Friday, August 28, 2015

Looting Made Easy: the $2 Trillion Buyback Binge

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Corporations are taking the retirement savings of elderly public employees and using them to inflate their stock prices so wealthy CEOs and their shareholders can enrich themselves at the expense of their companies. And it’s all completely legal. Under current financial regulations, corporate bosses are free to repurchase their own company’s shares, push stock prices into the stratosphere, skim off a generous bonuses for themselves in the form of executive compensation, and leave their companies drowning in red ink.
Even worse, a sizable portion of the money devoted to stock buybacks is coming from  “massively underfunded public pension” funds that retired workers depend on for their survival. According to Brian Reynolds, Chief Market Strategist at New Albion Partners,  “Pension funds have to make 7.5%,” so they are putting their money “in these levered credit funds that mimic Long-Term Capital Management in the 1990s.” Those funds, in turn, “buy enormous amounts of corporate bonds from companies which put cash onto company balance sheets…and they use it to jack their stock price up, either through buybacks or mergers and acquisitions…It’s just a daisy chain of financial engineering and it’s probably going to intensify in coming years.”   (“How a Public Pension Crisis Is Driving an Epic Credit Boom“, Financial Sense)
So, once again, ordinary working people are caught in the crosshairs of a corporate scam that could blow up in their faces and leave them without sufficient resources to muddle through their retirement years.
The amount money that’s being funneled into buybacks is simply staggering. According to Dave Dayen at the Intercept:
“Last year, companies spent $553 billion to repurchase outstanding shares, just short of the record $589.1 billion in 2007. Large companies like Apple, General Motors, McDonald’s, Pfizer, Microsoft and more have engaged in buybacks in recent years.
Returning profits to shareholders through buybacks and dividends accounted for 95 percent of all earnings in 2014. As a result, each additional dollar of corporate earnings now translates to under 10 cents of reinvestment, according to a study by J.W. Mason of the Roosevelt Institute.”
This explains why business investment (Capex) is at record lows.  It’s because the bulk of earnings is being recycled into buybacks, over $2.3 trillion dollars since 2009 to be precise. And it’s all connected to the Fed’s zero rate policy.  Zero rates have created an environment in which corporations no longer look for ways to grow their businesses, expand operations, hire more employees or improve productivity.  Instead, they look for the quick fix, that is, load up on debt, buy more shares, goose the stock price, and walk away with a bundle.
It’s all about incentives. The Fed has created incentives that encourage financial engineering and stock manipulation as opposed to growth and productivity. And keep in mind that repurchasing shares is a form of margin buying, the same type of margin buying that triggered Stock Market Crash of 1929.
According to Dayen: “Prior to the Reagan era, executives avoided buybacks due to fears that they would be prosecuted for market manipulation. But under SEC Rule 10b-18, adopted in 1982, companies receive a “safe harbor” from market manipulation liability on stock buybacks if they adhere to four limitations.”
We won’t go over the regulations now because, as you can see,  they obviously don’t work or these corporations wouldn’t be $2 trillion in the hole. But it is interesting to note that, at one time,  policymakers saw how destructive buybacks were and were prepared to prosecute offenders for manipulation. I doubt that any of our regulators today would even dream of bringing a case against these corporate behemoths, after all, they pretty much own the whole show lock, stock and barrel.
The real danger of this buyback phenom, is that the corporations have piled on so much debt that any sharp decline in the market could push one or two of these giants into default.  That, in turn, could quickly take down other counterparties touching off another financial crisis.    So, the question regulators should be asking themselves,  is how much red ink are these corporations hiding on their balance sheets and what are the risks to the public if they’re unable to repay their debts.  According to Henry Blodget at Business Insider:
“As corporations have borrowed more and more money, the level of corporate debt relative to the size of the economy has continued to increase. As the chart below shows, this ratio is now at its highest level ever — even higher than it was in 2007, before the last debt-fueled economic implosion. Importantly, corporate net debt — the amount of debt that corporations are carrying minus the cash they have on hand (green line below) — is also at its highest level ever as a percent of the economy.”
debtloads
Let’s summarize:
1. Buybacks are driving the stock market higher.
2. Corporations purchase buybacks with credit.
3. “The level of corporate debt relative to the size of the economy… is now at its highest level ever.”
What can we deduce from these three observations?
First, that stock prices are a bubble and, second, that a significant stock market shakeout could leave some of the nation’s biggest corporations teetering towards insolvency.
Of course, none of this is going to stop corporations from engaging in the same risky behavior. Heck, no.   In fact,  CEOs are actually looking for ways to speed up the buyback process. I’m not kidding. Check clip from yesterday’s Wall Street Journal:
“Companies are increasingly turning to accelerated share repurchase agreements…to return cash to shareholders and secure an immediate boost to per-share profits…..But these turbo-charged stock buybacks can backfire, especially when a steep market plunge—such as the 5.3% drop in the markets over the past two trading days. That’s because a steep plunge in stock prices can force the companies to potentially pay more to buy the shares through an ASR than what they would pay if they purchased the shares over time on the open market.
 
