Harvard Business ReviewL Profits without Prosperity

[Winehole23]

Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.


The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.


The buyback wave has gotten so big, in fact, that even shareholders—the presumed beneficiaries of all this corporate largesse—are getting worried. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote in an open letter to corporate America in March. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”


Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.


As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity—with unsurprising results. Even when adjusted for inflation, the compensation of top U.S. executives has doubled or tripled since the first half of the 1990s, when it was already widely viewed as excessive. Meanwhile, overall U.S. economic performance has faltered.https://hbr.org/2014/09/profits-without-prosperity

[CosmicCowboy]

Pretty over simplistic. Stock prices are at an all time high not because of buybacks but because central banks are keeping interest rates at an all time low. Investors have no other place to go and have to accept the increased risk in order to get any return.

Most companies have adequate production facilities for the current market. With tepid worldwide GDP growth they don't need to invest in additional capacity they have no use for. This is the same reason there are a lot of current mergers and acquisitions. The cash is being used to grow market share and realize the reduced overhead of the combination.

Stock buybacks are like putting money in the bank.Future profits can be retained and used internally instead of distributing them to the shareholders of the stock they retired. This will put them in a better position to react and grow when and if worldwide demand increases and they need to increase production.

[Winehole23]

it's greed and short-sightedness. instead of investing productively and creating value, big firms are using record levels of profit to extract value for upper management.

[CosmicCowboy]

Oversimplification. Why invest in new production they can't sell or use? Worldwide GDP growth is flat as a pancake trending towards recession despite unprecedented monetary easing by central banks.

A 30 million CEO salary/stock option package is peanuts for a multi billion dollar company.

[CosmicCowboy]

WH you are normally more objective that that. Your post was alarmingly Boutonish.

[CosmicCowboy]

*

[boutons_deux]

BigCorp sitting on $2T+ cash domestically and probably as much overseas

The objective of capitalism is to create capital, not to create jobs, or promote the "socialistic" general welfare.

The greed of brutal, no-prisoners, dog-eat-dog capitalism is the only ethic, and it has worked very well for the 1%.

USA doesn't even build its own rocket motors now, has to buy from Russia.

[CosmicCowboy]

If you anticipate a recession (which many signs indicate) it is wise to hoard cash.

[spursncowboys]

If you anticipate a recession (which many signs indicate) it is wise to hoard cash.
When the brokers start thinking recession, they start moving their stocks into high yield stocks. Apple is one of the only ones in the NASDAQ that has a pretty good dividend. So as Apple has climbed higher and higher, its safe to say that people are thinking like this.

[CosmicCowboy]

When the brokers start thinking recession, they start moving their stocks into high yield stocks. Apple is one of the only ones in the NASDAQ that has a pretty good dividend. So as Apple has climbed higher and higher, its safe to say that people are thinking like this.

iv'e got 4000 shares of this crazy beat down low cost silver mining company. Their share price sucks because silver is cheap at $17 but their all in cost to produce is $10 so they are still putting money in the bank and paying a 1.4% dividend and about to do a 10% stock repurchase. Kind of a cool deal...park the money and the dividend keeps up with inflation and should get a 4-5X stock pop when silver prices go back up.

[Winehole23]

One contingent that was particularly happy to see the Fed leave rates at 0% was corporate America. Rock bottom financing has fueled the stock buyback binge for several years as companies can borrow money much cheaper than what they are reaping through their share repurchases. Whether or not that is a prudent use of resources is another matter. But one thing is certain – the binge has continued. According to he most recent data from Factset, companies in the S&P 500 spent $134.4 billion on share repurchases in the 2nd quarter. And while that figure was down slightly from the 1st quarter, the $278.8 billion total for the 1st half of 2015 was the highest figure on record for a first half of a year, surpassing the previous high set in both 2007 and 2014.



http://41.media.tumblr.com/3dff246ba969de936785c5dd4ee7ec74/tumblr_inline_nv6c64dYtF1sq14jh_500.jpg

A couple other statistics from the report from Factset (http://www.factset.com/websitefiles/PDFs/buyback):




Information Technology Tops Buyback Spending; Financials & Industrials Lead YoY Growth: The Information Technology sector spent $35.9 billion on buybacks in Q2, which was more than any other sector. The Financials and Industrials sectors led all groups in year-over-year growth for quarterly buybacks, posting growth rates of 29.8% and 17.1%, respectively.
Buybacks to Free Cash Flow Ratio Exceeds 100%: Companies spent more on buybacks in Q2 on a trailing 12-month basis than they generated in free cash flow (FCF). The aggregate Buybacks to FCF ratio for the S&P 500 exceeded 100% for the first time since October 2009.

Buyback Yield Hits Lowest level since April 2011: The 12-month basis shares repurchased represented 2.8% of the aggregate shares outstanding in the S&P 500. This constituted the smallest buyback yield for the index since April 2011, when the ratio was 2.7%.

Pharma/Biotech Led the QoQ Buyback Decliners: Pfizer, a consistent participant in buybacks, experienced the largest quarter-over-quarter decline of any S&P 500 company in Q2 in dollar terms (-$6.2 billion). Also, of the other 8 companies showing declines of >$1 billion, 3 were pharma/biotech companies: Gilead, Abbott Labs and Johnson & Johnson.



