zenruption really doesn’t care about the profits corporations make. Most of the money is now wasted on stock buybacks instead of truly innovating and taking care of employees and communities. We do care about those profits and their impact on stocks as it impacts the regular people we affiliate ourselves with and hope to help make some money.
This will not be a money making week and will start a protracted non-money making period.
Our goal is long term and profitable investments for the little guy. If we have sounded like traders lately, it is because it has been a trader’s market. In fact, it has been so since our co-founder, Brian McKay, was telling people it was time to get out last May. If you did get out last May, you made some money. If you didn’t get out, you might currently be even. The only way stocks have produced returns since May 2015, was in active trading.
This week, is when the piper gets paid.
As we have stated continuously, stocks are tremendously overvalued. The average price to earnings ratio is 24. Historically, a balanced market has supported a P/E of 16. Granted we feel that higher P/E ratios are the new normal, but 24 is much too much.
Companies have been complicit is keeping these P/E ratios high with a massive amount of stock buybacks. The zenruption belief is that stock buybacks are the absolute worst use of corporate money period. Propping up a stock by buying a lot of it and taking it out of the markets, rarely has a lasting effect and wastes money that would be better spent on long term initiates and growth. That much of this has been done with debt over the last year, is a disaster waiting to happen. The irony will be that these stock buybacks will actually cause more damage to the stock prices over the long run. Companies are running out of access to funds to keep buying stock and will not be able to further prop up prices.
This week starts another earnings season. Daily there will be announcements of last quarter’s earnings and guidance for the coming quarter. They are not expected to be good. Nothing calls into question abnormally high valuations like a bad earnings report.
The lofty run of the last two months will reverse very quickly when stocks that are considered to be the canary in the coal mine, issue poor guidance and lackluster earnings.
Again, zenruption doesn’t really care about the companies. Bad, overpaid management, short-termism and erroneous initiatives will have fostered the coming declines. We do however care about the effect of investors like ourselves and the employees of such poorly managed entities. It is never right when the poor actions of rock star CEO’s that are paid millions, destroy the value of your 401k.
While workers are in short supply, companies with falling stock valuations will look for any way possible to cut their biggest expense, labor, and try to meet their quarterly earnings targets. Since the loss of the labor movement, the only negotiation tool labor has had to increase wages is labor shortage. This recent recovery hasn’t been strong enough and labor hasn’t had enough power to make a meaningful recovery from the wage drops caused by the Great Recession.
Companies are quite simply killing their own customer bases in short changing their employees and fostering their own tepid earnings.
It seems that greed moving to the quarterly model, has once again produced a setup for bad times. We at zenruption worry about the effect on average employees and the potential for further damage to the economy.
As always, Wall Street will continue to find ways to keep screwing itself. We will start seeing those effects this week.
Lina Martinez is a contributor to zenruption’s money and life sections. Man, she sounds like a real downer, but we think that markets are creating the downer situation right now. We credit Lina with giving us a further excuse to go have drinks.
Feature photo courtesy of Flickr, under Creative Commons Attribution-Noncommercial license