“Things can go wrong,” said Robert Leonard, head of specialty equity transactions at Citigroup Inc….
(“Accelerated Buybacks Less Favorable During Market Swoons“, Wall Street Journal)
You’re darn right, they can go wrong, but who gives a rip? Not America’s insatiable CEOs, that’s for sure. They’re just looking for faster ways to cash in, that’s all that matters to them. These guys aren’t even thinking about the health of their companies, let alone their customers. ‘Making widgets for the masses, is for suckers’, right?  Corporate honchos have bigger fish to fry, like leveraging up their whole operation to its eyeballs, skimming the cream off the top, stuffing the moolah in an unmarked Caymans account, and slipping out the backdoor before the whole rickety structure comes crashing to earth. That’s modern-day capitalism in a nutshell. Slash and burn, Baby, just like big boys at the Pentagon.
One last thing: Just to show the extent to which these corporate mandarins will go to enrich themselves at their company’s expense, check out this blurb from this 2014 article at Bloomberg:
“International Business Machines Corp. (IBM) is reducing stock buybacks after an $8.2 billion first-quarter splurge… IBM said last week it won’t sustain its rate of share repurchases in the first quarter, when buybacks more than tripled from a year earlier to the most since 2007. The company plans to spend less than $5.8 billion total in the final nine months of this year….
. 
 IBM’s sales have fallen from a year earlier for eight straight quarters…Declining sales and rising buybacks have squeezed IBM’s free cash flow…The repurchases, meanwhile, have taken a toll on IBM’s balance sheet. Total debt climbed to $44 billion in the first quarter, up from $33.4 billion a year ago….
 
 During the first quarter, IBM issued $4.5 billion of new bonds, clearly used to fund buybacks, Black said….
“The company tapped the bond market five different times last year, then you have a pretty sizable February issuance,” Black said in the interview. “I feel like there is investor fatigue on the name.” 
(“IBM End to Buyback Splurge Pressures CEO to Boost Revenue“, Bloomberg)
Okay, let’s translate this into English: IBM spent $8.2 billion in first-quarter on stock buybacks, even though “sales have dipped “from a year earlier for eight straight quarters”; even though “declining sales and rising buybacks have squeezed IBM’s free cash flow”; even though buybacks “have taken a toll on IBM’s balance sheet”; and even though “Total debt climbed to $44 billion in the first quarter, up from $33.4 billion a year ago.”
Unbelievable, right? And that’s not even the best part. The best part is the fact that “The company tapped the bond market five different times last year.”  In other words, they went to the bond market with ‘cup in hand’ and appealed to gullible investors to lend them more money to pay their lavish executive bonuses, to shower more dough on their worthless, do-nothing shareholders, and to keep this whole ridiculous farce going on a bit longer.
Talk about balls!
Tell me this, dear reader, when can we stop referring to this activity as “buybacks” and call it by its real name; looting?