We mentioned above that we have wondered whether stock buybacks are the most prudent use of corporate capital. This imponderable gets at the main objective of corporate management. Is it to maximize shareholder value? Or is it to keep the company best positioned, strategically, for the long-term? Is it inherently both? Can it be both? Or is there a duration conflict involved in which the effort to meet, or exceed, quarterly earnings estimates is in competition with the longer-term best interests?
One factor that has had us wondering about this issue for some time is the lack of growth in core capital expenditures (CapEx). We wrote the following in a March 27 (http://jlfmi.tumblr.com/post/114774064280/gap-widening-between-stocks-capex) piece on the widening gap between stock prices and CapEx:


In the conundrum over the gap between CapEx and stocks, buybacks are squarely in the cross hairs. Now it is unknown, and perhaps unknowable, if companies are putting off CapEx in favor of buybacks. However, we do know that buyback activity has been at or near historic levels recently.


Now there, of course, is not a perfect relationship between CapEx and buybacks. However, given the recent levels of corporate stock buybacks, it is not a stretch to think that some CapEx may be getting put on the back burner in favor of buybacks, or any number of financial engineering mechanics given the favorable environment for that stuff. Consider this: if the growth of CapEx had kept pace with the S&P 500′s rise over the past 2 years, it would equate to about $24 billion more in CapEx per month. Buybacks are currently running at about $12 billion more per month than 2 years ago. So that’s half the difference there.



Also consider this: from 2000 to 2014, CapEx has grown a mere 11%. Buybacks, on the other hand, are up by 263%. Now, we’re not inside every corporate board room, but we do have to wonder, is there too much “shareholder value” going on relative to longer-term “strategic position”? What happens when the Goldilocks, ZIRP-funded, leveraged stock binge/revolving door corporate windfall comes to an end? (And it won’t necessarily take an end to ZIRP to bring that about.) What tangibles will companies be left with? As we finished the CapEx piece:

Now, once again we are not economists. Perhaps our readers have some good explanations for what is going on here – or perhaps would vouch for our [CapEx vs. buyback] thesis. Otherwise, we will simply leave you with some open-ended questions that we have posed before. We won’t endeavor to answer them – and frankly would be more than a little concerned to hear what they are.

1) To what extent have stock buybacks cut into CapEx?
2) What happens to balance sheets in a real stock correction given the level of buybacks?
3) With profits and margins recently at peaks (maybe), what happens when companies are forced to spend again on CapEx?
If 2 and 3 occur, what sort of EPS theatrics will companies resort to in order to meet estimates?



Well, #2 has certainly unfolded this quarter to some extent. And given the continued buyback binge, 3rd quarter earnings should be pretty interesting.

http://jlfmi.tumblr.com/post/129771820120/stock-buyback-binge-continues

[Winehole23]

America’s vaunted research prowess is under attack. Not from China, Japan, or Germany, but from within, led by impatient investors eager to gain immediate boosts in stock prices.

Spurred on by activist investors, these shareholders are arguing that research takes too long, costs too much, and carries too many risks.




Now, DuPont’s research labs, which produced discoveries such as nylon, rayon, Teflon, and solar cells, is the target of persistent activist attacks. This week’s announcement of the merger of America’s two leading chemical companies, DuPont (http://fortune.com/fortune500/dupont-87/)DD (http://fortune.com/fortune500/dupont-87/) -5.51% and Dow (http://fortune.com/fortune500/dow-chemical-48/)DOW (http://fortune.com/fortune500/dow-chemical-48/) -2.80% , could spell doom for DuPont’s central research labs and presages further research cuts at Dow as well. To preserve DuPont, former CEO Ellen Kullman won a hard-fought proxy contest with activist investor Nelson Peltz. Six months later, new board member Ed Breen convinced her to retire and took over as CEO.


Only a month after taking the reins, Breen merged the company with Dow and will become CEO of the combined companies. Breen and Dow CEO Andrew Liveris have vowed to cut R&D and break the combined company into three smaller firms (http://www.wsj.com/articles/dupont-and-dow-talks-put-spotlight-on-agricultural-industry-1449794667), leaving it a weakened player in a competition against global chemical giants like Germany’s BASF and Bayer, and China’s Sinopec and Sinochem. Breen and Liveris were apparently reacting to pressure from activist investors including Peltz and Third Point’s Dan Loeb to resort to financial engineering to create immediate shareholder value. In doing so, they are pleasing short-term shareholders at the potential expense of business fundamentals.

http://fortune.com/2015/12/12/dow-dupont-corporate-research-america/

[boutons_deux]

capitalism is great for capitalists, sucks for everybody else

cutting BigCorp taxes kills investment, as profits go to mgmt, to investors, stock buybacks (increases stock price for mgmt, investors), and overseas evasion.

BigCorp makes bigger returns in the sterile financial casino rather actually doing stuff.

It looks like GE is reversing Welch's de-industrialisation of GE (laid off 1000s of engineers, had 1000 people in the tax dept, moved GE towards BigFinance) is selling off its financial stuff, in order to get back being one of America's superpower industrial giants.

[Winehole23]

When is the potential merger of two centuries-old chemical industry behemoths not the biggest story in economics news?


The answer: When it's merely the capstone to one of the biggest frenzies of corporate mergers in years.


