Never underestimate the ingenuity of corporate America or the optimism of its citizens. While the media obsess over multiple economic crisis scenarios and reinforce the message that the economy promises little growth, corporations just keep on grinding out higher earnings.
Much is made of Federal Reserve Bank intervention and its various programs to pump up economic growth, but our central bank’s efforts are merely pump-priming at best. It’s the resilience of business that is propelling growth. This is glowing testimony to the system we have today and a powerful argument for how corporations grow in a no-growth world.
Pressured on the top line, corporations have been cutting costs, downsizing and increasing worker productivity since 2008. This obviously has its limits and becomes less effective over time, but greater efficiency is a mind-set that takes years to instill in large organizations before measurable savings occur.
Since markets care more about earnings per share than total earnings, financial engineering is an effective tool that can work wonders. With interest rates so low, and shrinking sales requiring less working capital, corporations can borrow cheaply and leverage their balance sheets to use the increased cash flow to buy back outstanding shares. Some 20% of all U.S. corporate stock has thus been bought back since 2005.
Another tool is growth through mergers and acquisitions. Resurgent stock prices and huge buildups of cash make buying other companies with lower price/earnings ratios an attractive option. It’s also a way to use overseas cash for foreign buyouts without first having it taxed in the U.S. Upwards of $600 billion in deals so far this year testifies to the popularity of this trend.
While the growth outlook in the U.S. is poor, it’s even worse for the rest of the world. This usually leads to a stronger dollar, which translates into lower costs for foreign-sourced materials. It also means lower earnings from currency translation losses, but these can be partially hedged.
Income investors interested in dividends benefit from rising corporate payouts that also buttress stock prices, but investors who hold corporate debt face increased risk from ratings declines due to higher borrowings used to retire stock. Also fear of rate increases due to inflation will continue to haunt us despite Fed reassurances. For investors Online Stock Trading Systems are also a very good option to ensure the growth. With the help of these systems you can earn regular income.
I believe locking in investments paying 6% or more today should prove immune to inflation-borne value erosion, if not volatility. Further protection can be built into a portfolio by the right choice of instrument and industry. Uncertainties and uneven growth in different sectors argue for staying diversified.
That's the fact that markets care more about earnings per share than total earnings, financial engineering is an effective tool that can work wonders for Gold Trading Calls.
ReplyDelete