Bubble
News!
Richard Murphy: Stock Markets Look Ever More Like Ponzi Schemes
Richard Murphy gives a particularly clear and terse explanation of where this sorry trend has led, to corporate cash flow and even borrowings being used primarily to prop up stock prices, and that the scale and deep entrenchment of this process means that the equity markets have become Ponzi schemes.
So what, you might ask? Does it matter that companies are making sense of low-interest rates to raise money when I am saying that government could and should be doing the same thing?
Actually, yes it does. And that’s because of what the cash is being used for. Borrowing for investment makes sense. Borrowing to fund revenue investment (that is training, for example, which cannot go on the balance sheet but still adds value to the business) makes sense. But borrowing to pay a dividend when current profits and cash flow would not support it? No, that makes no sense at all.
Unless, of course, you are CEO on a large share price linked bonus package and your aim is to manipulate the market price of the company. It is that manipulation that is going on here, I suggest. These loans are being used to artificially inflate share prices.
The problem is systemic. In the US the problem is share buybacks, which I read recently have exceeded $5 trillion in the last decade, meaning that US companies are now by far the biggest buyers of their own shares. That is, once again, market manipulation.
And as fiasco after fiasco shows, the reports of well being in the form of the financial statements are themselves manipulated, or just blatantly cooked.
No one knows where the tipping point for any crisis will come from. I am not claiming I do. But the charade that current stock market valuations represent will be seen through some time soon. Those values are being maintained by Ponzi schemes. And such schemes always end in tears.
DYI: 5 Trillion dollars worth of buybacks over the
last 10 years all at elevated prices in relationship to sales, earnings, and
dividends as corporate CEO’s along with permission from the board of directors
paying inflated prices simply to inflate the prices even higher.
Another way to look at this is the earnings yield simple arithmetic 1 / 15.17 x 100 = 6.6% that would have been a reasonable return though not great return for share buyback. At 1 / 32.53 x 100 = 3.1% return on share buyback an outrageously poor investment for corporate dollars. 10 year T-bonds yield close to that return at 2.84%. For corporations who are becoming top heavy with debt and borrows at 5% to earn 3.1% on the share buyback legally it is NOT fraud [incredibly stupid] with a real board of directors – not those who are puppets chosen by the CEO – his days as the boss would end pronto!
And
by the way this is how Benjamin Graham created his simple arithmetic formula in
determining the basic level of the market as compared to high grade corporate
bonds. Today stocks are no bargain to
the point of insanity. Below is the
latest update for our Earnings Yield Coverage Ratio.
Ben Graham's Corner
Margin of Safety!
Central Concept of Investment for the purchase of Common Stocks.
"The danger to investors lies in concentrating their purchases in the upper levels of the market..."
Stocks compared to bonds:
Earnings Yield Coverage Ratio - [EYC Ratio]
EYC Ratio = 1/PE10 x 100 x 1.1 / Bond Rate
1.75 plus: Safe for large lump sums & DCA
1.30 plus: Safe for DCA
1.29 or less: Mid-Point - Hold stocks and purchase bonds.
1.00 or less: Sell stocks - Purchase Bonds
Current EYC Ratio: 0.83 (rounded)
As of 7-01-18
Updated Monthly
Updated Monthly
PE10 as report by Multpl.com
Bond Rate is the rate as reported by
Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)
DCA is Dollar Cost Averaging.
Lump Sum any amount greater than yearly salary.
PE10 ..........32.30
Bond Rate...4.08%
Lump Sum any amount greater than yearly salary.
PE10 ..........32.30
Bond Rate...4.08%
Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety. The danger to investors lies in concentrating their purchases in the upper levels of the market.....
Benjamin Graham
DYI
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