Dow Chemical and DuPont — established in 1897 and 1802, respectively, and with a market value of about $60 billion each — are in talks to combine forces. The proposal may yet come undone, but if it goes through, it would just add to 2015's flurry of mergers: Think Pfizer and Allergan (http://www.wsj.com/articles/2015-becomes-the-biggest-m-a-year-ever-1449187101) for $160 billion (the second-biggest health care deal on record), Dell and EMC Corp. (http://www.wsj.com/articles/2015-becomes-the-biggest-m-a-year-ever-1449187101) for $67 billion (the biggest tech deal on record), and Anheuser-Busch InBev and SABMiller (http://theweek.com/articles/582948/great-budweiserization-global-beer-market) for $108 billion (the biggest beer deal on record).


In fact, when U.S. coffee maker Keurig Green Mountain got bought out for $13.9 billion earlier this month, 2015 hit the all-time record (http://www.theguardian.com/business/2015/dec/07/value-of-mergers-and-acquistions-all-time-high-coffee-deal): 18,603 deals completed for a total value of $4.614 trillion. The previous peak was 2007, which had a higher number of deals at 23,577, but topped out the total value at $4.610 trillion. Before that the highest peak was 2006, and before that it was 1999, and then 2000.

http://theweek.com/articles/593304/why-great-merger-frenzy-2015-signals-another-recession

[Winehole23]

why the falling rate of productivity in the US?

Jared Bernstine fingers misallocated capital:


It’s hard to know what drives productivity trends up and down, but I’ve got a couple of theories. Investment in productive capital is a known driver of productivity growth, and its slower growth rate in recent years shows up as one reason for productivity’s deceleration. But that just begs the question: why the slowdown in investment? (My other theory is that there’s a full employment productivity multiplier—full employment drives firms facing higher labor costs to find efficiencies they otherwise didn’t need to maintain profits. I won’t get into that here but it suggests what I believe to be an important linkage between productivity growth and persistently weak labor demand.)


In fact, after accounting for measurement issues, our productivity problem may be less a slowdown than a misallocation. If you want to see what deeply damaging misallocation looks like, and be entertained by it (really!), go see The Big Short. Surely the (d)evolution of finance and its contribution to some pretty awful economic outcomes in recent years is diverting investment into non-productive sectors and activities.http://jaredbernsteinblog.com/the-productivity-slowdown-mismeasurement-or-misallocationor-both/

[Winehole23]

Once inept (and wrongly incented (http://cepr.net/blogs/beat-the-press/credit-rating-agencies-still-suffer-from-conflict-of-interest)) credit-rating agencies label dangerous junk as triple-A-grade securities, domestic investment—e.g., large pension funds—can slosh into unproductive sectors as well.

I find this research compelling. The conventional assumption is that flows that boost “I” (investment in the GDP equation) are always and everywhere pro-growth. This approach to analyzing the more nuanced impact and even the content of capital flows (http://www.voxeu.org/article/macro-effects-capital-inflows-capital-type-matters) (investments in some assets are more benign than others) may help to develop a more realistic understanding of what’s driving productivity growth down in nations across the globe.


But wait. Didn’t the under-regulated-finance-inflated housing bubble implosion occur years ago? Yep. But such misallocation, I’m guessing (to be clear: a lot of this is new, unproven thinking), takes years to shake out, especially when it involves leverage, shadow banks, bailouts, and all the rest. “Extend and pretend”—where banks convince themselves that non-performing loans would soon come back to life—draws out the rebalancing cycle a lot more than “mark-to-market,” like when the value of your equities in pet rocks falls to zero from Monday to Wednesday.

[Winehole23]

is finance decoupled from industrialization? Michael Hudson, author of Killing the Host, weighs in:



The financial sector today is decoupled from industrialization. Its main interface with industry is to provide credit to corporate raiders. Their objective is asset stripping, They use earnings to repay financial backers (usually junk-bond holders), not to increase production. The effect is to suck income from the company and from the economy to pay financial elites.

These elites play the role today that landlords played under feudalism. They levy interest and financial fees that are like a tax, to support what the classical economists called “unproductive activity.” That is what I mean by “parasitic.”




If loans are not used to finance production and increase the economic surplus, then interest has to be paid out of other income. It is what economists call a zero-sum activity. Such interest is a “transfer payment,” because it that does not play a directly productive function. Credit may be a precondition for production to take place, but it is not a factor of production as such.


The situation is most notorious in the international sphere, especially in loans to governments that already are running trade and balance-of-payments deficits. Power tends to pass into the hands of lenders, so they lose control – and become less democratic.


To return to my use of the word parasite, any exploitation or “free lunch” implies a host. In this respect finance is a form of war, domestically as well as internationally.


At least in nature, “smart” parasites may perform helpful functions, such as helping their host find food. But as the host weakens, the parasite lays eggs, which hatch and devour the
host, killing it. That is what predatory finance is doing to today’s economies. It’s stripping assets, not permitting growth or even letting the economy replenish itself.


The most important aspect of parasitism that I emphasize is the need of parasites to control the host’s brain. In nature, a parasite first dulls the host’s awareness that it is being attacked. Then, the free luncher produces enzymes that control the host’s brain and make it think that it should protect the parasite – that the outsider is part of its own body, even like a baby to be specially protected.


The financial sector does something similar by pretending to be part of the industrial production-and-consumption economy. The National Income and Product Accounts treat the interest, profits and other revenue that Wall Street extracts – along with that of the rentier sectors it backs (real estate landlordship, natural resource extraction and monopolies) – as if these activities add to Gross Domestic Product. The reality is that they are a subtrahend, a transfer payment from the “real” economy to the Finance, Insurance and Real Estate Sector. I therefore focus on this FIRE sector as the main form of economic overhead that financialized economies have to carry.


