The Business Of Corporate America Is No Longer Business—-It’s Money Shuffling

by Financial Times • May 17, 2016

One of the great ironies of business today is that the richest and most powerful companies in the world are more involved than ever before in the capital markets at a time when they do not actually need any capital. Take Apple, which has around $200bn sitting in the bank, yet has borrowed billions of dollars in recent years to buy back shares in order to bolster its stock price, which has lagged recently. 

Why borrow? Because it is cheaper than repatriating cash and paying US taxes, of course. The financial engineering helped boost the California company’s share price for a while. But it did not stop activist investor Carl Icahn — who had manically advocated borrowing and buybacks — from dumping the stock the minute revenue growth took a turn for the worse in late April. 

The buyback bubble is only one part of a larger trend, which is that the business of corporate America is no longer business — it is finance. American firms today make more money than ever before by simply moving money around, getting about five times the revenue from purely financial activities, such as trading, hedging, tax optimisation and selling financial services, than they did in the immediate postwar period. No wonder share buybacks and corporate investment into research and development have moved inversely in recent years. It is easier for chief executives with a shelf life of three years to try to please investors by jacking up short-term share prices than to invest in things that will grow a company over the long haul. 

It is telling that private firms invest twice as much in things like new technology, worker training, factory upgrades and R&D as public firms of similar size — they simply do not have to deal with market pressure not to. 

None of this is good for the real economy; a wealth of academic research shows that not only has finance become an obstacle to growth, but also that financial engineering is destroying long-term value within companies. 

Buyback booms of the sort we have seen in the past couple of years tend to happen at the top of the market, when financially manufactured growth is tapped out. 

With corporate earnings under pressure, US businesses that have not been investing in real, underlying growth and innovation may be in for a fall. The result will be more economic stagnation — and more political populism.

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What Happens When "Real Growth" Goes Negative?

DYI

What little momentum there was in the New York manufacturing sector is fizzling, based on the Empire State index which came in much weaker-than-expected, at minus 9.02 in the May report to end two lonely looking gains in April and March.

DYI Comments:  All of this shows the signs and symptoms of an ever expanding market top. When will the market break to the downside?  No one knows and not certainly me!  What we do know, this is an absurdly overpriced market where market returns going forward will be dismal at best and losses at it worst over the next 12 to 15 years!  So hang onto your head while everyone else is losing theirs.  Better values are ahead.

The Great Wait Continues...

DYI