they're outta here.  

In summary, the reason the U.S. stock market is still so high is because America is still currently considered one of the safest places to park money.  It's all about confidence.  The DOW is where big money parks, especially in a crisis. 

Many Liberals have stated they would love to have a stock market crash before Nov. 2020, if only to rid themselves of President Trump.  ...I just shake my head at the idiocy.

timetippingpt
Honored Advisor

Re: A little note on the stock market and the economy

free buddy... I'll agree that this is indeed the "MeltUpFinish".  Will anyone take advantage of it to exit? Doubtful

freedom1493
Veteran Advisor

Re: A little note on the stock market and the economy

Yup, 2020 is gonna be an interesting year for a lot of reasons.

BTW, remember how I was admonished by Holloway that I don't know how sugar is priced...???

Whatever.  I still believe in the old definitions of supply and demand.

There is talk about having to IMPORT extra sugar, more than we already do -- and that's IF the supply is available from Mexico to meet all of the U.S.' sugar needs beyond an incremental amount.  Farmers are having to REPAY on their no-harvest sugar beet acres.  Sugar beet producers have been forced to declare "force majeure" because they can't meet their commitments.  There apparently is also something up with the sugar cane harvest this year.  

Anyway, the USDA actually released a report on November 15 outlining its much lower sugar-production expectations:

"High Levels of Unharvested Sugarbeet Area Reduces U.S. Sugar Production Outlook for 2019/2020"

https://www.ers.usda.gov/webdocs/publications/95379/sss-m-375.pdf?v=4960.6

https://business.financialpost.com/pmn/business-pmn/bad-u-s-weather-forces-sugar-producers-to-declar...

As I am particularly fond of homemade pies, we just bought another 30 pounds of sugar.  What the hell, right?  It lasts forever.

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sdholloway56
Senior Advisor

Re: A little note on the stock market and the economy

Stock market ought to be OK because the economy is OK at the present moment. But the surge since late Sept is entirely a function of Fake News manipulation about trade and future prospects.

Most of that stuff isn't going to happen and we have a throwover above a very impressive long term topline in the major indexes- which might be rejected tonight.

Sell.

BTW, give me the names of five people other than family who ever prospered with Trump.

Whitesand_Farms
Veteran Contributor

Re: A little note on the stock market and the economy

Don’t forget about the Huawei executive that was arrested on Canadian soil because the US wanted to extradited Her.  So now China stopped buying meat and canola from Canada in retaliation that also tanked prices. Now a rail strike is derailing prices even further now we can’t get grain to port. I’m glad this is my last year farming because even Hollywood couldn’t write a script like the one that’s unfolding in Canadian agriculture.  

k-289
Senior Advisor

Re: A little note on the stock market and the economy

Interesting  how  folks  think,  if  your  neighbor  tanks,  it's  a  humorous,  un-till  the  reality  lands   at  home base,  then  start  pointing  fingers -  -  -

Canada's  crown  jewel  being ,  abundant  fresh  water ,  will  soon , make  Saudi  Oil  Fields,   seem quite trivial  -  don't  squander  the  asset   -  -  -

Reflect  on   the  BIG  promise - fallout ,  in  Wisconsin ,  4.5  Billion  Foxxcon ,  dealing  -   -   -

2007  hype  ,  will   see -  ?  

      

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Whitesand_Farms
Veteran Contributor

Re: A little note on the stock market and the economy

K-289 I wish there was something we could do to protect our water but as I predicted a while back, this liberal government is hell bent on spending billions unaccounted for so that our country is so in debt that we will have to “give” our water away. I wish I could wave a magic wand and be a US citizen because the way this liberal government is running this country into the ground that by the time there is another election there will be nothing left of it. Personally I hope Western Canada separates from the leeches and hippies out east.