What this means in the most general economic terms is that finance and property ownership claims are not “factors of production.” They are external to the production process. But they extract income from the “real” economy.


They also extract property ownership. In the sphere of public infrastructure – roads, bridges and so forth – finance is moving into the foreclosure phase. Creditors are trying to privatize what remains in the public domains of debtor economies. Buyers of these assets – usually on credit – build interest and high monopoly rents into the prices they charge.

http://www.nakedcapitalism.com/2016/03/michael-hudson-on-debt-deflation-the-rentier-economy-and-the-coming-financial-cold-war.html

[Winehole23]

If you read Adam Smith and subsequent classical economists, you see that their main concern was to distinguish between productive and unproductive economic activity. They wanted to isolate unproductive rentier income, and unproductive spending and credit.

To do this, they developed the labor theory of value to distinguish value from price – with “economic rent” being the excess of price over socially necessary costs of production. They wanted to free industrial capitalism from the legacy of feudalism: tax-like ground rent paid to a hereditary landed aristocracy. They also opposed the monopolies that bondholders had insisted that governments create to sell off to pay the public debt. That was why the East India Company and the South Sea Company were created with their special privileges.


Smith and his followers are applauded as the founding fathers of “free market” economics. But they defined free markets in a diametrically opposite way from today’s self-proclaimed neoliberals. Smith and other classical economists urged markets free from economic rent.


These classical reformers realized that progressive taxation to stop favoring rentiers required a government strong enough to take on society’s most powerful and entrenched vested interests. The 19th-century drive for Parliamentary reform in Britain aimed at enabling the House of Commons to override the House of Lords and tax the landlords. (This rule finally passed in 1910 after a constitutional crisis.) Now there has been a fight by creditors to nullify democratic politics, most notoriously in Greece.
Today’s neoliberals define free markets as those free for rent-seekers and predatory bankers from government regulation and taxes.


No wonder the history of economic thought has been stripped away from the curriculum. Reading the great classical economists would show how the Enlightenment’s reform program has been inverted. The world is now racing down a road to the Counter-Enlightenment, a neo-rentier economy that is bringing economic growth to a halt.

[boutons_deux]

example:

What Bishop Gekko and Bain are doing to iHeartMedia (Clear Channel). destructive, parasitic p/e sucks cash out of the victim by p/e loaning itself $Ms (the $Ms come from other predatory capitalist lenders) using the assets (stripped) of the victim as collateral.

The victim can't repay the loans, sooner or later, so the capitalist lender takes control of the assets, while p/e parasite absconds with the cash.

Just another form of capital FUCKING OVER labor (because the jobs of the victim org are lost).

Simultaneously, the capitalists buy politicians, pay demagogues, run hate media, construct stink tanks to convince the sheeple that their economically shitty, no-future lives are exclusively the fault of Those People (n!gg@s), illegal immigrants, and government which the capitalists also own, fuckup, defund, self-fulfilling their "govt is fucked up" propaganda.

As Hudson puts it: the predatory, extractive, parasitic capitalists create propaganda to "focus on political and cultural issues, not the economic policy that led to their original creation", deflecting the blame from themselves to govt and The Others (n!gg@s, wetbacks, the poor, government)

[boutons_deux]

Hudson refers to Rome's "Conflict of the Orders"

https://en.wikipedia.org/wiki/Conflict_of_the_Orders

[Winehole23]

buybacks offset dilution caused by stock compensation for CEOs -- a significant recurring cost for shareholders



“We realized that dilution was systemic in the Standard & Poor’s 500,” Mr. Winters said in an interview, “and that buybacks were being used not necessarily to benefit the shareholder but to offset the dilution from executive compensation. We call it a look-through cost that companies charge to their shareholders. It is an expense that is effectively hidden.”


Mr. Winters and his colleague Liz Cohernour, Wintergreen’s chief operating officer, totaled the compensation stock grants dispensed by S.&P. 500 companies and added to those figures the share repurchases made by the companies to reduce the dilution associated with the grants.


What they found: The average annual dilution among S.&P. 500 companies relating to executive pay was 2.5 percent of a company’s shares outstanding. Meanwhile, the costs of buying back shares to reduce that dilution equaled an average 1.6 percent of the outstanding shares. Added together, the shareholder costs of executive pay in the S.&P. 500 represented 4.1 percent of each company’s shares outstandinghttp://www.nytimes.com/2016/07/10/business/investors-get-stung-twice-by-executives-lavish-pay-packages.html?_r=0

[boutons_deux]

Guess who legalized buybacks?

Guess who allowed inversions?

[Winehole23]

Dunno. Who?

[Th'Pusher]

Dunno. Who?

Buy backs were legalized in the early 80s, so my guess is both inversions and buy buy backs were legalized under the Reagan administration.

[Winehole23]

Reagan gets the blame for bad policy passed by Democrats, obviously.

[boutons_deux]

Reagan gets the blame for bad policy passed by Democrats, obviously.

Clinton did sign off on 5 Repug long-term goals, and Hillary will do the same.

Repugs (paid by VRWC, BigCorp, 1%) wrote the shit, and enough Dems, also corrupted by money, went along. That's why America is fucked and unfuckable.

The VRWC got organized in the early '70s, worked hard and widely, got their diseased puppet and his team elected in 1980. Americans have been on the decline ever since, and it continues.

