December 11, 2008
S.&.P. Companies' Divestment
If anyone who wondered why many U.S. companies fell behind in international competition in recent years these S&P numbers via Floyd Norris tell part of the story (last line added):
Over the last four years, since the buyback boom began, from the fourth quarter of 2004 through the third quarter of 2008, companies in the S.&P. 500 showed:
Reported earnings: $2.42 trillion
- Stock buybacks: $1.73 trillion
- Dividends: $0.91 trillion
De-capitalization: $0.22 trillion
Over the last four years the S&P 500 companies did not invest one dime of their earnings into additional or new business or increased productivity. Instead they divested and gave $220 billion of their basic equity back to their shareholders.
This was an extremely shortsighted behavior. Sure, these companies used part of their revenue to replace depreciated capital expenditures (machinery and the like). But if anything was spend for additional research or new opportunities at all, it must have been financed by taking on additional debt. This debt will turn out to be poisonous in the downturn.
Most of this can likely be laid on the idiotic practice of paying short term bonuses to CEOs for rising stock prices. A stock buyback will lead to a rising stock price as it increases demand and lowers supply of that stock. Buybacks were just a simple way for greedy CEOs to increase their personal income at the cost of the long term validity of the business.
Posted by b on December 11, 2008 at 08:18 AM | Permalink
For some of the biggest, gradual asset-stripping is the best and highest use of the firm's resources. Bosses see pervasive overcapacity and they know first-hand that they're not going to win a fight for market share.
Posted by: ...---... | Dec 11, 2008 2:35:20 PM | 1
The stock buybacks are useful for large insiders (the bosses) to cash out without sending the stock price plummeting.
Posted by: jeff65 | Dec 11, 2008 5:07:32 PM | 2
No auto bailout - $700 million+ for banks- fine! $14 billion for Detroit? No way.
Senate Abandons Auto Bailout Bid
WASHINGTON — The Senate on Thursday night abandoned efforts to fashion a government rescue of the American automobile industry, as Senate Republicans refused to support a bill endorsed by the White House and Congressional Democrats.
After Senate Republicans balked at supporting a $14 billion auto rescue plan approved by the House on Wednesday, negotiators worked late into Thursday evening to broker a deal, but deadlocked over Republican demands for steep cuts in pay and benefits by the United Automobile Workers union in 2009.
Posted by: b | Dec 12, 2008 1:08:37 AM | 3
Oh, and some guy named Madoff just divested $50 BILLION. Oy veh!
Posted by: biklett | Dec 12, 2008 2:19:54 AM | 4
@Biklett - yes, that Madoff story is unbelievable. He scammed some really rich people ...
Stiglitz on the auto bailout: Chapter 11 is the right road for America's carmakers
What needs to be done is to help the automakers get a fresh start and allow them to focus on producing good cars rather than trying to juggle their books to meet past obligations.
The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America's bankruptcy code is supposed to do.
With financial restructuring, the real assets do not disappear. Equity investors (who failed to fulfil their responsibility of oversight) lose everything; bondholders get converted into equity owners and may lose substantial amounts. Freed of the obligation to pay interest, the carmakers will be in a better position. Taxpayer dollars will go far further. Moral hazard - the undermining of incentives - will be averted: a strong message will be sent.
Some will talk of the pension funds and others that will suffer. Yes, but that is true of every investment that has diminished. The government may need to help some pension funds but it is better to do so directly, than via massive bail-outs hoping that a little of the money trickles down to the "widows and orphans". Some will say that bankruptcy will undermine confidence in America's cars. It is the cars and carmakers themselves - and the dismal performance of their executives - that have undermined confidence. With industry experts saying $125bn (€94bn, £84bn) or more will be needed, with bail-out fatigue setting in, why should US consumers believe that a $15bn gift will do the trick of a turnround?
As the bail-outs continue, numbers that once looked huge are starting to seem almost normal. Hundreds of billons are being given to banks and insurance companies. AIG got $150bn. Compared with that $34bn, or even $125bn, for the automotive industry seems a modest request. Even so, we should not forget that a few months ago, President George W. Bush said there was not enough money for health insurance for poor children although it cost just a few billion dollars.
Even if Congress does now give carmakers $15bn as a "stay of execution," postponing the hard decisions, before the next multi-billon dollar dose of medicine we need to think more carefully about who we are really bailing out and why. This should not end up as just another rescue package for bondholders and shareholders.
Posted by: b | Dec 12, 2008 8:08:36 AM | 5
Forgot the link on Madoff: (WSJ subs.) Top Broker Accused of $50 Billion Fraud
Bernard L. Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday, a day after his sons turned him in for running what they said their father called "a giant Ponzi scheme."
The Securities and Exchange Commission, in a civil complaint, said it was an ongoing $50 billion swindle, and asked a judge to seize the firm and its assets. "Our complaint alleges a stunning fraud that appears to be of epic proportions," said Andrew M. Calamari, associate director of enforcement in the SEC's ...
Posted by: b | Dec 12, 2008 8:11:54 AM | 6
Still on the way towards my prediction that Paulson will demand and get the full $700 billion TARP money in exchange for a small bailout of the big three.
