The Underbelly of Corporate America: Insider Selling, Stock Buy-Backs, Dodgy Profits
Courtesy of Charles Hugh-Smith of OfTwoMinds
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.
"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)
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?
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.
Picture via Jesse's Cafe Americain