[boutons_deux]

Market Capitalism is Broken: Why Adam Smith Would be Outraged by Modern Finance

But only 15 percent of all the money flowing through financial institutions today ends up in businesses. The rest of it is staying within the closed loop of the market itself. It’s being traded.

What is the rest of the money — that 85 percent — actually doing?

A lot of that money is going into the real estate market. Some of it is going to average people like you and me for mortgage loans, but the real money is in securitizing those loans.

We heard about that during the financial crisis, the splice‑and‑dice CDOs that blew up. That’s still happening. The mortgage market essentially funds the purchase of old assets, houses. It doesn’t grow the economy. That’s one part of it.

http://evonomics.com/makers-and-takers-adam-smith/

[Pelicans78]

Clinton did sign off on 5 Repug long-term goals, and Hillary will do the same.

Repugs (paid by VRWC, BigCorp, 1%) wrote the shit, and enough Dems, also corrupted by money, went along. That's why America is fucked and unfuckable.

The VRWC got organized in the early '70s, worked hard and widely, got their diseased puppet and his team elected in 1980. Americans have been on the decline ever since, and it continues.

I seem to be doing ok so I'm not complaining.

The government is no better at investing for the general public than the corporations.

[RandomGuy]

Pretty over simplistic. Stock prices are at an all time high not because of buybacks but because central banks are keeping interest rates at an all time low. Investors have no other place to go and have to accept the increased risk in order to get any return.

Most companies have adequate production facilities for the current market. With tepid worldwide GDP growth they don't need to invest in additional capacity they have no use for. This is the same reason there are a lot of current mergers and acquisitions. The cash is being used to grow market share and realize the reduced overhead of the combination.

Stock buybacks are like putting money in the bank.Future profits can be retained and used internally instead of distributing them to the shareholders of the stock they retired. This will put them in a better position to react and grow when and if worldwide demand increases and they need to increase production.

The Dumbest Business Idea Ever. The Myth of Maximizing Shareholder Value


By the end of the 20th century, a broad consensus had emerged in the Anglo-American business world that corporations should be governed according to the philosophy often called shareholder primacy. Shareholder primacy theory taught that corporations were owned by their shareholders; that directors and executives should do what the company’s owners/shareholders wanted them to do; and that what shareholders generally wanted managers to do was to maximize “shareholder value,” measured by share price.

Today this consensus is crumbling. As just one example, in the past year no fewer than three prominent New York Times columnists have published articles questioning shareholder value thinking.1 Shareholder primacy theory is suffering a crisis of confidence. This is happening in large part because it is becoming clear that shareholder value thinking doesn’t seem to work, even for most shareholders

http://evonomics.com/maximizing-shareholder-value-dumbest-idea/


Public companies have become too focused on short-term.

[RandomGuy]

buybacks offset dilution caused by stock compensation for CEOs -- a significant recurring cost for shareholders

http://www.nytimes.com/2016/07/10/business/investors-get-stung-twice-by-executives-lavish-pay-packages.html?_r=0

Pretty much.

It sucks money out of existing shareholders' pockets, and puts it in that of management.

Dividends FTW. If you want to give shareholders something, and put some money into the economy... pay fucking dividends.

[Winehole23]

Robin Greenwood and David Scharfstein’s (2012) “The Growth of Modern Finance” provides a telling empirical illustration of the transfer (rather than income- generating) character of today’s financial sector. In addition to showing that the financial industry accounted for 7.9 percent of U.S. GDP in 2007 (up from 2.8 percent in 1950), they calculated that much of this took the form of fees and markups — the quintessential transfer payments. Such charges by asset managers of mutual funds, hedge funds, and private equity concerns now account for 36 percent of the growth in the financial sector’s share of the economy, as Gretchen Morgenson (2012) reports. Finance also accounts for some 40 percent of corporate profits. But our point is that financial “profits” in the classical scheme are largely rents, not profit. They are not the same thing as industrial earnings from tangible capital formationhttp://www.unz.com/article/finance-is-not-the-economy/

[Winehole23]

An economy based increasingly on rent extraction by the few and debt buildup by the many is, in essence, the feudal model applied in a sophisticated financial system. It is an economy where resources flow to the FIRE sector rather than to moderate-return fixed capital formation. Such economies polarize increasingly between property owners and industry/labor, creating financial tensions as imbalances build up. It ends in tears as debts overwhelm productive structures and household budgets. Asset prices fall, and land and houses are forfeited.


This is the age-old pattern of classical debt crises. It occurred in Babylonia, Israel, and Rome. Yet, despite its relevance to the United States and Europe today, this experience is virtually unknown in today’s academic and policy circles.

[Winehole23]

financialization is a drain on productivity:



Faced with the choice between the arduous long-term planning and marketing expense of real-sector investment with single digit returns, the quick (and lower-taxed) capital gains on financial and real estate products offering double-digit returns have lured investors. The main connection to tangible capital formation is negative by diverting new borrowing away from the real sector, as recent studies show (Chakraborty Goldstein and McKinlay 2014).


Industrial companies were turned over to “financial engineers” whose business model was to take their returns in the form of capital gains from stock buyback programs, higher dividend pay-outs, and debt- financed asset takeovers (Hudson 2012, 2015a, 2015b). Charting the ensuing rise of interest and capital gains relative to dividends, and of portfolio income relative to normal cash flow in America’s nonfinancial businesses, Greta Krippner (2005, 182) concludes: “One indication of financialization is the extent to which non-financial firms derive revenues from financial investments as opposed to productive activities.”


