Wednesday, October 15, 2014

Share Buybacks
Are Diverting Cash
From The Real Economy
[& We Say It Will Have Nasty Long Term Consequences]
Economist Ed Yardeni provides the above chart on share buybacks - references FT essay below which makes the argument he has been making in the past few years: Given the Federal Reserve's ultra-easy monetary policies, including near zero interest rate policy & quantitative easing (QE), companies have a tremendous incentive to issue cheap debt to buy expensive stock, diverting corporate cash from creating jobs & investment.
link here to the article
The Unanticipated Risks of 
Maximizing Shareholder Value
Forbes essay references the recent emphasis in economics & business on "shareholder value", how this emphasis has resulted in unintended consequences, one of which is the simple share buybacks trend of recent years .. lists several results associated with this "shareholder value" creed:
Caused endemic short-termism
Generated combines of executives and shareholders
Fostered executive cronyism
Led to widespread stock price manipulation
Undermined organizations, communities and whole industries
Dispirited employees
Failed to renew human capital
Short-changed customers
Locked in obsolete management practices
Caused secular economic stagnation
Killed international competitiveness
Led to rampant income inequality
Caused an unhealthy concentration of economic power
Sparked successive economic crashes
Caused unhealthy concentration of economic power
Corrupted society itself
LINK HERE to the essay

From Our Archives:
October 6, 2014
"Companies Spend Almost
All Profits On Buybacks"
As Corporate Debt Goes Higher
Bloomberg reports that companies in the Standard & Poor’s 500 Index, are "poised to spend $914 billion on share buybacks and dividends this year, or about 95% of earnings!" .. Zero Hedge: "Who needs capex when you have financial engineering .. Financial engineering has become the primary source of global 'investment', eclipsing such barbaric relics as trade:"
Fund Manager: "You can only go so far with financial engineering before you actually have to have a business with real growth." .. virtually all U.S. corporate retained earnings are now "unretained" & going straight to shareholders - leaving virtually no investment for growth in the company nor in the economy.
LINK HERE to the commentary & article

From Our Archives:
August 27, 2014
Harvard Business Review:
Profits That Don't Spread Prosperity
Executive Profit Motive Is Driving Stock Prices Higher, But Corporate Stock Buybacks Do Not Enrich The Whole Economy. The Lack Of 'Capital Investment' Is Setting Us Up For Future Problems
Harvard Business Review essay highlights how stock prices are going higher due in large part from corporations using their earnings to buy back their own stock - forget about plowing back earnings into plant & equipment & productive capacity enhancement, & forget about higher incomes for employees .. the biggest reason? .. "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."
LINK HERE to the essay

From Our Archives:
July 8, 2014
 The Deduct-Interest-To-Retire-Stock Tax Game
could be the unintended consequence that destroys
whatever was left of free market capitalism
of corporate profits are going into buybacks & dividends
It is money that should be going into 'capital expenditure' for future growth
The American government has been stealing from the future for decades
Now the corporate sector is stealing from America's future
The sector that will be left holding the bag? THE PUBLIC 
5* Please be sure to read Gordon T Long* explains the escalating trend of corporate buybacks of their company stocks - now about $1Trillion over the last 12 months, but rising .. it's a tax ruse .. given the Federal Reserve's financial repression-based zero interest rate policy (ZIRP), companies can borrow money at low cost - couple that with say 35% nominal corporate tax rates in the U.S. & with the tax deductibility of interest but not dividends, here is the math on one example:
* Dividend payout rate approximates the S&P 500 average of 2.25% per annum.
* Borrowing costs approximate 3.5% per annum
* Corporate nominal US tax rate 35%
* Assume stock trades at $100/share with 100 shares outstanding,
* Market Capitalization of $10,000 (100 X 100)
* A 2.25% Dividend rate means a $2.25 Dividend payout per year.
If we were to borrow $225 to buyback 2 1/4 shares it would cost $7.89 ($225 @ 3.5%)
The tax deductibility of $7.89 at a nominal tax rate of 35% would be $2.76
Therefore our model corporation would save $0.51 ($2.76 - $2.25)) by borrowing to buyback their shares.

"We presently have one of the biggest tax ruses in history going on as the Federal Reserve and U.S. Treasury desperately try and increase the wealth effect to elevate asset prices and finance government debt .. We may be witnessing one of the biggest orchestrated 'tax loop holes' in history. Clearly corporations are wasting no time taking full advantage of it. The question now is whether the game has gotten out of control and whether the Fed is afraid to stop it?"
LINK HERE to the analysis/commentary

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