|Dow||-17.72 to 16,991.97|
|S&P 500||-3.06 to 1,964.84|
|Nasdaq||-20.82 to 4,454.80|
|10-YR Yield||-.022 to 2.425%|
|Gold||+$14.30 to $1,207.20|
|Crude Oil||+$0.87 to $90.61|
My father was a company man in a world where company men just aren’t that common anymore. He worked for more than four decades as a materials engineer with a leading aerospace company … and even though he’s technically “retired,” he still sneaks in some work from time to time.
I’ve always been proud of his engineering work. The problem these days, though, is that America seems to excel much more in “financial engineering” than any other engineering field.
Just look at the biggest corporate news of the day: Technology giant Hewlett-Packard (HPQ, Weiss Ratings: B) said it’s going to split its businesses into two separate publicly traded entities. One will include HP’s printer and PC business. The other will focus on the corporate, “enterprise” computing businesses, including sales of data servers and networking gear.
HP is far from alone. Online auction firm eBay (EBAY, Weiss Ratings: C) recently said it will spin out its PayPal payments business. The idea is that the individual business divisions will achieve a higher market valuation than they would if they stayed under the same corporate umbrella.
Maybe I’m old fashioned. But when you choose to cut a four-slice pizza into eight smaller ones, you still have the same amount of pizza, right? It doesn’t taste any different either, does it?
Frankly, it seems the only reason these types of deals are being done is because they’re the “flavor of the month” on Wall Street — something investors are temporarily enamored with. Then again, I’m not a highly paid Wall Street investment banker who needs to make payments on his Hamptons beach house.
Another story from Bloomberg shows that financial engineering in the form of stock buybacks keeps going strong, too! The companies in the S&P 500 have collectively announced plans to buy back stock and pay out dividends to the tune of $914 billion. That’s a whopping 95 percent of all the earnings they’ve generated.
Companies are now spending more than 30 percent of their cash flow on share buybacks. That’s roughly double the amount they spent 12 years ago. During that same time, they slashed capital spending to just 40 percent of cash flow from 50 percent.
|About 95% of all profit earned by companies in the S&P 500 is being shoveled to shareholders.|
If you’re a shareholder, that’s good news — at least for the short term. Buying back shares boosts earnings per share. Shrinking the public float of a company also helps support the price of the other shares still in the hands of investors.
But what does it say about the long-term vision of executives if they can’t find anything better to invest in than their own shares? Shouldn’t they be spending money on new factories to boost production and profits the “old fashioned” way? Shouldn’t they be paying their workers more so the economic recovery broadens out? And shouldn’t they plow money into research and development to find the next great American product?
It’d be nice. But the numbers show that just isn’t happening.
|“Maybe we need tax policies aimed at dividend payouts and buybacks.”|
I don’t know how we fix this problem. Maybe we need tax policies aimed at rewarding R&D or capital investment, rather than dividend payouts and buybacks. Regardless of how we do it, one thing looks certain to me: Our economy would be much better off if we had more engineers like my dad working on Main Street — and fewer financial ones running amok on Wall Street!
How about you? Do you think financial engineering is a necessary evil? Or not an evil at all? Should companies be investing more in plant, property, equipment, and labor … or is the “shareholder first” approach ultimately a better one? Let me know here.
|Our Readers Speak|
Is the job market improving? That’s an incredibly important question we all have to revisit each month when we get the latest figures from the Labor Department. But suffice it to say, many of you commenting on the blog aren’t buying Washington’s sanguine story.
Reader Howard said: “What’s missing is that we have more people not working today than ever in our history. They can play with the numbers to make it look rosy as the elections come closer. The jobs that were created are low income jobs; not what Middle Americans need to grow. Family income is lower for Middle Americans as well.”
Reader Mike chimed in as well, saying: “The underlying data of the jobs report sucks. Labor participation rate drops to the lowest in 36 years … 4 out of 5 jobs created are minimum or low wage … 230k jobs created were for 55 to 69 year-old grandparents … No job growth for 25 to 54 year-olds … wage growth flat … lower hours worked.
“Unfortunately, the CNBC talking heads drooling over the headline numbers as usual really does not change the fact that the U.S. has significant structural problems.”
Finally, Reader Dick said: “I no longer trust government reports. Inflation reports are not accurate because they keep changing what they cover. Employment figures are no good because of seasonal & life/death calculations. Total employment does not agree with government job creation numbers that even leave out those no longer looking for work. Of course employment numbers look good as we have a Nov. 4 election coming.”
Talk about a skeptical bunch! I’ll just repeat what I’ve said over and over here and elsewhere. Conditions are better than they were in the Great Recession, which means “crisis-era” monetary policy makes absolutely no sense anymore. But they’re not as good as they should be thanks to poor monetary and fiscal policy across the board.
As for monetary policy, Reader J.P.F. had some interesting comments: “As a 63-year old retiree with a balanced 60/40 stock/ bond portfolio, it is time for the Fed to allow the market to raise interest rates. End the QE as planned to sop up the excess liquidity and allow the market to seek its own level.
“It may go up, it may go down, it may stay the same. I would prefer that borrowing rates rise, as it would also tend to raise interest rates on the borrowed money. It is a supply demand thing. I do not plan to borrow money, I plan to lend some, at free market rates to well qualified borrowers. Sub-prime need not apply. Money will remain cheap enough.”
Amen, JPF! The Fed has far outstayed its welcome, and it’s time for them to ride off into the sunset! Let America get back to business lending and borrowing money at realistic, market-determined rates that accurately account for potential risks and rewards.
Remember: The website is the best place for you to jump into any of these debates and add your comments here!
|Other Developments of the Day|
• I know, it’s cliché — and we really need to come up with a better name. But for now, let’s just say “Merger Monday” is still going strong!
The latest deal? Medical device maker Becton, Dickinson (BDX, Weiss Ratings: B) said it would buy CareFusion (CFN, Weiss Ratings: A-) for $12.2 billion in cash and stock. The deal will boost sales by adding equipment like infusion pumps and drug dispensing equipment to BDX’s product line.
• The pro-democracy protests in Hong Kong are calming down a bit after a week and a half of increasing chaos. Demonstrators say they managed to force government officials to the bargaining table over the structure of the 2017 elections. But it doesn’t look like Chinese or Hong Kong officials are poised to give much ground. So renewed protests could break out at any time.
•Texas Ebola patient Thomas Eric Duncan is reportedly doing poorly, breathing only with the assistance of a ventilator. So far none of the people he came in contact with are showing signs of the deadly disease, but they aren’t out of the woods yet given the virus’ lengthy, 21-day incubation period.
• Will the Federal Reserve start hiking interest rates sooner? Or later? You know I’m firmly in the “sooner” camp, which also happens to be the view of the $4.3 trillion money management firm BlackRock (BLK, Weiss Ratings: A-). But Goldman Sachs (GS, Weiss Ratings: B+) has the opposite view. Talk about an economist battle royale!
Until next time,
P.S. By now, I’m guessing you have learned quite a bit about Martin’s Ultimate Portfolio — the investing strategy he built from the ground up to help you grow wealthier in these uncertain times. If you join now, you risk nothing! You must be thrilled with the money you make or you can cancel at anytime in the next 365 days!
But remember: Time is running out. Your introductory savings expire at the end of this week. Click this link for the facts and join me while you can still save up to $2,603!