Much as real estate speculators grow rich on inflated land values rather than production, so financialization threatens to undermine long-term growth. Since the 1980s, the major OECD economies have seen rising capital gains divert bank credit and other financial investment away from industrial productivity growth. Engelbert Stockhammer (2004) shows a clear link between financialization and lower fixed capital formation rates.

[Winehole23]

“The stereotype of what finance is supposed to do is take the income of savers and channel that to productive investments,” Marshall Steinbaum, an economist at the Roosevelt Institute, told me. “That’s not what finance does now. A lot of finance goes in the opposite direction, where essentially they are taking money out of productive corporations and sending it back to investors.”

[RandomGuy]

“The stereotype of what finance is supposed to do is take the income of savers and channel that to productive investments,” Marshall Steinbaum, an economist at the Roosevelt Institute, told me. “That’s not what finance does now. A lot of finance goes in the opposite direction, where essentially they are taking money out of productive corporations and sending it back to investors.”



Capitalism is limping along. It is things like this that make me very unsympathetic to the crocodile tears of the investor class.

[boutons_deux]

Capitalism is limping along.

how so?

inequality keeps increasing, the rich capitalists, BigCorp, rentier assholes always getting richer by looting the non-capitalists, while relentlessly killing or trying to kill any and all attempts at regulation.

[Winehole23]

SEC frets over buybacks. This sort of thing used to be considered illegal manipulation.


A study by the SEC of 385 recent share-buyback announcements — this is when companies announce how much money they will spend in the future on buying back their own shares, but before they actually begin buying them — found:




Share-buyback announcements led to “abnormal returns” in the share price over the next 30 days.
Executives used this share price surge to cash out.


“In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day. So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell,” explained SEC Commissioner Robert Jackson Jr. – appointed by President Trump and sworn in earlier this year – in a speech (https://www.sec.gov/news/speech/speech-jackson-061118) today. He went on:

And, in the process, executives take a lot of cash off the table. On average, in the days before a buyback announcement, executives trade in relatively small amounts—less than $100,000 worth. But during the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day—a fivefold increase. Thus, executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement:
https://wolfstreet.com/wp-content/uploads/2018/06/US-SEC-insider-shares-sold-after-buyback-announcement.png
https://wolfstreet.com/2018/06/11/sec-frets-about-share-buybacks-torrent-of-corporate-trading-dominating-todays-market-and-short-term-financial-engineering/

[Winehole23]

high water mark reached:


In the first quarter, companies actually repurchased an all-time-record $178 billion of their own shares. In terms of announcements of future share buybacks, May set an all-time record of $174 billion – in just one month!

[Winehole23]

SEC commissioner slams the short-termism and extractive nature of buybacks:


On too many occasions, companies doing buybacks have failed to make the long-term investments in innovation or their workforce that our economy so badly needs.

And, because we at the SEC have not reviewed our rules governing stock buybacks in over a decade, I worry whether these rules can protect investors, workers, and communities from the torrent of corporate trading dominating today’s markets.



Executives often claim that a buyback is the right long-term strategy for the company, and they’re not always wrong. But if that’s the case, they should want to hold the stock over the long run, not cash it out once a buyback is announced. If corporate managers believe that buybacks are best for the company, its workers, and its community, they should put their money where their mouth is..
https://wolfstreet.com/2018/06/11/sec-frets-about-share-buybacks-torrent-of-corporate-trading-dominating-todays-market-and-short-term-financial-engineering/

[Winehole23]

“in the years leading up to the financial crisis, top executives at Bear Stearns and Lehman Brothers personally cashed out $2.4 billion in stock before the firms collapsed.”


Tying executive pay to the growth of the company, he said, “only works when executives are required to hold the stock over the long term.”

[Winehole23]

recommends denying safe harbor:



[B]uybacks give executives an opportunity to take significant cash off the table, breaking the pay-performance link. SEC rules do nothing to discourage executives from using buybacks in this way. It’s time for that to change.He proposed, among other suggestions, that “SEC rules should encourage executives to keep their skin in the game for the long term. That’s why our rules should be updated, at a minimum, to deny the safe harbor to companies that choose to allow executives to cash out during a buyback.”

[clambake]

no pain, all gain

[Winehole23]

strong words, is SEC commissioner Jackson a voice in the wilderness?


The increasingly rapid cycling of capital at American public companies has had real costs for American workers and families. We need our corporations to create the kind of long-term, sustainable value that leads to the stable jobs American families count on to build their futures. Corporate boards and executives should be working on those investments, not cashing in on short-term financial engineering.


Investors deserve to know when corporate insiders who are claiming to be creating value with a buyback are, in fact, cashing in.

[Winehole23]

I mean, if this were a Michael Hudson article, some superpatriot here would probably call me a commie, but this is Trump's SEC commissioner, basically echoing what Michael Hudson's been saying for the last ten years.

[boutons_deux]

"We need our corporations to create the kind of long-term, sustainable value that leads to the stable jobs"

how un-charmingly naive.

stable, well-paid, long-term jobs for Labor is in direct opposition to the short-term, rapid amassing of Capital.

Capital vs Labor: ancient zero-sum game.

Financial precarity is the norm for the USA's lower 4 quintiles.

[Winehole23]

we'll see. the rules changed in 1982. they could change again.

