Profits Not Prosperity

[SimpleDon]

The relationship of a company and the stockholders is not well understood by the public or even the stockholders themselves.

The stock market is a secondary market for the most part. It is not so much a way for companies to raise capital for investment as it is a giant casino. The main profits that are made, the capital gains, are made from other gamblers, not from the company whose stock you bought.

Corporations hate to have to sell stock to raise money. They much prefer to borrow it instead. Borrow money and you have a short term defined liability, the loan. Issuing new stock and you have a permanent liability, it is like a loan that you can't pay off, a never ending one.

Capital gains for stocks is what for anything else in the economy is called inflation. Capital gains is the inflation of stock prices.

 

[SimpleDon]

If a company had lots of wonderful growth projects I would expect the stock to go up more by doing lots of wonderful growth projects.

Sure, but it wouldn't go up fast enough for the ceo's to hit their eps or roe benchmarks for their bonuses.

But I'm sure such mundane things never enter into the thinking of a master of the universe.

Bingo, give the man a prize. Most CEOs bonuses are tied to the stock price. This is a way to boost the stock price without having to work hard, doing research, innovating, investing in production facilities, improving productivity, increasing market share, etc.

Otherwise the corporation doesn't particularly care about the share price. As I have already said corporations try not to sell shares to raise capital.

 

[AthenaAwakened]

no, not necessarily.

What definition of manipulation are you using? Can you provide a real world example; or are you just being contrarian?

I manipulate the yarn into shapes and patterns when I crochet.
A pianist manipulates the keys beneath his fingers in order to bring life to the composers work.
Through careful manipulation of the new laser, the surgeon was able to successfully remove the cyst.

Need I go on?

Buying back significant amounts of stocks is going to have a specific effect, and that is to during the amount of stock on the market and drive up the price of that stock. Now this can be done for quite noble reasons or quite dastardly ones. Or it could be done strategically with constant control or hamfistedly with little regard for the long term outcomes for both the company and the stock market itself.

The point of the op is that right now we may be in a cycle typified by hamfistedness and short sightedness

 

[coloradoatheist]

What definition of manipulation are you using? Can you provide a real world example; or are you just being contrarian?

I manipulate the yarn into shapes and patterns when I crochet.
A pianist manipulates the keys beneath his fingers in order to bring life to the composers work.
Through careful manipulation of the new laser, the surgeon was able to successfully remove the cyst.

Need I go on?

Buying back significant amounts of stocks is going to have a specific effect, and that is to during the amount of stock on the market and drive up the price of that stock. Now this can be done for quite noble reasons or quite dastardly ones. Or it could be done strategically with constant control or hamfistedly with little regard for the long term outcomes for both the company and the stock market itself.

The point of the op is that right now we may be in a cycle typified by hamfistedness and short sightedness

People are having a hard time with you using manipulation instead of just deciding on finding the best shareholder value. When I go out and buy 1 share of IBM stock, I'm not trying to manipulate IBM stock. But for your second part, we've have this for 30 or more years so it's not like companies all of a sudden said, hey we can buy our own stock. So I asked why now, why is this argument the right one now. Instead of just looking at individual cases look at percentage of companies doing it and how does that compare to the past. And second, the next question why do companies and the board of directors now believe that would be the best use of their money?

 

[dismal]

Huh? What a non sequitur. Attempting to make the stock go up not equal manipulation.

They are supposed to try to make the stock go up you know.

And the answer to your question would be "versus what?"

If a company had lots of wonderful growth projects I would expect the stock to go up more by doing lots of wonderful growth projects. The stock market loves a good growth stock. If the company is lacking good growth projects I would expect the stock to go up more by doing a stock buy back than by doing lots of crappy money losing projects. Investors can redeploy the money they get in the stock buybacks to the companies that have the good growth projects. And it's all good. For everyone.

At some point we don't want the buggy whip companies to keep investing in buggy whip plants. Better they should distribute the money to investors so it can be invested in auto plants.

in order for stock buybacks not to manipulate the market for said stock, the outcome of the buyback would have to somewhat in doubt.

Now understand what I typed. I did not say buybacks were illegal. I did not say they were not useful, were not even helpful.

I asked did they manipulate the market.

This seems like a word game.*shrug*

However, there are companies that would very likely see their stock go down if they announced a buyback. If a company is widely perceived as having a large number of wonderfully profitable growth opportunities it will likely trade at a very high PE multiple. If such a company announces a stock buyback the market will immediately perceive it as having no (or at least fewer) profitable growth opportunities and its PE multiple will nose dive.

