Oct 062014
 October 6, 2014  Posted by at 10:42 pm Finance Tagged with: , , , ,

Harris&Ewing Angelus siren on roof of Evans building, Washington, DC Aug 1918

If and when you see that in 2014 S&P 500 Companies Spend Almost All Profits on Buybacks and Payouts, in a Bloomberg report, how can you not be scared sh*tless about the future of the financial world? And given the power finance has gathered over the real world, how can you not be scared about your own future? I’m open to suggestions, but I don’t see it. Because I think that what we’re looking at here is the imminent demise of the corporate world, and therefore the financial world, and the entire US economy as we know it.

Companies need to invest their earnings into projects that will generate profits, into the development of products and services that they can sell to the world out there. If they instead use their earnings to buy back their own shares, they’re on a fast track to oblivion, because they can’t keep on buying their own shares over and over again. At one point, they’ll own them all.

Apparently, the S&P companies have no projects, innovative or not, that they deem worthy of spending money on. Or, let’s rephrase that just a bit, they have not nearly enough of such projects. Because they do spend, of course they do. It’s not as if they take every dollar that comes in and buy back shares with it. They don’t, it’s not that simple. The problem is that they do buybacks with far too many of their dollars.

Much of what they buy back shares with is borrowed money. Ultra low rates, what can go wrong, right? Well, here’s what can: these allegedly rich firms are loading up on debt. While their productive qualities, for lack of a better term, get thrown out with the bathwater. Here’s how, and how much, US companies are loading up on debt, graphs courtesy of Tyler Durden:

The S&P 500 companies we’re talking about are set to spent almost $1 trillion (equal to 95% of their earnings) on buying back their own stock, and pay out dividends to others who bought and own their stock, this year alone. The details as per Bloomberg:

S&P 500 companies will spend $565 billion on repurchases this year and raise dividends by 12% to $349 billion, based on estimates by Howard Silverblatt, an index analyst at S&P. Profits would reach $964 billion should the 8% growth forecast come true.


Five years of profit growth have left S&P 500 constituents with $3.59 trillion in cash and marketable securities and they’ve raised almost $1.28 trillion in 2014 through bond sales.

So at the exact same moment that the companies dilute their value through huge increases in their debt obligations, they get investors to buy huge amounts of additional debt, backed by, yeah, what exactly after a while? Backed by the fact that their shares are supposed to represent a certain value, ONLY because they’ve used their capital, and then some leveraged some, to lift those same shares. Keep that up and nobody ever has to work anymore?!

And don’t forget, it’s not just the companies themselves that buy their own stock, we know the major central banks, the Fed, Bank of Japan, and People’s Bank of China, also have substantial US stock portfolios. And 50% of US public pension funds are now holding the same US stocks. Everyone puts lipstick on the US corporate pig.

At some point, someone’s bound to see a bubble in there somewhere. The S&P companies gained $3.59 trillion in ‘value’ since 2009, and are set to spend $9.14 billion in buybacks and dividends in 2014. Bloomberg says that “the stocks with the most repurchases gained more than 300% since March 2009”. Looks great, until it doesn’t:

Inevitably, buyback rates are falling. See the red bar there. If and as companies’ actual value gets worse because they don’t invest in productive projects, they delve into more debt, just to buy their own stock, just to keep their stock values up, and the S&P is left hugely bloated, which fools investors into thinking they buy something that has real value. But what has real value?

It’s like there’s a house up for sale, and you’re interested, but the owner asks $20 million, based on the fact that he himself just made an offer of $20 million. The pipes are leaking, and so is the roof, but the realtor says, I tell you man, there’s a $20 million offer on the table. Just to say, in today’s market nobody has a clue what anything is truly worth.

And today’s stock buyers (investors?) are in essence offering $21 million for a house that may not be worth a tenth of the asking price, but they wouldn’t have any way of knowing. All that’s left is blind wagers. A bit more from that Bloomberg piece:

Companies in the Standard & Poor’s 500 really love their shareholders. Maybe too much. They’re poised to spend $914 billion on share buybacks and dividends this year, or about 95% of earnings, data compiled by Bloomberg and S&P Dow Jones Indices show. Money returned to stock owners exceeded profits in the first quarter and may again in the third. The proportion of cash flow used for repurchases has almost doubled over the last decade while it’s slipped for capital investments…

Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300% since March 2009. Now, with returns slowing, investors say executives risk snuffing out the bull market unless they start plowing money into their businesses. “You can only go so far with financial engineering before you actually have to have a business with real growth,” Chris Bouffard at Mutual Fund Store said. “Companies have done about all that they can in terms of maximizing the ability to do those buybacks.”