[RandomGuy]

SEC commissioner slams the short-termism and extractive nature of buybacks:



https://wolfstreet.com/2018/06/11/sec-frets-about-share-buybacks-torrent-of-corporate-trading-dominating-todays-market-and-short-term-financial-engineering/

A wider picture take:

Buying back stock shares slowly shrinks the number of shares overall being traded. The money paid to the owners, generally also hyper-wealthy, then turns around and looks for more assets, i.e. fewer shares.

What this does is make large share price swings more likely. We are gearing up for another crash at some point, aided by trading algorithms and automated trading, IMO.

With the recent move towards an inverted yield curve (precursor to recessions), and trade wars, the next bump will be pretty nasty if I am right about that.

[Winehole23]

https://www.nakedcapitalism.com/wp-content/uploads/2018/07/fall-e1530811166112.jpg

[rmt]

A wider picture take:

Buying back stock shares slowly shrinks the number of shares overall being traded. The money paid to the owners, generally also hyper-wealthy, then turns around and looks for more assets, i.e. fewer shares.

What this does is make large share price swings more likely. We are gearing up for another crash at some point, aided by trading algorithms and automated trading, IMO.

With the recent move towards an inverted yield curve (precursor to recessions), and trade wars, the next bump will be pretty nasty if I am right about that.

Well, then, you should cash out, wait for that crash and buy cheap (if you are right).

[SnakeBoy]

We are gearing up for another crash at some point


RG going out on a limb

[RandomGuy]

Well, then, you should cash out, wait for that crash and buy cheap (if you are right).

Pretty much. Paying down debt and biding time.

[Winehole23]

buybacks may not be in the interest of the shareholders, long term


To get a better understanding of the impact of buybacks, we set out to compare the performance of companies that rely heavily on repurchasing shares with those that do not. Our study, “Secular Stagnation”, examined 1,839 public companies in the United States over a five-year time‐scale. We found that the more money a firm spends on buybacks, the less likely it is to grow over the long-term. In fact, as the chart below makes clear, we discovered that not only do buybacks not lead to growth in a company’s market value, they are strongly correlated to a declining market value.
https://www.nakedcapitalism.com/wp-content/uploads/2018/07/Screen-Shot-2018-07-10-at-3.30.11-PM.png
https://knowledge.insead.edu/economics-finance/share-buybacks-are-corporate-suicide-7071

[boutons_deux]

buybacks may not be in the interest of the shareholders, long term

https://knowledge.insead.edu/economics-finance/share-buybacks-are-corporate-suicide-7071

short-termism, taxes are low, so dump all profits into buybacks, dividends, (not research, or investment). Corporate execs are heavily compensated in stocks so they cook the books every qtr to fake profits, and/or move pension reserves into operating finances.

short-termers don't care about eventual corporate disease and/or death. it's Grab The Money, All The Time (as bad as p/e predators)

[boutons_deux]

As the Data Show, Higher Corporate Profits Mean Higher Investment (Not)

http://cepr.net/blogs/beat-the-press/as-the-data-show-higher-corporate-profits-mean-higher-investment-not
iow, "we would invest more if taxes were cut" is a business lie.

low taxes means higher profits which are creamed off to investors and buybacks

[Winehole23]

"we're too dependent on Taiwan"

1406696124401004546

[Winehole23]

takers, not makers, tbh

[boutons_deux]

Now Congress/Biden, aka taxpayers, giving US chip mfrs $10Bs to invest

low taxes = buybacks, no investment, then taxpayers bail out chip mfrs with $10Bs to invest.

[boutons_deux]

If US chip mfrs want capital to invest, then raise capital in the markets, issue stock, but not from the pockets of taxpayers.

[Winehole23]

Now Congress/Biden, aka taxpayers, giving US chip mfrs $10Bs to invest

low taxes = buybacks, no investment, then taxpayers bail out chip mfrs with $10Bs to invest.Biden isn't repealing the Trump tax cuts.

[Spurtacular]

Biden isn't repealing the Trump tax cuts.

How do you feel about that?

[Winehole23]

once upon a time stock buybacks used to be strictly illegal, but this would be a start.

buybacks mainly serve to enrich upper level managers and investors without any concrete benefit for productive capacity, innovation or society at large.

Democrats Eye Taxing Stock Buybacks and Partnerships to Pay for Agenda (https://www.nytimes.com/2021/09/10/us/politics/stock-buybacks-partnerships-democrats-tax.html)
Senate Democrats say a 2 percent tax on the money companies use to buy back stocks and tightened rules around taxing partnerships would raise $270 billion for their $3.5 trillion social policy bill.

[Winehole23]

financialization squeezes profits for upper management and investors at the expense of productive capacity -- the real economy

1449078566151405574

[RandomGuy]

once upon a time stock buybacks used to be strictly illegal, but this would be a start.

buybacks mainly serve to enrich upper level managers and investors without any concrete benefit for productive capacity, innovation or society at large.

Democrats Eye Taxing Stock Buybacks and Partnerships to Pay for Agenda (https://www.nytimes.com/2021/09/10/us/politics/stock-buybacks-partnerships-democrats-tax.html)
Senate Democrats say a 2 percent tax on the money companies use to buy back stocks and tightened rules around taxing partnerships would raise $270 billion for their $3.5 trillion social policy bill.

https://media.giphy.com/media/xUPGcA3aMBqRfkD4v6/giphy.gif

[RandomGuy]

financialization squeezes profits for upper management and investors at the expense of productive capacity -- the real economy

1449078566151405574

I get the feeling we may actually see some resurgence in US manufacturing.