On the other hand, the companies that are not generally perceived as having growth opportunities (and are thus trading at low multiples) are highly likely to see their stock price improve from a buyback.

So, it becomes more certain to make the stock price go up as it becomes more the exact right thing to do.

Which makes it seem rather silly to attempt demonizing it.

 

[AthenaAwakened]

in order for stock buybacks not to manipulate the market for said stock, the outcome of the buyback would have to somewhat in doubt.

Now understand what I typed. I did not say buybacks were illegal. I did not say they were not useful, were not even helpful.

I asked did they manipulate the market.

This seems like a word game.*shrug*

However, there are companies that would very likely see their stock go down if they announced a buyback. If a company is widely perceived as having a large number of wonderfully profitable growth opportunities it will likely trade at a very high PE multiple. If such a company announces a stock buyback the market will immediately perceive it as having no (or at least fewer) profitable growth opportunities and its PE multiple will nose dive.

On the other hand, the companies that are not generally perceived as having growth opportunities (and are thus trading at low multiples) are highly likely to see their stock price improve from a buyback.

So, it becomes more certain to make the stock price go up as it becomes more the exact right thing to do.

Which makes it seem rather silly to attempt demonizing it.

So the answer is yes, buybacks manipulate the market.

 

[coloradoatheist]

This seems like a word game.*shrug*

However, there are companies that would very likely see their stock go down if they announced a buyback. If a company is widely perceived as having a large number of wonderfully profitable growth opportunities it will likely trade at a very high PE multiple. If such a company announces a stock buyback the market will immediately perceive it as having no (or at least fewer) profitable growth opportunities and its PE multiple will nose dive.

On the other hand, the companies that are not generally perceived as having growth opportunities (and are thus trading at low multiples) are highly likely to see their stock price improve from a buyback.

So, it becomes more certain to make the stock price go up as it becomes more the exact right thing to do.

Which makes it seem rather silly to attempt demonizing it.

So the answer is yes, buybacks manipulate the market.

Do you consider buying one share of IBM stock manipulating the market?

 

[dismal]

This seems like a word game.*shrug*

However, there are companies that would very likely see their stock go down if they announced a buyback. If a company is widely perceived as having a large number of wonderfully profitable growth opportunities it will likely trade at a very high PE multiple. If such a company announces a stock buyback the market will immediately perceive it as having no (or at least fewer) profitable growth opportunities and its PE multiple will nose dive.

On the other hand, the companies that are not generally perceived as having growth opportunities (and are thus trading at low multiples) are highly likely to see their stock price improve from a buyback.

So, it becomes more certain to make the stock price go up as it becomes more the exact right thing to do.

Which makes it seem rather silly to attempt demonizing it.

So the answer is yes, buybacks manipulate the market.

I really have no interest in playing word games with you. If it satisfies you to attempt to hang a pejorative word on perfectly valid and generally beneficial behavior that is entirely consistent with the goals of a corporation then feel free to have at it.

 

[Trausti]

This seems like a word game.*shrug*

However, there are companies that would very likely see their stock go down if they announced a buyback. If a company is widely perceived as having a large number of wonderfully profitable growth opportunities it will likely trade at a very high PE multiple. If such a company announces a stock buyback the market will immediately perceive it as having no (or at least fewer) profitable growth opportunities and its PE multiple will nose dive.

On the other hand, the companies that are not generally perceived as having growth opportunities (and are thus trading at low multiples) are highly likely to see their stock price improve from a buyback.

So, it becomes more certain to make the stock price go up as it becomes more the exact right thing to do.

Which makes it seem rather silly to attempt demonizing it.

So the answer is yes, buybacks manipulate the market.

You apparently have little knowledge of the market. Manipulation has a particular recognized meaning: http://en.wikipedia.org/wiki/Market_manipulation

A buyback is not market manipulation any more than selling a stock is. A publicly traded company cannot engage in a buyback without first disclosing the plan, and usually gets shareholder approval before doing so. Unless the market and shareholders are fed misinformation, this is not manipulation. The most recent example of this in my mind is Apple: http://money.cnn.com/2014/04/23/technology/apple-earnings/?iid=EL

 

[AthenaAwakened]

I have already stated the buyback can be a good thing, can be a helpful thing.

I will go further and say buybacks are also at times necessary things in order to sustain the existence of the company and protect the investments of stockholders and the interests of stakeholders.

i will grant all of that

But like any practice, any item in a company's toolkit of financial actions, this tool can be misused.