Profits climbed to about $230 billion over the last three months, based on analyst forecasts. That compares with total buybacks and dividends of about $235 billion, assuming repurchases estimated by Silverblatt are evenly divided between the third and fourth quarters. Cash returned to shareholders exceeded profits in the first quarter for the first time since 2009

“We’re at a point you sort of question whether they can continue to rise from here,” Glionna said. “This kind of 100% earnings is a barrier. It can bounce around here and there, but it doesn’t go much above that.”

Excluding the recession years 2001 and 2008, dividends and stock buybacks have represented, on average, 85% of corporate earnings since 1998. The last time payouts exceeded income in 2007, the buyback index fell 4.7%, compared with a 3.5% gain in the S&P 500. Equities peaked that October before losing more than half their value.

CEOs have increased the proportion of cash flow allocated to stock buybacks to more than 30%, almost double where it was in 2002, data from Barclays show. During the same period, the portion used for capital spending has fallen to about 40% from more than 50%.

The reluctance to raise capital investment has left companies with the oldest plants and equipment in almost 60 years. The average age of fixed assets reached 22 years in 2013, the highest level since 1956 …

Stock repurchases worth almost $2 trillion have helped buoy the bull market since March 2009. Even as sales were stuck at an average growth rate of 2.6% a quarter in the past two years, per-share earnings expanded more than twice as fast, 6.1%, data compiled by Bloomberg show.

“Buybacks have become sort of the low-risk medicine in the C suite,” David Lafferty for Natixis, said. “The reality is capital expenditure comes with risk, significant amount of risk, especially in a slow-growth world. Buybacks offer a lot of flexibility.”

“It’s going to be harder and harder to justify using that capital to buy back stocks at record highs,” Tim Courtney at Exencial Wealth Advisors said. “Money has to be diverted to other places to keep operations going. The point of concern is where the future growth is going to come from.”

The take away should be obvious, or so I think:

• While the S&P is at record highs, the US companies it is supposed to reflect have become dramatically less productive. Not just a little bit. They’ve also accumulated a pirate’s fortune in additional debt.

• Through buybacks, S&P companies have, aided by central banks, and Wall Street, created a hugely perverted idea of what their shares are worth. ‘Someone’s buying, so there must be value there’. Well, not if the seller poses as the buyer too.

• The lack of capital invested in productive undertakings spells even more erosion of the US manufacturing base. And that tells you all you need to know about the future of US industry. If companies don’t invest earnings in their own productive futues, who’s going to do it, and why should they?

Company shares have become a purely financial play, not something linked to a company doing well, performing, innovating, exceeding itself. That link is broken. It’s no longer about what you do, but what you can make people believe you do.

How much closer can you get to not having a functional economy? Beats me. There’s nothing there anymore, other than cheap credit and old habits. There’s no there there.

Home Forums The Imminent Demise Of The American Economy

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    Harris&Ewing Angelus siren on roof of Evans building, Washington, DC Aug 1918 If and when you see that in 2014 S&P 500 Companies Spend Almost All Prof
    [See the full post at: The Imminent Demise Of The American Economy]


    The inflation of assets is the purpose of the economy. Janet Yellen said as much recently when she urged middle class and poor people to accumulate assets to gain wealth. (wink wink, nod nod, elbow to the gut. Damnit, the Fed has your back on this stuff)


    No mention of work, income,wages, heaven forbid. That’s so 19th century,she could have said. Do I need mention the absurdity of people barely scraping by, or less, buying assets, presumeably finanicial? The assumption that inflating assets creates wealth is absolute. Well it would be if they thought that assets inflated but no, they only rise in value. A perfect storm of misconception.


    Speaking of which, rapier, here’s a good one:

    “Loan gives low-income borrowers a chance to build equity fast”

    Check it out, Ilargi. The bankers are just full of bright ideas. That should have some value, right?