Now that the bailout hung up in Congress, the TARP variant comes back:
U.S. Treasury Ready to Prevent Failure of Automakers (Update2)
Dec. 12 (Bloomberg) -- The Bush administration dropped its opposition to using the $700 billion bank bailout to provide financing for U.S. automakers, after the Senate yesterday failed to approve emergency loans.
The Treasury has used all but about $15 billion of the first half of the Troubled Asset Relief Program’s funds since the plan was enacted Oct. 3. Treasury Secretary Henry Paulson has until today repeatedly resisted calls to use the program to aid the automakers.
While the Treasury’s one-sentence statement doesn’t mention the TARP, White House spokeswoman Dana Perino said earlier in a separate statement that the Bush administration is considering using some of the program to keep the auto companies afloat.
But the $15 billion left from the first TARP tranche is already "committed" Paulson said. So the second tranche will be needed to bail out the big three (and then feed 95% of it to Paulson's friends on Wall Street).
Posted by: b | Dec 12, 2008 11:32:46 AM | 7
Nice numbers b. Imho the US has not seen any real growth - whatever that is - except in population since about 2000. How to measure that, what charts to link to.. a small selection in the next post to bypass the spam filter.
We know the public numbers are massaged and pretty worthless without adjustment and interpretation (ex. GDP).
US Job growth has been, in the main, in the Gvmt. or para-gov. sector, rising slowly / steadily with a bit of flat here and there. Health - because there is still money to squeeze out while the general level of ‘health’ stays stable or sinks, depending at what figures you care to look at, and a small rise as well in Education, as that is a racket, ppl will pay/borrow to obtain a degree or ‘be certified’... (Note, these are the areas where Obama plans to ‘spend’ as well.)
Around 2000 a perception that BOA was no longer realistic and ‘the world had changed’ (global competition biting in, or making new openings, energy crunch coming up, industrial base shunted overseas, Chinese toys are but a minuscule part, etc.) and thus the old order, limping along, bit the dust and Bush was selected - mostly because malleable, dopey, an available figure-head, a prop.
That brought on a burst of US triumphalist aggression, Afgh, Iraq, biting Iran, prodding the sleeping ‘defeated’ bear, in brief more of the usual but without the hoped for results or the capacity to wash them away. Concurrently, a bubble economy at home, dot com, then housing, the ill fated ‘service economy’ (as if Americans could survive by doing each other’s nails!), the hype of ‘hydrogen economy’ etc. with Gvmt. paying for minor expansions (ethanol, security, etc.)
At the same time, clumsily ensuring that some State apparatus would be able to contain what is seen as an inevitable upcoming chaotic state.
An outside enemy, personalized, that is the Muslim terrorist, both within and without, applicable to anything, person, country, idea, was constructed. And the powerful and rich had one aim only - make as much as possible and save their asses.
Posted by: Tangerine | Dec 12, 2008 12:04:57 PM | 8
@Tangerine - agree - the U.S. economic stats are quite fraudulent. GDP is artificially increase due to the deflators applied. Inflation rates are reported too low for years, 'qualitative adjustment' and all. The unemployment data are a joke. And so on ... This has been going on for years while the majority of people got more poor day after day.
London Banker: Deflation has become inevitable
For a while now I have been on the fence on the inflation/deflation issue – whether the massive monetisation of bad debts by central banks and governments will lead to rapidly escalating inflation as currencies are debased or, alternatively, lead to deflation as bad debts and illiquidity undermine all commercial and financial activity in the economy. I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.
Anyone sitting on a pile of cash now is unlikely to want to either (a) place it in a bank, or (b) invest it in the stock market. As a result, the implosion of the financial and real economy must continue no matter how big the central bank’s aspirations for its balance sheet or the treasury’s aspirations for its deficit.
It’s this simple: I won’t invest in a country that bails out failure and punishes savers. I won’t invest in the US or UK until they change course and protect savers and investors, ensuring a reasonably predictable positive return.
Right now survival of businesses in the West depends largely on political pull and access to regulatory forbearance and central bank or treasury finance. The market has failed, and officialdom is collaborating in perpetuating that failure.
It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world.
Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.
When that happens, if reason is restored in markets with effective oversight, I might consider investing again, very selectively, in whatever productive works might then be on offer and only when secure in realising - and retaining - a positive yield.
London Banker adds that he will discontinue posting coming 2009.
Posted by: b | Dec 12, 2008 3:15:13 PM | 10
I wonder what kind of reverberations this affair will cause...
Madoff's alleged $50 billion fraud hits other investors
"Madoff's investors included captains of industry, corporations -- some of which are publicly traded -- that used Madoff almost as a high-yielding cash management account, endowments, universities, foundations and, importantly, many high-profile funds of funds," said Douglas Kass, who heads hedge fund Seabreeze Partners Management.
"It appears that at least $15 billion of wealth, much of which was concentrated in Southern Florida and New York City, has gone to 'money heaven,'" he said.
How fitting that among his other accomplishments, Mr. Madoff was also the chairman of a business school:
Experts: Ponzi Scheme By Chairman of YU Business School Is Largest Ever In History
Posted by: Alamet | Dec 12, 2008 8:20:10 PM | 11