Stocks: Too Late For Rescue

Today, a one-question physics test: Can you inflate a balloon by taking out the air?

The answer is obvious, so you pass the test.

And, yet, Wall Street is defying the same basic physics. It’s rising (to rarefied levels) even as money has been flowing out.

How can this be?

Well, to me, it’s another sign that something wicked this way comes.

Two data points tell this story:

  1. So far this year, investors have pulled nearly $80 billion out of equity mutual funds and exchange-traded funds (ETFs). Every month but one has been a down month, and so far through mid-September, the equity mutual fund outflows have surpassed $5 billion. That’s an indication that Main Street investors are not involved in the current euphoria on Wall Street.
  2. So far this year, foreigners have pulled $67 billion out of America, according to Treasury Department data on international capital flows. That’s an indication that, on the whole, foreigners have been selling U.S. assets.

So back to our physics test: How is it that Wall Street keeps hitting new highs on an almost daily basis when the air it needs is leaving that balloon?

I have a two-pronged theory, the first part of which I detailed in my dispatch on August 31: Wall Street is higher, in part, because companies are using their cash to buy back their own shares instead of investing in growing their businesses.

It’s financial Ecstasy. The market is under a psychotropic influence abetted by the C-suite and boards of directors that are spending shareholder cash to buy stock in record amounts and at imprudently high levels. In the last quarter alone, share buybacks and dividends consumed every penny of corporate profits, plus another 18%. How any CEO or chairman can justify buying stock when the market trades at more than 20 times earnings is baffling (and should probably lead to shareholder lawsuits or, at the very least, shareholders voting that management team out of office).

The Peak Is Coming

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As a lifelong world traveler, Jeff Opdyke has been investing directly in the international markets since 1995, making him one of the true pioneers of foreign trading. He is Investment Director for ...

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