And a growing number of observers (academics, market watchers, money managers, policy makers, etc.,) are concerned that too many companies are relying too heavily on market buybacks as a quick and dirty fix to whatever ails a company.

what is controversial about that?

(incidently, if more people spent their time reading what is actually posted as opposed to trying to read people's minds, we wouldn't have to keep going down this road)

 

[coloradoatheist]

I have already stated the buyback can be a good thing, can be a helpful thing.

I will go further and say buybacks are also at times necessary things in order to sustain the existence of the company and protect the investments of stockholders and the interests of stakeholders.

i will grant all of that

But like any practice, any item in a company's toolkit of financial actions, this tool can be misused.

And a growing number of observers (academics, market watchers, money managers, policy makers, etc.,) are concerned that too many companies are relying too heavily on market buybacks as a quick and dirty fix to whatever ails a company.

what is controversial about that?

(incidently, if more people spent their time reading what is actually posted as opposed to trying to read people's minds, we wouldn't have to keep going down this road)

That's a much better argument than trying to keep using manipulate. And yes, companies can use buybacks in the wrong way, but it doesn't explain the jobless recovery we that it looks like we are having.

 

[ksen]

The rampant increase of stock buyback programs was never meant to be the complete answer to our jobless recovery but it is a piece of the puzzle.

 

[dismal]

I have already stated the buyback can be a good thing, can be a helpful thing.

I will go further and say buybacks are also at times necessary things in order to sustain the existence of the company and protect the investments of stockholders and the interests of stakeholders.

i will grant all of that

But like any practice, any item in a company's toolkit of financial actions, this tool can be misused.

And a growing number of observers (academics, market watchers, money managers, policy makers, etc.,) are concerned that too many companies are relying too heavily on market buybacks as a quick and dirty fix to whatever ails a company.

what is controversial about that?

(incidently, if more people spent their time reading what is actually posted as opposed to trying to read people's minds, we wouldn't have to keep going down this road)

That's a much better argument than trying to keep using manipulate. And yes, companies can use buybacks in the wrong way, but it doesn't explain the jobless recovery we that it looks like we are having.

What do you mean "in the wrong way"? It's possible that there are cases where it may not the best thing for the shareholders. This would require the company have better sues for the money than the investing public at large. But this is a business decision the people running a company are paid to make.

The particularly absurd thing about this post was the idea that companies as a group are doing this for some reason. Obviously, if one company is making a bad decision by foregoing profitable investments this presents even more opportunities for other companies to make even more profit. Since there are large pools of capital both public and private available at historically cheap rates it's spectacularly implausible that our "economic problems" are being caused by people willfully not doing all these wonderfully profitable projects that are out there. The depth of disconnect one must have with the current reality of the capital markets to believe this is truly extraordinary.

 

[ksen]

Laurence Fink, CEO of BlackRock, is a giant dummy that doesn't know what he's talking about . . . according to dismal.

 

[AthenaAwakened]

I have already stated the buyback can be a good thing, can be a helpful thing.

I will go further and say buybacks are also at times necessary things in order to sustain the existence of the company and protect the investments of stockholders and the interests of stakeholders.

i will grant all of that

But like any practice, any item in a company's toolkit of financial actions, this tool can be misused.

And a growing number of observers (academics, market watchers, money managers, policy makers, etc.,) are concerned that too many companies are relying too heavily on market buybacks as a quick and dirty fix to whatever ails a company.

what is controversial about that?

(incidently, if more people spent their time reading what is actually posted as opposed to trying to read people's minds, we wouldn't have to keep going down this road)

That's a much better argument than trying to keep using manipulate. And yes, companies can use buybacks in the wrong way, but it doesn't explain the jobless recovery we that it looks like we are having.

I also provided examples of why there isn't a damn thing wrong with the word manipulate or its usage here in this context.

The limited vocabulary of some who post here is not my problem.

 

[coloradoatheist]

That's a much better argument than trying to keep using manipulate. And yes, companies can use buybacks in the wrong way, but it doesn't explain the jobless recovery we that it looks like we are having.

I also provided examples of why there isn't a damn thing wrong with the word manipulate or its usage here in this context.

The limited vocabulary of some who post here is not my problem.

And you didn't answer my question. Is me buying one share of IBM stock manipulating the market? It's normal market operations. A company decides how much public stock it wants out on the market and I decide how much stock I want to own.

The rampant increase of stock buyback programs was never meant to be the complete answer to our jobless recovery but it is a piece of the puzzle.

