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Dow Sentiment

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NYSE (Photo credit: wikipedia.com)

This past week has been quite the roller coaster for investors and public companies alike. The Dow fell 513 points on Thursday, August 4, the biggest drop since 2008.
 
Following are some quotes from a few publications to sum up this week’s sentiment among the investment community:
 

  • “The very fact that we have been engrossed in dealing with our debt ceiling issues has taken our focus away from the task at hand–growing our economy and job creation,” said Bill Nuti, chairman and CEO of NCR Corp, a maker of automated-teller machines and other products.”If the U.S. credit rating is downgraded, he warned, “our economy will transition from a slow-growth scenario to a no-growth scenario, and we could likely find ourselves in a double-dip recession.”www.wsj.com
     

  • “You’ve got a weak economy, the aversion of a debt crisis but not a solution, and you’ve got the rest of the globe starting to implode in a lot of areas, especially Europe,” said Barry James, president and chief executive of the James Advantage Funds. “It’s natural that people would react with fear.” www.wsj.com
     

  • “The markets were very similar from a macroeconomic standpoint as they were on May 6 of last year, and obviously things performed much better,” said Joseph Cangemi, managing director of electronic trading for Convergex Inc. “We could have had a situation at any one time where capitulation could have happened, but the market structure itself did not allow it to breach any critical levels.”www.wsj.com
     

  • “Investors are anxious about the U.S. and global economic outlook, and the current market volatility reflects their distress,” said Larry Leibowitz, chief operating officer of NYSE Euronext. “While high volume has accompanied this volatility, we have not seen a real panic,” he added, asserting that exchanges’ performance has been “high” through a “difficult time.”www.wsj.com
     

  • “People are worried about liquidity and where the economy is going, and don’t see any sort of life preserver as yet,” said Doug Roberts, chief investment strategist at Channel Capital Research.www.marketwatch.com
     

  • “The ECB needs to continue to be aggressive in its efforts to solve the euro-zone debt crisis, but this will not happen overnight and as a result, will affect the U.S. economy in a negative way,” said Kevin Giddis, a fixed-income analyst at Morgan Keegan. www.marketwatch.com
     

  • “The most important thing for people to do right now is to take a deep breath, whether you’re reacting to the latest, pretty good job numbers or you’re still in shell shock from everything else we’ve learned in the last week,” said Jerry Webman, chief economist at Oppenheimer Funds in New York.www.yahoofinance.com
     

  • “The burden of debt has become much more onerous because the outlook for growth is sliding back. That is very concerning for the markets,” said Don Smith, economist at ICAP, the largest inter-dealer broker in the world. “The fear is ultimately about defaults and business failures.”www.yahoofinance.com

 

PondelWilkinson, investor@pondel.com
 
 

To Buy or Not to Buy, That is the Question

At a time when many stocks are languishing (the Dow is down 3.7% over the last 12 months, the Nasdaq Composite is down 6.9% over the same period and the S&P 500 has lost 8.2%), many investors are asking companies to put their cash to work and initiate stock buyback programs.
 
Is a buyback a good idea?  In 2007, many companies thought so.  According to the Wall Street Journal, companies in the S&P 500 repurchased a record $589 billion of their own stock in 2007, up 36% from the prior year. 
 
Buybacks reduce a company’s number of shares outstanding, which in turn helps increase earnings per share.  Company’s stocks often advance on the news of a buy-back, but the effect is generally short-term.  According to a May 2007 article in Forbes, the increase in EPS as the result of a buyback gives only a temporary, one-time, artificial boost to earnings, while causing companies without the proper cash position to increase debt, leaving them vulnerable to a downturn in the economy.  Additionally, a study by Birinyi Associates and cited in the Forbes article showed that of 375 S&P 500 companies that bought back their shares in the six years through December 2006, the companies’ median stock return post-buyback was 56%, versus 72% at companies that did not repurchase their shares. The average return post-buyback was 102%, compared with 131% at companies that did not repurchase.
 
So what’s a company to do now that the economy has turned sour?  Buybacks fell 18% in the 2007 fourth quarter, the biggest quarter-to-quarter drop in more than five years, says the Journal, and given the current credit crunch and fall of the large financials, buybacks are unlikely to reverse this trend in the near-future.
 
If your company’s stock represents a great investment, you have idle cash in the bank and your business can self-fund its growth, a buyback can be a fantastic statement of your future confidence.  However, if you’re considering buying back stock to please a group of critical investors, think hard about whether the cash outlay will introduce unnecessary risk to the business.

 

Laurie Berman, Senior Vice President, lberman@pondel.com