    John Day

    A Spanish nurse in Madrid, who helped care for a Spanish priest with Ebola, entered his room twice. He died September 25. She has now been diagnosed with Ebola, and has a high fever. That puts an end to the proposition that Ebola is “hard to catch”. This Ebola epidemic is of different character than all prior outbreaks.
    There are statements that it is not transmitted through airborne aerosols, but they are not proven at all. Aerosol transmission is the explanation which fits best with the information about this gowned, masked, goggled and gloved nurse catching Ebola.
    How long until this gets rationally discussed in the mass media?


    SteveB – from the article you posted:

    “To make the payments more affordable, the offering rate will be about three-quarters of a percentage point below the 30-year FHA rate. And the rate can be bought down even further. For every 1% of the loan amount the borrower puts up as a down payment, the interest rate will be lowered by half a percentage point, which is twice as much as usual.

    Consequently, a $6,000 down payment on a $100,000 mortgage at 3% would bring the rate down to zero, meaning that every penny spent on the monthly payment would go to principal.”

    LOL – Santa Claus is in the house!

    Ilargi – “Companies need to invest their earnings into projects that will generate profits, into the development of products and services that they can sell to the world out there.”

    Well, the insiders of these companies ARE investing their earnings. They bought stock when it was low, got given stock options, and they’re cashing them in like crazy, along with bonuses up the wazoo. That’s the problem. There is currently too much money being made from nothing (financial products). Their reasoning is, “Well, why would I ever want to risk starting a project when I can make a killing doing what I’m doing?”

    And then these very people turn around and say, “Don’t raise our taxes because we’re the money-earners, we pay all of the taxes.” From what? From money made out of nothing.

    Ilargi – “Because I think that what we’re looking at here is the imminent demise of the corporate world, and therefore the financial world, and the entire US economy as we know it.”

    I think you are right!


    John Day – the Dallas Ebola patient’s daughter-in-law (the one who came over on Sunday, September 28th, to give him tea, who went out and bought him a blanket, who rode with him in the ambulance to the hospital, the one who was not ordered into quarantine, but has thankfully quarantined herself – that one) was yesterday (October 5th) given permission to go back to work at the old-age care facility she works at.

    She was not “gowned, masked, goggled and gloved” while attending to her father-in-law, yet the CDC have given her and her husband (who had seen the Ebola patient the morning of September 28th) permission to go out and get back to work. She is not agreeing to this (thank goodness), and is herself deciding to ride out the 21 days in quarantine.

    John Day, do you not think that this is too short a time to decide they can re-enter the work force, go out shopping? I know you are only infectious when you’re feverish and ill (so they say), but sometimes (as in the case of the flu) you are infectious before you know you’re even sick. Sounds like this Spanish nurse didn’t develop symptoms for about 10 to 12 days, if you start counting from about the 24th of September.

    Hope you got my link yesterday on the Liberian doctor who gave his patients the HIV drug and saved 13 out of 15 lives. That might be a good thing to know if this gets out of hand. Thanks.


    I don’t know if this guy is correct or not, but he’s quoting government documents:

    “It seems to be a common assumption that Ebola isn’t Aerosol and cant be transmitted via inhalation (a lot of news stories I read seem to make this assumption when talking about a story surrounding an infected person). While this is true for SOME strains of Ebola (4 out of 5), there is a strain that is Aerosol and transmittable via inhalation; the Zaire strain, which this current virus is a genetic variant of. Because of this I find that a lot of the precautions being taken, especially at airports, and in planes involving visibly sick people, really aren’t going to stand a chance for containing this virus (they seem to just let other passengers go assuming they are not also infected due to not actually touching the suspected person…). Truth is an airplane is extremely close to a “hospital environment”, which is the perfect condition for Ebola-Zaire to transmit via aerosol. For those that say that Ebola isn’t aerosol or transmittable via inhalation, please check out the follow .gov sources that blatantly say otherwise.”