I seriously wonder what effect all the stock buy backs have collectively on reducing the number of outstanding shares available for trading.

Fewer shares = more volatile.

[baseline bum]

"we're too dependent on Taiwan"

1406696124401004546

TSMC is by far the best fab in the world and their 7nm process just wipes the floor with Samsung's 8nm process. It's one of the reasons why AMD gaming gpus actually consume less power than Nvidia's for once even though Nvidia has way better engineers, because AMD bought out a ton of TSMC's 7nm production and Nvidia had to go to Samsung instead. Intel is even worse, their new processes have been failure after failure to the point they have had to slash prices to the bone to compete with AMD's way better cpus on TSMC 7nm.

[Winehole23]

TSMC is by far the best fab in the world and their 7nm process just wipes the floor with Samsung's 8nm process. It's one of the reasons why AMD gaming gpus actually consume less power than Nvidia's for once even though Nvidia has way better engineers, because AMD bought out a ton of TSMC's 7nm production and Nvidia had to go to Samsung instead. Intel is even worse, their new processes have been failure after failure to the point they have had to slash prices to the bone to compete with AMD's way better cpus on TSMC 7nm.Making shit that people want and need is the real economy. Buying and selling financial products isn't productive unless the profits fund production.
i

[Winehole23]

how is gutting profitable newpapers good business?

1449525467690663939

1449525470899302404

[DMC]

TSMC is by far the best fab in the world and their 7nm process just wipes the floor with Samsung's 8nm process. It's one of the reasons why AMD gaming gpus actually consume less power than Nvidia's for once even though Nvidia has way better engineers, because AMD bought out a ton of TSMC's 7nm production and Nvidia had to go to Samsung instead. Intel is even worse, their new processes have been failure after failure to the point they have had to slash prices to the bone to compete with AMD's way better cpus on TSMC 7nm.

Samsung is a shithole run like a concentration camp.

But as far as ramping up production, fabs in the US not named Samsung (meaning owned by shareholders) are always somewhere in the cycle of hiring and laying off. They get a big order, they hire. TSMC takes the order, they lay off. On and on. It's extremely expensive to retool for smaller linewidths and larger wafers. In fact many if not most fabs in the US cannot convert, they have to rebuild from the ground up because the foundation and layout won't support the needs of the technology, like stability for photolithography, power needs and cleanroom requirements/automation. It becomes an issue of "we have a huge order we could fulfill in 6 months with a 8" fab or 2 months with a 300mm, and they look at the cost of conversion and it's not worth it if the orders aren't guaranteed to keep coming.

[boutons_deux]

Private Equity Funds, Sensing Profit in Tumult, Are Propping Up Oil

These secretive investment companies have pumped billions of dollars into fossil fuel projects, buying up offshore platforms, building new pipelines and extending lifelines to coal power plants.

Since 2010, the private equity industry has invested at least $1.1 trillion into the energy sector —

double the combined market value of three of the world’s largest energy companies, Exxon, Chevron and Royal Dutch Shell

Only about 12 percent of investment in the energy sector by private equity firms went into renewable power, like solar or wind, since 2010,

Private equity investors are taking advantage of an oil industry facing heat from environmental groups, courts, and even their own shareholders to start shifting away from fossil fuels, the major force behind climate change.

As a result, many oil companies have begun shedding some of their dirtiest assets, which have often (https://www.ogj.com/general-interest/article/17288981/kayne-andersonbacked-sabinal-energy-buys-west-texas-assets-from-chevron)ended up (https://www.businesswire.com/news/home/20170731005947/en/Hilcorp-Affiliate-Finalizes-San-Juan-Basin-Assets-Acquisition-from-ConocoPhillips)in the hands (https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bp-to-sell-alaska-business-to-hilcorp.html)of private equity-backed (https://www.offshore-technology.com/news/contango-conocophillips-us/) firms.

https://www.nytimes.com/2021/10/13/climate/private-equity-funds-oil-gas-fossil-fuels.html

Destructive, predatory Capitalism really sucks, will destroy or kill anything or anybody to amass more Capital

[SnakeBoy]

https://www.zerohedge.com/s3/files/inline-images/buybacks%201.jpg?itok=kDQ3aRMX
https://www.zerohedge.com/markets/why-goldman-expects-huge-market-melt-coming-days

[boutons_deux]

Making shit that people want and need is the real economy. Buying and selling financial products isn't productive unless the profits fund production.
i

Money making money is neoliberal Capitalism. Inhuman, sterile, surgical, bloodless, destructive, but fantastic for the Capitalists.

Capitalists buy companies, and now one Capitalist predator is buying newspapers, load them up with debt, strip/liquidate their assets, kill jobs, pension obligations dumped on taxpayers.

When there's no more money to extract, Capitalists leave their victims weak and heading toward dissolution.

=================

U.S. Billionaires Wealth Surged by 70%, or $2.1 Trillion, During Pandemic;

They Are Now Worth a Combined $5 Trillion

https://www.commondreams.org/newswire/2021/10/18/us-billionaires-wealth-surged-70-or-21-trilion-during-pandemic-they-are-now

[Winehole23]

1584972255364120581

[boutons_deux]

1584972255364120581

Stock buybacks were illegal until the 1980s when the oligarchy bribed them into legality

[Winehole23]

1650165787057967105

[Winehole23]

Predatory extraction

https://twitter.com/RudyHavenstein/status/1700201544552165709?s=20

1700201544552165709