The Strategy of the Buyback

Apple has scheduled a massive stock buyback for later this month, with the expectation that the company will repurchase about $10 billion worth of its own shares. This is supposed to be an encouraging sign for stockholders. It's not just that Apple is confident enough in its future that it wants to own more of its own stock, but by removing those shares from the marketplace, the purchase should help buoy the price.

 

But it doesn’t always work that way. Like many individual investors, companies are all too often willing to buy their own stock when prices are high, and sell it when prices are low. In the recent past, stock buybacks by the S&P 500 peaked at $172 billion in the third quarter of 2007 – when the market was at its peak – and reached a trough at $24 billion in the second quarter of 2009, just after the market had hit bottom.

 

Consider the plight of Best Buy, which has bought back 98 million of its own shares since April 2010, according to the Wall Street Journal’s CFO Report. It paid about $30 a share for that stock, but it’s now trading just under $20, which means the buyback program has cost Best Buy around $1.2 billion.

Teenagers in the Work Force

Here's a follow-up to Friday's job report, in which the unemployment rate dropped despite the fact that the overall number of new jobs added was disappointing. That happened in part because so many people dropped out of the labor force, a total of 368,000 would-be workers.

The vast majority of those dropouts, though, were teenagers who might never have had full-time jobs before in their lives. According to the Labor Department, 209,000 people aged 16 to 19 dropped out of the labor force, as did an additional 218,000 people aged 20 to 24. The statistics may have a hard time accounting for younger people leaving their part-time summer jobs so they can go back to school.

Meanwhile, there was actually significantly growth in the labor force among older people. There were small upticks for the cohorts aged 25-34 and 35-44, and the number of people aged 55 and over entering the work force grew by a whopping 274,000 workers.   

Jobs Report Falls Short

We've got another good news/bad news unemployment figure out this morning: After some excitement earlier in the week, when the private ADP payroll figure suggested the economy might have created as many as 200,000 new private-sector jobs, the official number from the Bureau of Labor Statistics came in at just 96,000 new jobs. At the same time, though, the official unemployment figure dropped from 8.3 percent to 8.1 percent.

The private sector was responsible for the creation of 103,000 new jobs, with the government shedding 7,000 jobs for the month.Perhaps the most disappointing sector was factory jobs, which were down 15,000 on the month, after in increase of 23,000 jobs in July.

The unemployment rate dropped primarily due to an increase in the number of people leaving the work force. All told, 368,000 Americans stopped looking for work, for one reason or another, over the course of the month.That is not a positive sign for the economy.

Too Many ETFs?

One of the big investing trends of this year has been the  outflow of assets in equity mutual funds, much of which has happened in response to the rise of exchange-traded funds. But certain aspects of the ETF industry have been challenged as well: The Financial Times has reported that there are literally hundreds of ETFs on the market that lack the assets to remain financially viable.

And the numbers are getting worse. FT says that at the end of 2010, roughly 14.5 percent of all ETFs that had been around for six months had less than $25 million in assets or had traded less than $100,000 per day. Now that number is up to 27 percent.  Those funds falling below the viability threshold draw in just $35,000 a year in revenue - hardly enough to make it worth keeping them going.

What we may be seeing is that the ETF market has been over-flooded with new products, with more than 1400 total funds available now. That's a big reason why asset managers such as Russell Investments have decided to close up their 25 ETFs and exit the business.

The Vital Information

What should you know about your financial advisor? As part of the Dodd-Frank banking regulation, the SEC was tasked with talking to individual investors to gauge the breadth of their knowledge about various financial and investing topics, and one of the most interesting areas of the survey, released last week, touched on what people felt they should know about the professionals who handle their money.

The top three subjects that investors considered "absolutely essential" to know about their advisor:

* Information about their advisor's fees: 76.4 percent said this was absolutely essential
* Information about their advisor's investment strategies: 69.5 percent
* Information about their advisor's disciplinary history: 67.4 percent

All this information is vital to know, and any advisor who doesn't freely release it is someone you shouldn't be working with. If you have any questions about these or any other aspect of what we do here at Echelon Wealth Strategies, please feel free to give me a call.

Trends in Household Debt

One of the signs that our economy is growing is that people are continuing to pay down their household debt. Even as consumer spending has been increasing  - it was up 0.4 percent in July -  consumer debt fell by $53 billion in the second quarter.

At the end of the second quarter of 2012, total consumer indebtedness had fallen to $11.38 trillion, 0.5 percent lower than its level at the end of the first quarter of 2012. The biggest driver of this reduction has been the drop in real estate loans. Mortgage balances are down 0.5 percent from the first quarter of this year, and  home equity lines of credit balances dropped by 3.7 percent.

Aside from mortgages and HELOCs, household debt balances actually increased by 0.4 percent in the second quarter. One of the biggest causes was an increase of $14 billion in auto loans - good news for the continuing strength of our auto industry.

Thoughts for Labor Day

“My grandfather once told me that there were two kinds of people: those who do the work and those who take the credit. He told me to try to be in the first group; there was much less competition.”~ Indira Gandhi

“A mule will labor ten years willingly and patiently for you, for the privilege of kicking you once.” ~ William Faulkner

“I believe in the dignity of labor, whether with head or hand; that the world owes no man a living but that it owes every man an opportunity to make a living.” ~ John D. Rockefeller