Cash

Posted on Saturday, March 7th, 2015

Market got the chills this week from a better than expected jobs report. That report may be the excuse that is needed for the Federal Reserve to move on rates. The market has been in a sideways consolidation pattern since the Fed ended QE back in October of 2014. We are not surprised as we surmised that equities would at least slow their ascent without the aid of the FOMC and easy money. The reinvestment of dividends by the Fed has enabled the market to maintain its holding pattern. If the FOMC plans to raise rates in June then very soon they should announce that they will halt reinvestment of dividends that they receive. The jobs reports on Friday made that possibility all too real for investors. While the market’s technicals look fine here markets may pull back to 2000 on the S&P 500 and take another look. What was so disturbing about Friday’s action was that no asset class was spared. Gold. Bonds. Stocks. Everyone took their lumps. Cash was king on Friday. A decent stash of cash may be the thing for now. Caution lights are on but no alarm bells until the S&P 500 breaks 2000.

There were some thoughtful discussions around the street this week on the subject of corporate buybacks. Corporations announced over $104 billion in buybacks last month according to Trim Tabs. This is the most announced buybacks since Trim Tabs started tracking the data in 1995 and it was double the February 2014 number. While the idea of a corporation buying back its own stock is a tailwind for investors, corporations tend not to be the best stewards of capital in that regard. Understand that there is an inherent conflict on interest in a CEO buying back his own stock. It increases Earnings per Share (EPS) and helps elevate the company’s stock price. This is a top priority for any CEO who is expected to keep a very large part of his/her net worth and compensation in said stock. While a buyback makes sense if a stock in undervalued it is harmful if a company pays too high a price for its investment. What seems a lifetime ago I was the Specialist in Ford Motor Company. Ford had a very large repurchase plan. On a particularly bullish day in the stock the company complained that they were not buying enough stock. The stock was up $5! Why would the company need to buy stock? Within six months Ford Motor had a rollover problem with its Explorer and the company announced a suspension of its buyback program. Companies tend to buy lots high and nothing low. Arthur Cashin had this to say on buybacks earlier this week.

Records show that companies have bought over $2 trillion of their own shares since the low of 2009.  They are on a pace to spend about 95% of their earnings on buybacks and dividends.  No wonder we’re at new highs.

Oil has bounced but not as high as most would like. The move in oil from its highs last summer is nothing short of a crash. More blood may need to be spilled in that sector as bankruptcies are announced which will decrease production and eventually help raise prices. Keep an eye on Saudi Arabian policies and geopolitical events in Russia for clues on the price of oil. Market has been in a range between 1975 and 2100 on the S&P 500 since late October since QE ended. Could the recent move above 2100 been a false breakout and have investors looking for cover? Can markets handle the Fed halting reinvestment and raising rates? 2000 is support for now. All eyes will be on 2000 for clues.

 

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.