"Like No Other"
Let’s face it. We have been hearing over and over that this year has been “like No Other”. Ok. It has been. So was last year. The year before that as well. Every year is unique and what makes this year so unique, it really is like every other year.
We may not have dealt with a true pandemic in our lifetime but we have been dealing with this pandemic since early last year. So, for the last two years we have been dealing with the knowing and unknowing in equal portions and the markets have reflected that. When we are concerned about the spread and not knowing the damage it will cause, we sold the market off. Uh, we did the same thing last year. When we get some sort of handle on the severity we rush back into the market. Ditto 2020.
We have seen a “transitory” spike in inflation that has actually turned into a deeper, more insidious form of inflation just like we dealt with in 2006 and 2008. They preceded bigger events but we had 5%+ inflation both times and then it rolled back to the Feds chosen target inflation number of 2-3% inflation for several years.
You say the root cause of inflation is different this time. It is unlike any other time in US history due to the pandemic. Well maybe. Supply chain issues may cause a short bump in prices but historically, those issues are quickly worked out and transportation issues end up not playing a role in price increases. Not this time, you say again. Well, lets be honest here. I do believe at the beginning of the pandemic there were absolutely issues with supply. Factories being shut, logistics being thrown for a loop, etc. However, No matter what the press wants you to believe, transportation issues always work themselves out and after having dealt with the pandemic for 10 or 12 months, you would think those issues would be corrected. I believe they were. I think the narrative coming from media was about problems that sporadically existed but overall were straightened out.
At the beginning of Covid, the Chinese shut the country down, didn’t like the way things looked and they quickly reopened to the World. Their factories were humming. Covid be damned! The rest of the World, not so much, but the one thing the rest of the World was doing, was buying Chinese products. Shipping containers were being filled and sent on their way. Logistically, at the beginning of the pandemic, the US and the rest of the World weren’t really ready to move those products out so there was a backlog and that I do believe is true but as the months went on in 2020, transportation companies were busy. Truck drivers were driving, the railroads were at capacity and things were moving through the system.
However, a narrative was developing and US based companies took advantage of it. Things were stuck on ships or in port and there were no drivers to deliver those goods through the United States. To get those drivers they needed to up their pay. The cost of containers blew through the roof as well. It was a disaster! Pass the price increases along to the consumers. We can’t absorb these higher costs. Mayhem in pricing followed.
I’m not sure in 2021, that was the issue. Again, I will reiterate a point I have made numerous times. Corporations found an opportunity to raise prices without any backlash. They had an excuse, Covid 19. For 13 years they have barely raised prices (and with that wages) now they have a chance to increase revenues substantially and look like they are out-managing the pandemic crisis. Shareholders love a good story and increasing revenues in a Worldwide meltdown is one hell of a story. Across the board, companies were looking like geniuses as revenue and earnings ratcheted up, share prices as well.
Followers of markets and stocks will say that is too simplistic and I agree, it is simplistic but I can dig to the next level and tell you that yes, earnings per share were going up but that was based on fewer shares outstanding.
You see, corporate management has the unyielding belief that their job is solely to increase the share price and to do that they will use any tools that are legal and accepted business practices. The biggest tool in their arsenal is not great management or building better, more desirable products. Its corporate repurchases.
Buy backs as they are know in the industry have multiple profound affects. One, they reduce the amount of shares outstanding and that reduction generally helps increase the price of the shares of the company buying back its shares. That, in turn, increases the price earnings per share.
A simple example: If Company A makes 100 million dollars in profit in 2020 with 100 million shares outstanding, it has earned 1 dollar per share. If Company A buys back 10 million shares over the course of the year and still earns 100 million dollars in profit it actually will report $1.11 a share in earnings. If the company trades at a historical multiple of 30 times earnings that would translate into a little over 3 dollar rise in share price with no other factors taken into account. Basically, shareholders received a 10% dividened without ever having to cash a check. That isn’t the onlt reason that companies put buy backs in place. More importantly, their compensation may be linked to the share performance and additional bonuses may be rewarded due to those share price increases. Thats the dirty little secret they don’t bother putting in their announcements. One other little benefit is usually the bump the stock recieves when that buyback is announced.
I will admit, my position on corporate purchases is hypocritical because during my career on the NYSE floor, I handed three of the largest buybacks in history and our firm benefitted from having executed those orders. While they were great revenue generators for our firm, they did little to help those companies expand and grow their businesses. That is my biggest issue with buybacks. Why take billions of dollars of profits to improve your performance in the stock market when you could use that money to improve your future business by increasing research and development or possibly buying a company that will help your company grow in the future?
Once again, I have digressed and I apologize but while the market is having a great year, I think some of that prosperity is due to corporate management of share prices as opposed to good corporate management. Ok, you wonder why I bring that up when I am trying to make the point about this year being no different than any other year. No better or worse. Well, management of share price is an ongoing thing in the corporate world and this past year may set a record for that corporate management. beating last year, which beat the year before that. Get my point?
Business writers will expound on price movements and volatility, saying this was the most volatile year on record. Eh, come on. In point movements, perhaps. Stock indexes are at their highest level in history and every decent move in the S&P or Dow Jones Index will look like this huge event but step back and look at one fact. A two hundred point move in the DJ Index is barely registered but a two hundred point move five years ago meant a lot more. It is about percentage moves now and 2021 isn’t even close to the record holder for that dubious distinction. Volatility has been no better or worse this year than others. Last year, had a much more profound impact as far as pricing equities goes.
As the year closes, we can look back and count our gains and thank corporate America for navigating the most trying economic conditions in history successfully.
I even have to laugh at that one.