And where are the numbers about how this compares to the past. How much more or less than before? And is it the cause, or the symptom of underlying issues?

- - - Updated - - -

That's a much better argument than trying to keep using manipulate. And yes, companies can use buybacks in the wrong way, but it doesn't explain the jobless recovery we that it looks like we are having.

What do you mean "in the wrong way"? It's possible that there are cases where it may not the best thing for the shareholders. This would require the company have better sues for the money than the investing public at large. But this is a business decision the people running a company are paid to make.

The particularly absurd thing about this post was the idea that companies as a group are doing this for some reason. Obviously, if one company is making a bad decision by foregoing profitable investments this presents even more opportunities for other companies to make even more profit. Since there are large pools of capital both public and private available at historically cheap rates it's spectacularly implausible that our "economic problems" are being caused by people willfully not doing all these wonderfully profitable projects that are out there. The depth of disconnect one must have with the current reality of the capital markets to believe this is truly extraordinary.

I agree. As I said to ksen, it could be an issue of the underlying symptom

 

[ksen]

And where are the numbers about how this compares to the past. How much more or less than before? And is it the cause, or the symptom of underlying issues?

http://www.businessinsider.com/stock-buybacks-and-stock-prices-2014-8

It looks like stock buybacks may be starting to decline and that has people worried about future index performance (although from what I've read stock buybacks affect the Dow much more than they do the S&P 500).

http://www.marketwatch.com/story/uh-oh-stock-buybacks-are-on-the-decline-2014-08-20

U.S. corporations have been spending hundreds of billions of dollars a year buying in their own stock, simultaneously increasing the demand for the stock and reducing the supply.

And this matters right now because…er…they just stopped.

 

[SimpleDon]

That's a much better argument than trying to keep using manipulate. And yes, companies can use buybacks in the wrong way, but it doesn't explain the jobless recovery we that it looks like we are having.

What do you mean "in the wrong way"? It's possible that there are cases where it may not the best thing for the shareholders. This would require the company have better sues for the money than the investing public at large. But this is a business decision the people running a company are paid to make.

The particularly absurd thing about this post was the idea that companies as a group are doing this for some reason. Obviously, if one company is making a bad decision by foregoing profitable investments this presents even more opportunities for other companies to make even more profit. Since there are large pools of capital both public and private available at historically cheap rates it's spectacularly implausible that our "economic problems" are being caused by people willfully not doing all these wonderfully profitable projects that are out there. The depth of disconnect one must have with the current reality of the capital markets to believe this is truly extraordinary.

I agree with you. Companies are resorting to stock buy backs simply because there is no better use for huge amount of capital that the companies have accumulated. Demand is so low that they see no gain in building new production facilities. They wouldn't be able to sell the additional product.

But it would be very useful for us to look at the reasons for, one, the large accumulation of capital and, two, the shortage of demand.

Is it possible that the two are related and if they were might that point a way out of our current problems, problems that the whole world seems to be sharing with us to one degree or another?

 

[coloradoatheist]

What do you mean "in the wrong way"? It's possible that there are cases where it may not the best thing for the shareholders. This would require the company have better sues for the money than the investing public at large. But this is a business decision the people running a company are paid to make.

The particularly absurd thing about this post was the idea that companies as a group are doing this for some reason. Obviously, if one company is making a bad decision by foregoing profitable investments this presents even more opportunities for other companies to make even more profit. Since there are large pools of capital both public and private available at historically cheap rates it's spectacularly implausible that our "economic problems" are being caused by people willfully not doing all these wonderfully profitable projects that are out there. The depth of disconnect one must have with the current reality of the capital markets to believe this is truly extraordinary.

I agree with you. Companies are resorting to stock buy backs simply because there is no better use for huge amount of capital that the companies have accumulated. Demand is so low that they see no gain in building new production facilities. They wouldn't be able to sell the additional product.

But it would be very useful for us to look at the reasons for, one, the large accumulation of capital and, two, the shortage of demand.

Is it possible that the two are related and if they were might that point a way out of our current problems, problems that the whole world seems to be sharing with us to one degree or another?

But if they are getting that cash from operations, that does mean that demand is there. And in the business world, there is never enough demand, you have to go get it. when you start a business or a product line you aren't thinking, hey people have $10 they want to spend. It's always unknown. I think businesses learned their lessons from the 2000s and are being more prudent.

 

[ksen]

They are getting some of the cash from operations but a lot of it they are borrowing.