Legg Mason, the giant asset management company that was recently sold off by Citigroup, issued a report on January 10, 2020 by Michael Mauboussin, Chief Investment Strategist, entitled, “Clear Thinking About Share Repurchases”.

Legg Mason Report
Legg Mason Report

A fundamental technique of Capital Flow Analysis is to look for the motivation of market players when examining Federal Reserve national flow of funds accounts.

Legg Mason, with $8.2 billion in its own assets and $373 billion of other people’s money under management, certainly qualifies as a major player; its official views are relevant to understanding the behavior of fund managers.

The Legg Mason commentary was available in PDF format at no cost on their website in March 2006.

Rather than hedge its strong support for stock buybacks, this report boldly states that “the views expressed in this commentary reflect those of Legg Mason Capital Management as of the date of this commentary.”

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On January 28, 2020, an Associated Press dispatch proclaimed: “Corporate Earnings Good Despite Headlines”, stating that “corporate profits remain very healthy overall, and the majority of corporations are beating expectations.”

Michael Mauboussin, chief investment strategist of a large fund management group, in the report cited in “Legg Mason Argues For More Efficient Stock Buybacks“, also wrote in January 2006 that “corporate America is flush, and returns and cash flows remain strong.”

Are these assertions true and does this mean that the outlook is rosy for the average investor in U.S. equities?

As the Federal Reserve national flow of funds table F102 reveals, the answer is,

“Yes, U.S. corporations are flush with cash and profits are growing”, and

“No, this does not mean the outlook is rosy for the average investor in equities.”

The reason for this apparent contradiction is that the most practical and useful measure of value for corporate profits depends on who you are.

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