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The Underbelly Of Corporate America: Insider Selling, Stock Buy-Backs, Dodgy Profits
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
The hollowing out of corporate strengths to enable short-term profiteering by the handful at the top leads to systemic fragility.
Anonymous comments on message boards must be taken with a grain of salt, but this comment succinctly captures the underbelly of Corporate America: massive insider selling, borrowing billions to buy back their own stocks to push valuations to the moon so shares granted as compensation can be sold for a fortune, and dodgy accounting strategies that boost headline profits and hide the gutting of investments in long-term growth.
Here's the comment:
"I’m occupying a vantage point that allows me to see what is going on inside the top Fortune 50 companies. I have never seen such rot before. Of the 50, at least 30 have debt at 120% of cash. Most have cut capex, R&D and maintenance by 80%. Most have been borrowing money to do stock buy-backs, while simultaneously selling off business units and doing layoffs.Of the 50, at least 20 have 100% insider selling. For some, you would have to go back decades to find a point where all of the acting board of directors are selling. In essence, they are paying the mortgage with their credit cards. Without bookkeeping games, there are no solid earnings. There will be no earnings growth.“Executive compensation based on stock performance” is killing corporate America.A black swan is not needed to make it fall, a gentle breeze will do just fine."
(source message thread)
So let's try contesting these points.
Where is the data showing insiders buying hand over fist at these valuations?
Insider selling has been raising red flags since March 2014: In-the-know insiders are dumping stocks
Where is the data proving Corporate America isn't borrowing billions of dollars and using the nearly-free money to buy back shares? Buying back shares reduces the float (stocks available for purchase by the public), reducing supply and creating demand which pushes prices higher.
Stocks’ Biggest Gains Are an Inside Job: Companies spent $598.1 billion on stock buybacks last year, according to Birinyi Associates in Westport, Conn. That was the second highest annual total in history, behind only 2007, Birinyi calculated. The pace picked up in the first quarter of 2014, when companies spent $188 billion, the highest quarterly amount since 2007.
Where is the data showing Corporate America has added jobs?
Who actually creates jobs: Start-ups, small businesses or big corporations? During the 1990s, American multinational companies added 2.7 million jobs in foreign countries and 4.4 million in the United States. But over the following decade, those firms continued adding positions overseas (another 2.4 million) while cutting 2.9 million jobs in the United States.
As for dodgy accounting: when the dodgy accounting has been institutionalized, it's no longer viewed as dodgy. Which brings us to the money shot of the comment: “Executive compensation based on stock performance” is killing corporate America.
When executives and others at the top of the corporate pyramid have such an enormous incentive (stock options worth tens of millions of dollars) if they can push the stock price higher with buy-backs paid with borrowed money and accounting gimmicks that inflate headline earnings, then why wouldn't they do precisely that?
The profits are as bogus as the stock prices: both are relentlessly gamed to make sure fortunes can be reaped in a few years by those at the top.
As the comment noted, this hollowing out of corporate strengths to enable short-term profiteering by the handful at the top leads to systemic fragility. No shock is needed to bring down these fragile corporate structures: existing debt and the slightest tremor of global recession will be enough to topple the rickety facade.
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lol.. zerohedge.. when is the sky falling.. i mean the world is ending..you been calling for it for past 6yrs..
2 more years...its a 8 year cycle..
Trolls are out in force. Kids back in school so they're heading back into the cubicle to spam blogs. lmao. New age "GDP".
Frontline on Wall Street trading corruption.
https://www.youtube.com/watch?v=5jnihc4rzFw
Should be DICKfan81 you mook!
"Buybacks" and "insider selling"?
Nice...
Don't you know that capex and executive resonspibility are soooo 20th century? The new paradigm is I've got my pile so fuck you.
This is interesting and the reason I read ZH. Let me get this straight. The execs. of top companies personal compensation comes in the form of stock. They (ceo's BofDs etc.) are busy buying back company shares(often viewed by the public as strength) with company cash, maybe derived from layoffs,selling assets etc. So at the same time they are driving shares higher through company buyback, they are selling personal compensation shares at the inflated levels. I would like to see a graph/chart that shows the ratio between company buyback and the selling of stock comp over a period of various years...it would need to be simple (I am). I already know that both our government and the crony Corps are monsters that eat their own. A good chart would let me see it more clearly.
not a chart, but this may help.
Corporate insiders are more bearish than they have been in almost 25 years. That isn’t good news for the stock market, since these insiders — corporate officers and directors— know more about their companies’ prospects than the rest of us.
Currently that adjusted figure shows a record level of insider bearishness. According to this measure, corporate officers and directors in recent weeks have sold an average of six shares of their company’s stock for every one that they bought. That is more than double the average adjusted ratio since 1990, which is when Seyhun’s data begin.
