How much longer can the US stock market party last? That question is on everyone’s mind, but for now the music is still playing. Even more, in some places the party has never been better and the surge in the number of optimists is remarkable, while stock prices remain on the up.
Don’t Stop The Party
Market watchers are tripping over each other to tell the outside world that the fun is far from over on the stock market and that stock prices have plenty of upside left. We pretty much need a new saying, because ‘the sky is the limit’ is not cutting it anymore.
Once in a while you can find an exception, however, like Goldman’s David Kostin for example. Kostin has some pretty convincing arguments that indicate that play time is almost over. Most of his focus revolves around buyback programs of publicly listed companies.
Goldman Sachs concluded that February was the busiest month ever for company buybacks. That is an indication of two things: in the first place it means that companies have a lot of cash on hand; cash that they do not want to invest in people or equipment. They must feel it is better to invest it in their own stock.
Secondly, it masks the fact that there is not too much profit growth. If they can buy back a big amount of shares, however, the number of outstanding shares drops and the profit per share remains on the rise. Retail investors can indeed by fooled if they do not pay attention.
This trick can not be repeated endlessly of course. At one point market watchers will realize what is happening and these buybacks will not be able to mask the fact that the profit growth is artificial anymore. Then, the lights will go back on and the party will be over. But until then…
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