Buying Growth in Shares

Posted | 27/10/2014 / Views | 2118
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US shares rallied again last week (buoying the Aussie shares along the way) on the back of firstly comments from various central bankers that maybe they should continue QE and keep interest rates near zero for longer, and then later on the back of some ‘good’ earnings out of majors on the Dow Jones.  What many don’t get is the 2 are still ultimately related.  We’ve mentioned before the alarming trend of share repurchasing going on in the US.  This is when companies buy back their own shares with either earnings or often loans at record low interest rates.  

Buying back shares reduces the pool of shares.  Reducing the pool means your Earnings Per Share (EPS) increases without actually increasing the Earnings.  A great example (among many) is Caterpillar who are often considered a ‘bellwether’ for the industrial economy and whose sales have rather infamously tanked over the last few years.  Yet Caterpillar just announced an EPS well above market expectations, and being such a big player on the DJIA, boosted the market, such is the market’s desire to jump on any piece of good news.  But scratching the surface you see that this was achieved through share buy backs and alarmingly at the expense of future capacity producing capex.  

This is just indicative of companies that have falling earnings in what is still a struggling economy making everything look awesome through borrowing at central bank engineered low interest rates and reduced investment for the future so all the cheap money has a reason to keep buying, further driving up the sharemarket.  This world continues to use debt as a tool to overcome the GFC crash borne of….. debt.   Got your golden insurance yet?