One year ago, Seyhun’s adjusted ratio was solidly in the bullish zone, he says. And in late 2003, the ratio was more bullish still.
The current message of the insider data “is as pessimistic as I’ve ever seen over the last 25 years,” he says
Stock Options to be precise.
Therein lie the leverage in the package; and the reason why every Big4 Accounting/Audit -er - Compensation Consulting Team Member with the Glorious Qualifications of a CPA Licence carries a Preprogrammed Black-Scholes Package for their Laptop or HP Calculator set up by a "real" Finance type or by the Math whiz on the IT Dept.
BTW, "Tylers Durden" - you forgot to mention the Options Contract Backdating Scheme to seal the Usury. E.g., Steve Jobs in the Spin/Mia Culpa Song and Dance.
I don't see anything "cyclical" about this.
We are in wholly uncharted, historically unprecedented territory; both fiscally and in overall moral/societal destruction.
And yes Libertarians, that last phrase certainly DOES matter.
Just as soon as they have finished looting ,and there is nothing left to save.
Not long now at all.
It's been kept afloat using your financial future. So laugh all you want.
I like the "hollowing out" meme. The entire stock market is one big, hollow entity. The corporations are actively destroying themselves, warping every possibility to maximize the money the CEOs and board can extract. When the ginormous, hollow entity that is the stock market is exposed these corporate officers will shrug, say "who coulda node?", and jump on their G4 headed for the island.
Most peeps know that what has been going on for the past few years is not going to end well. Problem is determining when the "End" will be. Me, I am clueless as to the timeframe so I just keep playing the game the TPTB have set up. Not going to fight them but instead join them to get my "Fair Share".
Yep, don't get caught up in guessing "when", assume tomorrow and get ready. Trying to pick "when" is how people get stuck holding the bag.
I believe the saying is:
Better to be a year early, than a day late.
Good luck timing this corrupt, rotten to the core "market".
I got all the way out of the markets in 2012 and haven't regretted it a bit. Greed will get you to the gallows.
Then you have much to lose when the cards fall. Only idiots continue to short equities in a free money environment. Me I decided to short the corrupt markets by paying off debt and putting all excess monopoly money into physical metals (which I keep praying that Yellen goes full retard and pushes silver down to low single digits and gold to double digits).
Wow! You got to post first. What an accomplishment for a turd sucker like yourself.
Kudos, please wipe your mouth before you kiss your boyfriend.
6 years isn't a long time. 40 years is a long time. When did the Knicks last win an NBA title? ;)
So $4 Trillion printed for cronies of Obama and a Zero interest world are just awesome indicators of how great a recovery for insiders are. Jon Corzine still walks a free man....shows how rampant the corrupt of washington is! Heck everyone has known for years that Detroit, A/C and Illinois are technically bankrupt and going down the tubes....just because it takes a awhile to happen doesn't mean they aren't doomed. Housing is going back down....big time....just because you have a bump doesn't mean it has recovered. Just talking to realtors in CT....said it is the worst they have EVER SEEN.
if you expect a big firework and hoops off the clip, then thi is not the scenario.
A crash from eveing until the next morning cannot be expected.
My interpretation (of the ZH painting the picture) is, that there is one step forward, five steps back....
A little bit progress here, but five problems elswhere. The problems will pull society/economy gradually down
one of cass sunsteins boys, eh? head back to MMFA or MoJo, and do us all a favor.
The only thing keeping it going are the Central Banks. We can point out the problems endlessly and these point to a crash and have done for a long time but we can't do anything Fed policy.
I use we as all those who understand the current status quo is screwing everyone over who earns their money through a wage or via trading in a functioning market.
Ye olde loot scoot boogie.
I feel like I've lived through all this before.
There is no compensation structure that is going to stop the elites from lining their pockets at this late date.
And what's all this about no R&D or CapEx? Bullshit. They spend MILLIONS on K Street lobbyists and their returns on that investment run in into the hundreds or even THOUSDANDS of percent. I'd say that beats the hell outta spending millions of dollars and years of develpment work on a new widget that's 2% more efficient than the old widget and trying to sell it to somebody.
Off topic, but have you seen JPY today?
Do you know where your WTI is today?
Debt at 120% of cash? I'm not a credit analyst, but that doesn't seem too extreme to me.
Depends how its structured, and what loan covenants there are.
Also depends if its actual cash, or A/R's are marked as cash.That can disappear in seconds,
they did in 2008 for a lot of businesses.
" A/R's are marked as cash"
You mean a firm issuing a customer invoice and waiting for the actual cash, counting this as cash ?
