Professor Elam

Tuesday Jan 20 2015

We study earnings management and financial engineering in both intermediate accounting and ethics. 

Here is an example of a potential research article for the ethics class. How much have stock buy backs figured in moving the stock market higher?  Do companies have to generate real earnings are can we just buy plow our own earnings into stock. lowering hte numnber of outstanding shares and raising earnings per share?

Are Buyouts Checking Out?
Two more key measures of optimism suddenly betray a diminishing appetite for stocks

By Elliott Wave International

Editor's note: With permission, this article was adapted from the January 2015 issue of The Elliott Wave Financial Forecast. For one week only, EWI is throwing open the doors to its big-picture U.S. outlook. Follow this link to read a lot more of their latest analysis, 100% free, by joining the State of the U.S. Markets Conference.

_____

NYSE margin debt was $457 billion in November, still down from its February 2014 peak of $465.7 billion.

This updated chart of corporate buybacks and mergers shows that after reaching the highest levels since the S&P's 2007 top, buyers pulled in their horns somewhat as 2014 drew to a close.

Thus, two more key measures of optimism suddenly betray a diminishing appetite for stocks.

As we noted in The Elliott Wave Financial Forecast in November, the investment community's obsession with share buybacks at price peaks generally turns into a deep misgiving. This process appears to be underway, as Bloomberg recently quoted a chief investment officer saying, "You can only go so far with financial engineering before you actually have to have a business with real growth."

The financial media sometimes refers to this corporate largesse as "money returned to owners." But history shows that it's nothing of the kind, because shareholders invariably hold on to their investment until stocks prices are much lower. By then, buybacks are so completely discredited that they all but cease to occur.

A reversal must be close: Bloomberg recently reported that in 2014, S&P firms will spend about 95% of their earnings on their own shares and dividends. Some companies are even borrowing money to buy their own shares. It's a strategy they will come to regret.

_____

Editor's note: With permission, this article was adapted from the January 2015 issue of The Elliott Wave Financial Forecast. For one week only, EWI is throwing open the doors to its big-picture U.S. outlook. Follow this link to read a lot more of their latest analysis, 100% free, by joining the State of the U.S. Markets Conference.