    And from the CDC themselves, they list what constitutes high risk exposure and low risk exposure:

    “Low risk exposures:

    A low risk exposure includes any of the following

    – Household contact with an EVD patient
    – Other close contact with EVD patients in health care facilities or community settings. Close contact is defined as
    a) being within approximately 3 feet (1 meter) of an EVD patient or within the patient’s room or care area for a prolonged period of time (e.g., health care personnel, household members) while not wearing recommended personal protective equipment (i.e., standard, droplet, and contact precautions; see Infection Prevention and Control Recommendations).”


    One commenter said that he thinks so many medical personnel got sick because they were assuming Ebola couldn’t be transmitted via aerosol droplets. I too am wondering if that’s the case.


    Zero percent low income home loans? Wow, I wonder what that cost the home builders lobby?

    On share equity for debt, why, again, is it not a good idea to lock in some of the lowest long term interest rates in all of history?

    There is some nice leverage there, and when rates begin rising again, shares can always be re-issued. And at that point, maybe the Fed will buy them all.


    On the one hand, anyone who falls for the Wealth Building Home Loan gets what they deserve. But given the average IQ in America these days, maybe the government should offer at least a minimum of protection. If not, you might as well make any and all breaking and entering legal.


    Re Ebola, from Jon Barron, a leader in alternative health, says that ebola risks outside West Africa are being hyped:

    The maleficent, monger-miners of morbidity are at it yet again, looking to whip people into a frenzy of fear and spread misinformation in the name of the CDC. In case you haven’t seen it, there have been an abundance of headlines over the last couple of days saying things like:

    CDC report predicts as many as 1.4 million cases of Ebola by January

    And although the CDC report literally says that, it doesn’t actually mean that. The statement is taken out of context. I encourage you to read the actual report and not just the stories about it. But if you don’t have the time, let me explain what the report actually says.

    First, this is not an actual prediction; it’s the presentation of two different scenarios based on an Ebola Response modeling tool developed by the CDC. The 1.4 million figure represents one scenario. To quote from the report.

    “Extrapolating trends to January 20, 2015, without additional interventions or changes in community behavior (e.g., notable reductions in unsafe burial practices), the model also estimates that Liberia and Sierra Leone will have approximately 550,000 Ebola cases (1.4 million when corrected for underreporting).”

    However, the second scenario in the report states:

    “If, by late December 2014, approximately 70% of patients were placed either in ETUs or home or in a community setting such that there is a reduced risk for disease transmission (including safe burial when needed), then the epidemic in both countries would almost be ended by January 20, 2015.”

    In other words, if you weren’t into fear mongering, you could just as easily have run a headline based on this report that read:

    CDC report predicts Ebola will be over by January

    So which scenario is more likely? Well, the last three sentences in the report clearly state the opinion of the researchers themselves.

    “Officials have developed a plan to rapidly increase ETU capacities and also are developing innovative methods that can be quickly scaled up to isolate patients in non-ETU settings in a way that can help disrupt Ebola transmission in communities. The U.S. government and international organizations recently announced commitments to support these measures. As these measures are rapidly implemented and sustained, the higher projections presented in this report become very unlikely.”

    Unfortunately, many news services have decided to transform into fear-mongering the CDC’s express effort to motivate the international community. As the Washington Post pointed out in its version of the story, CDC Director Tom Frieden, commenting on the report, said, “This presents a what-if case — the nightmare scenario if nothing is done.” He added, “It is still possible to reverse the epidemic, and we believe this can be done if a sufficient number of all patients are effectively isolated, either in Ebola treatment units or in other settings, such as community-based or home care. Once a sufficient number of Ebola patients are isolated, cases will decline very rapidly — almost as rapidly as they rose.”

    Link to the whole article: https://jonbarron.org/colds-flus-infectious-diseases/ebola-14-million-cases-not-really


    sumac.carol – yes, we have the story of the young woman who used plastic garbage bags to cover her body while she cared for her Ebola-infected family members. I believe she saved all but one. It could be her family members just had better immune systems.

    But I still believe in the Dallas case that the situation was handled in a negligent manner. And if the CDC has told the daughter-in-law that she may return to work, with a so-called incubation period of up to 21 days, then that is again being negligent.

    I think the only way they’re going to stop this from spreading further is if they quarantine all three countries affected, no one going in or out. When you want to stop a forest fire, you build a firewall.

    Of course, the pharmaceutical companies might have other ideas.