Yeah, A/R is usually counted as near cash when looking at short term liquidity measures. Debt at 120% of cash is quite vague though and doesn't really mean anything in an of itself. Some might even consider that to be efficient cash management if it includes revolvers. Of course, Taleb would say that the marginal benefits of efficiency result in increased fragility. The devil's in the details.
Considering how accounting works nowadays there are no details, just hope and change....
For the majority of Fortune 50 companies?
Those are the ones that should be swimming in real free cash.
Eventually tha back of the camel gets broken by the final straw. When and which remains to be seen, but keeping on adding straws will eventually do the job. It´s all about timing and assessing the strength of the camel - this one has been strong and pinned up in a way never seen before. But the final straw will do job anyway.....
Said it many times before, but when you make millions of dollars per year, no one cares about the company or their longer-term career. As long as you have enough to live on for the rest of your life you trash the company and then retire. And fraud doesn't matter because you won't get into any trouble and still end up rich.
I've waited since 2009. Bring it on already.
Don't be derisive. Hardly anyone could have seen the absolute depth of the trickery employed by the M.O.T.U. (Masters of the Universe) to keep the Grand Illusion alive. As well....who could have seen the absolute depth of self delusion of The Sheep to blinder themselves to this fact and lose all confidence in the Confidence Game to beat all confidence games. But....it will happen. Just as yeast does what yeast does.....and then dies when it has consumed all of the growth medium....or cancer does what it does until the host dies.....The Grand Illusion will eat itself as well. Therefore the question becomes....not if or even when....but knowing that it will end badly what are you prepared to do? Are you even prepared at all?
+1
I think when the market does crash...30-50%..the Feds will be there to buy it back up...cant have terror in the streets again.....like the 30s.....so the Fed will be there to bail out the house of cards again....whats a few more trillion in the overall game of things....nothing if it brings stability....
Suez Canal Dollar-denominated certificates suspended
http://nsnbc.me/2014/09/02/suez-canal-dollar-denominated-certificates-su...
King dollar indeed
Come on people, the FED, you know the private entity that is owned by the banks, has done this all for main street, not Wall St. After following the "Market" for 30plus years I can assure you that the scam that is going on right now will end terribly. Don't know when but there is no way it cannot. Eventually all these companies will turn out like every sovereign nation when it comes to debt. Buy high, sell low, if you're the CEO, why not enrich yourself, you'll probably be out in 3-4 years anyways. Most fortune 500 companies have board members that sit on numerous companies. Again the companies are truly owned by the few.
<delete> sorry.
BTFD in Silver? 19.1035. i say keep stacking.
Look at the volume in the DoW today. Grave Yards have more action...
volume is 70% lower than it was in 2008.
70%.
is that 70%?
Mum and pop have been ripped apart in stox twice already, and are now just surviving by government assistence (EBT). They watch this shyte show from the sidelines this time round. But Insiders are selling now, who are they selling to? Foreign or "savvy" investors (CBs ???) that join/continue the party till the bitter end ? Who's gonna be the big bag holder this time round?
It's contained theft.
Not a member of the club, no benefit to you.
No harm, right?
Is this a new economic model for the future?
Or is it the same old fascism we know and love?
Eventually.....even a Circle Jerk has to come to an end. And all you're left with is a pile of spooge, a cramped hand and a bloodied wanker.
And for what ? Everyone will just look on in horror at what they allowed their Masters to do for themselves......and unfortunately......all over us.
one oz BU liberty silver dollars.21.56
Yes who really creates the jobs?
Small business is being anihilated by the free money available to the corporate slugs. Bogus business models a being financed.
This is what happens when some well connected capitalists don't stay true to Capitalism's tenants.....which one of those is....
"There is no easy money AND you just may lose....so sad, but 'dems the breaks, kid. Try again."
But for fear of losing.....these capitalists make deals with other crony capitalists and better yet, politicians, to make deals to screw their leaner, meaner, small business competitor. Plus.....when it goes to shit.....they always have the ability to tap that politician for some free bail out money from the Eternal Teat of the Federal Reserve.
When Capitalists employ Socialism for themselves.....then Capitalism is dead. Thus is born Fascism. And that is what we have.
Brought to you by... a house of cards.
"Of the 50, at least 30 have debt at 120% of cash. Most have cut capex, R&D and maintenance by 80%. Most have been borrowing money to do stock buy-backs, while simultaneously selling off business units and doing layoffs."
ZIRP encourages debt. Why is this a surprise?
Who the hell is going to expand payrolls when Obamacare's costs are hanging over their head and who can invest when your products can be rendered unsellable by a regulatory edict (Ask Caterpillar, who won't be able to sell their locomotives come Jan 1, because they don't meet "Tier 4" standards, so the political playa' GE has a de facto monopoly).
This situation isn't a problem, it's the symptom of a problem, the same government that spends its time monitoring its citizens while completely missing out on real threats.