Market Talk

Selling the dollar and buying stocks and commodities has become a crowded trade these days, and some of the throng unwound a little today.

Session began with a negative tone as the dollar strengthened, euro weakened significantly premarket and high expectations on some earnings (IBM, AAPL late yesterday) weren’t met. Chatter about mortgage put-backs fan the flames, but it’s pretty clear from market action in stocks, gold, oil and other commodities that currencies were the key influence.

Euro gets hammered, falling well below $1.38 after flirting with $1.41 just yesterday. US dollar index up about 1.7%.

Major indexes trim losses near the close. Energy, materials and health-care lead sector decliners. IBM alone knocks 36 points off the DJIA, which falls 165.07 to 10978.62. Nasdaq Comp tumbles 43.71 to 2436.95, and S&P 500 ends 18.81 lower at 1165.90.

Data calendar tomorrow is pretty thin, with most notable item being the Fed’s latest Beige Book regional economic assessments.

Today’s Upshot takes a look at buybacks, a once-again growing trend among companies looking for something to do with all that money they’ve suddenly got (what’s that you say? Invest in the business? Hire some new people? Ah, you beautiful dreamer.)

From The Upshot:

Whether it’s energy industry blue-chip Exxon Mobil Corp. or little known financial products seller Artio Global Investors Inc., more companies are ramping up their stock-repurchase activity.

It’s another outgrowth of the stellar profit growth corporate America is enjoying for the third quarter in a row. Higher profits have led to copious cash flows. But all that money isn’t making executives more confident about future prospects. Instead of investing in new markets or expanding existing businesses, many see stock buybacks as a better option for now.

“It’s a pretty easy decision,” Artio Global Chief Executive Richard Pell said on a conference call last week. “I buy back the stock this cheap—it’s accretive to [earnings per share] and existing people [who] hold the stock are basically benefiting from that.”

Toward the end, we also noted that having less shares outstanding helps boost earnings per share, which prompted a quick note from Legg Mason’s Michael Mauboussin. “I can’t resist pointing out that buybacks don’t automatically increase EPS,” he wrote. He then highlighted this paragraph from a paper he wrote back in 2006.

Whether a buyback program increases or decreases earnings per share is a function of the price/earnings multiple and either the company’s forgone after-tax interest income or the after-tax cost of new debt the company uses to finance the buyback. More concretely, when the inverse of the price/earnings multiple—often called the earnings yield—is higher than the after-tax interest rate, a buyback adds to earnings per share. When the earnings yield is less than the after-tax interest rate, a buyback reduces earnings per share. The relationship between the earnings yield and the after-tax interest rate has little or nothing to say about value.

In other words, it’s complicated.

Dow Jones’ Dave Benoit and Nat Worden report:

On the day of truth, doubt creeps in.

Shares of Madison Square Garden (MSG), which runs the home of the New York Knicks and the place much of the city is dreaming will be called home by a certain basketball player as of 9:00pm ET tonight, are dropping this morning after yesterday’s big gain.

The shares and options both appeared pretty confident yesterday when news hit that LeBron James would announce in a TV special tonight where he’ll sign, the Knicks being one possibility. But reports suggest King James is headed to South Beach, a Knicks fan and MSG investor’s worst nightmare.

The potential LeBron could bring to Manhattan is hard to quantify. But it’s definitely safe to say LeBron could bring New York, and MSG, more than just a championship. If LeBron chooses to sign with the Knicks, increased suite and merchandising sales as well as higher MSG Network ratings would all ensure a stronger investment return on the upcoming renovation of the area, according to BTIG Research analyst Richard Greenfield (subscription required). Having James in the fold would also boost profitability levels across MSG’s businesses.

The rebuild is currently expected to cost more than $800 million, with a goal of adding over $75 million of annual EBITDA, according to Greenfield.

MSG shares were recently down 4.6% at $20.58 as enthusiasm is waning heading into tonight’s announcement on ESPN.

Editor’s Note: We here at Market Talk are still optimistic. Since the credible Chad Ochocinco is reporting LeBron’s headed to the Big Apple, we’re still holding out hope.

UPDATE: MSG shares close down 5.5% to $20.38, even as the market stages a late-day comeback and finishes sharply higher. We’re about three hours away from LeBron’s announcement. For Knicks fans and MSG investors, it’s not looking pretty.

(Photo credit: Wikimedia Commons.)