What You Need To Know About ‘Smart Money’
Energy prices are not the only thing weighing the economy down. Companies are taking advantage of almost free money (money at very low interest rates) to get involved in stock buyback programs. This just ends up increasing the liabilities on the balance sheet which measures how much money a company owes it’s lenders.
Learn about the impact of the buyback programs in relation to stock prices.
In this cycle, stocks have been powered higher by debt-fueled share buyback programs which, as any corporate finance textbook will tell you, increases the “gearing” or operating leverage of a company. That means that not only could the economy be pulled down by the drop in earnings, but stocks could be more sensitive to the drop in profitability because of the higher fixed costs associated with servicing all that new debt.
The article lists some good ideas of what to watch out for. The first thing I looking at forward earnings to see if they are increasing or decreasing overall. You also have to consider factory output activity and see if commodity prices are increasing or declining. An increase in commodity prices suggests high demand but when looking at this metric you also want to see if projects are coming online and being delayed as an indication of supply for commodities. A few other things to consider for the health of the economy are consumer prices and what insiders might be saying, do they feel strongly or negatively?
See how all these signs impact the current stock market.
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About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.