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  1. #1
    dangerous floater Winehole23's Avatar
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    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

  2. #2
    Mr. John Wayne CosmicCowboy's Avatar
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    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.

  3. #3
    dangerous floater Winehole23's Avatar
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    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.

  4. #4
    Mr. John Wayne CosmicCowboy's Avatar
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    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.

  5. #5
    Mr. John Wayne CosmicCowboy's Avatar
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    WH you are normally more objective that that. Your post was alarmingly Boutonish.

  6. #6
    Mr. John Wayne CosmicCowboy's Avatar
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    *

  7. #7
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    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.

  8. #8
    Mr. John Wayne CosmicCowboy's Avatar
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    If you anticipate a recession (which many signs indicate) it is wise to hoard cash.

  9. #9
    Rising above the Fray spursncowboys's Avatar
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    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.

  10. #10
    Mr. John Wayne CosmicCowboy's Avatar
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    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.

  11. #11
    dangerous floater Winehole23's Avatar
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    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.





    A couple other statistics from the report from Factset:



    • 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 cons uted 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 compe ion 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 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/1297718...inge-continues

  12. #12
    dangerous floater Winehole23's Avatar
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    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 DD -5.51% and Dow DOW -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, leaving it a weakened player in a compe ion 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-du...earch-america/

  13. #13
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    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.
    Last edited by boutons_deux; 12-14-2015 at 11:10 AM.

  14. #14
    dangerous floater Winehole23's Avatar
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    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 for $160 billion (the second-biggest health care deal on record), Dell and EMC Corp. for $67 billion (the biggest tech deal on record), and Anheuser-Busch InBev and SABMiller 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: 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/w...ther-recession

  15. #15
    dangerous floater Winehole23's Avatar
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    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-pr...cationor-both/

  16. #16
    dangerous floater Winehole23's Avatar
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    Once inept (and wrongly incented) 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 (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.

  17. #17
    dangerous floater Winehole23's Avatar
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    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/...-cold-war.html

  18. #18
    dangerous floater Winehole23's Avatar
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    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 cons utional 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.

  19. #19
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    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 ING 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 ty, no-future lives are exclusively the fault of Those People ([email protected]), illegal immigrants, and government which the capitalists also own, up, defund, self-fulfilling their "govt is ed 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 ([email protected], s, the poor, government)


    Last edited by boutons_deux; 03-22-2016 at 08:43 AM.

  20. #20
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    Hudson refers to Rome's "Conflict of the Orders"

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



  21. #21
    dangerous floater Winehole23's Avatar
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    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 outstanding
    http://www.nytimes.com/2016/07/10/bu...ages.html?_r=0

  22. #22
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    Guess who legalized buybacks?

    Guess who allowed inversions?

  23. #23
    dangerous floater Winehole23's Avatar
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    Dunno. Who?

  24. #24
    Veteran Th'Pusher's Avatar
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    Buy backs were legalized in the early 80s, so my guess is both inversions and buy buy backs were legalized under the Reagan administration.

  25. #25
    dangerous floater Winehole23's Avatar
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    Reagan gets the blame for bad policy passed by Democrats, obviously.

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