    Dr. Diablo

    Anyone else hear about Crucell’s Ebola vaccine from back in 2006? It’s a company Bill Gates was involved in. So despite the news, apparently THEY think there’s a vaccine or they wouldn’t have patented it with Phase I clinical trials. What a profit-maker there, huh?

    At the same time, doesn’t it seem like the people the US have brought back and given the “special treatment” seem to have all recovered? So does this mean we have a cure, either in trial or in total? Or is it not as dangerous as they claim, or…what?

    Reports were also that in Dallas, vomit was cleaned off the street, ambulance, etc with no protection as no one was informed. Where are these people, and did they contract it? (n.b. we probably wouldn’t know yet) If not, interesting vector that it a) infects some in whole-body suits and b) doesn’t infect others who are violently exposed. Just watching. Interesting questions.

    John Day

    Hi Raleigh, I’ve now looked at and replied to your post from yesterday. Back when this was “blogspot” I got e-notifications of replies. Not now. I would appreciate it if you would look at what I answered there. This link should go to a graph of presentation of Ebola symptoms over time.

    John Day

    That graph link seems to work.
    About 90% of people are symptomatic within 10 days of exposure. 21 days is something like 5 standard deviations from the mean, by the looks of things.
    3TC/Lamivudine , TKM-Ebola and brincidofovir, which is being used in Dallas, on Thomas Duncan, all take the place of a nucleotide in a DNA or RNA chain, which is like a zipper, and one side allows the other side of the zipper to form, then separate, then it all happens again.
    These drugs mess up the zipper function, so the viral RNA or DNA (Ebola is RNA) can’t replicate, or replicates with big warts and has the wrong shape to work.

    John Day

    I’m going to keep these replies bite sized.
    Yes, I agree that the response in Dallas has been an embarrassment, and with poorly reasoned snap responses.
    Putting a bunch of people in an apartment without food, not all even directly related, and stationing ungowned cops outside, was a Dallas Police Department level of professionalism (ie, low).
    The self-quarantined people in Dallas have clearly been directly and repeatedly exposed to an active Ebola patient and his bodily secretions. God bless them for their responsibility.
    Having clean-up workers with their isolation gowns rolled to their elbows (photo on Zero Hedge) and a guy on the sidewalk in street clothes pressure spraying Ebola vomit onto a pedestrian in sandals (also ZH photo) was par for that course. Vaccines don’t always work, and they take a lot of time to ramp up. Flu vaccine is big business, and probably a bit less effective than taking 2000-5000 units of vitamin D daily (adult dose interpolated from 1200 U/d pediatric dose in 2009 Japanese study). I was a (healthy) volunteer for an AIDS vaccine study over a decade ago. Still no AIDS vaccine…

    I do not know how the initial snap judgement was made about who to quarantine and who to let run free was made, but it was clearly made before collecting enough information.
    that’s understandable. Why was it not revised? There are so many errors here.
    Now the quarantined group has been moved to a house in a gated community, where they are not open to such embarrassing scrutiny.

    John Day

    Whether “Ebola” can be transmitted as an aerosol is really an open question, based upon conditions. “Ebola” is not one virus, but this new strain behaves very differently from prior strains. Aerosol transmission between sick piglets in a cage and chimps in a separate cage across the room has been demonstrated.Even without the droplet nuclei of a sneeze, aerosolized particles are created in everyday life. This article about “government lies”, by a Criminology Prof. has a lot of good details about aerosolized viruses. https://www.globalresearch.ca/ebola-outbreak-the-latest-u-s-government-lies/5405584
    It also contains the seldom mentioned information that this virus has no direct antecedents, and regression analysis of the mutation rate points to a first human contact in December 2013. This virus has covered a lot of ground since then, unlike all other Ebolas. Doubling every 3 weeks (hypothetical) means it will infect 8 billion people next June. Of course there are limits…
    So, Sumac.Carol, I don’t believe that there is an excess of fear about this.
    My independent medical analysis is that this is a direct threat to every human. Exponential growth is not something we are wired to understand, except through studied rational processes.
    I do agree with the CDC that America (and everybody) remains threatened, as long as this virus persists in Africa.
    Donating to Doctors Without Borders is the best form of self-protection that I can see right now.

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