The refugee crisis and the inhuman face of European capitalism

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The horrific treatment of refugees seeking shelter in central Europe in recent weeks via the Balkans and Italy shows the brutal and inhuman face of European capitalism. Desperate people, fearing for their lives and fleeing the war-ravaged regions of the Middle East and North Africa, confront a bitter ordeal.
Every day provides new outrages: corpses drifting in the Mediterranean; refugees without sufficient food and water crammed together in intolerable sanitary conditions; families with small children forced to cross hundreds of kilometers on foot; police deploying batons and tear gas against defenseless migrants; and everywhere borders and barriers, secured by barbed wire and security forces to repel the refugees with force.
Just yesterday, two boats with up to 500 migrants capsized off the coast of Libya, with hundreds feared dead. Among those on board the ships were migrants from Syria, Bangladesh and several African countries, according to media reports.
This follows the discovery of the bodies of up to 50 Syrian refugees in a truck on an Austrian highway. They are presumed to have suffocated en route. The parked vehicle was found by a highway worker who noticed liquid from decaying flesh dripping from the truck.
Just a few kilometers away, in tranquil Vienna, the heads of government and foreign ministers of Austria, Germany, Italy and six Western Balkan countries responded to the gruesome discovery by tightening measures against those fleeing to Europe. The external border of the European Union is to be reinforced and refugee routes through the Western Balkans better monitored. They assigned blame for the mass death on “criminal human traffickers”, whose business is flourishing due to the isolationist policies of the European powers.
The refugee crisis makes an absurdity of the myth that the European Union is a haven of peace, prosperity and international understanding. While governments work closely together to transform Europe into a fortress where thousands die at its borders, they engage in fierce competition over which state can most effectively deter refugees or send them to another country as quickly as possible. Meanwhile, concerned political commentators are warning that the erection of new borders and the dispute over refugee quotas could explode the EU.
Britain, which has accepted just 1 percent of the Syrian refugees arriving in Europe, is spending millions to barricade the entry to the Euro tunnel in Calais, where thousands of refugees live in misery and where 12 have already died this year. Immigrants who work without permission face draconian punishments.
Hungary, a transit country on the West Balkan route, has built a 3.5-meter-high fence at the EU’s external border with Serbia and is considering measures to punish illegal border crossing with years in prison.
Germany and Austria, the target countries for many refugees, are seeking to repel them with intolerable conditions in detention centers, accelerated deportation procedures and the slashing of social support. Germany, in particular, in collaboration with France, is exerting pressure on other EU countries to distribute refugees based on a quota system.
This proposal has met fierce resistance, especially in Eastern Europe. Polish President Andrzej Duda has categorically rejected any acceptance of additional refugees. He justifies his position by arguing, among other things, that his country expects a fresh wave of refugees from Ukraine, where the civil war between the Western-backed Poroshenko regime and pro-Russian rebels has intensified.
Czech Deputy Prime Minister Andrej Babis, a billionaire entrepreneur, has called for an intervention by NATO to “close the Schengen area to the outside”. He referred to the influx of refugees as the “greatest danger for Europe.”
The response of broad layers of the population to the plight of refugees stands in stark contrast to the reaction of the ruling elites. Especially in Germany, refugees have been met with a flood of aid that has surprised and shocked mainstream political circles.
In Hamburg, several tons of donations were delivered to an exhibition hall that has provided shelter for 1,100 refugees from Syria and Eritrea for the past two weeks. Thousands of local citizens donated clothes, toys, blankets or purchased urgently needed hygienic items. While the authorities harass refugees and justify their actions with the claim that they are “overtaxed”, hundreds of volunteers have built a supply chain that distributes donations throughout Germany and organizes language courses and health care.
The media only sporadically reports on such actions, preferring instead to fill their headlines with the xenophobic demonstrations of neo-Nazi groups, infiltrated by the secret services, and the nighttime deeds of cowardly arsonists. In response to these provocations, the wave of aid and support has only intensified.
The support extended to refugees is not just an expression of basic humanity. Many instinctively understand that the refugees are victims of a social system that threatens their own lives.
There has been no popular support for the imperialist wars in Iraq, Afghanistan, Libya and Syria, which have destroyed whole societies and are the root cause of the wave of refugees. And workers throughout Europe have for years experienced falling living standards while a small minority at the top of society has enriched itself enormously.
The refugee crisis is the most dramatic expression of the crisis of a social system that is no longer compatible with the most basic needs of the vast majority of humanity.
Capitalism, based on the private ownership of the means of production and the subordination of every aspect of economic life to the profit of the financial oligarchy, is incompatible with the needs of a global society comprising 7 billion people who are economically dependent on one another. The nation-state, in which capitalism is rooted, stands in irreconcilable opposition to the world economy based on an international division of labor.
The inhuman treatment of refugees, the erection of ever new, insurmountable barriers, the strengthening of the state apparatus and growing militarism are the response of the ruling elites to the insoluble contradictions of capitalism. The despicable treatment of refugees is the product of a profoundly inhuman social system.

Too warm, too few fish: Health warning for world’s oceans

Rampant overfishing combined with the impact of climate change is seriously endangering the wellbeing of the oceans, environmental analysts say.

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The world’s oceans – covering nearly two-thirds of the Earth’s surface, and on which much of human life depends – are under severe pressure, a report says.
Over-fishing has dramatically reduced fish stocks. The thousands of tonnes of rubbish dumped in the oceans wreak havoc on marine life, while climate change is warming and acidifying them, putting them under further stress.
These are the sobering conclusions of a wide-ranging study of the Earth’s ecosystems by theWorldwatch Institute, a US-based organisation widely rated as one of the world’s foremost environmental think-tanks.
“Our sense of the ocean’s power and omnipotence – combined with scientific ignorance – contributed to an assumption that nothing we did could ever possibly impact it”, says Katie Auth, a researcher at Worldwatch and one of the authors of the report.
“Over the years, scientists and environmental leaders have worked tirelessly to demonstrate and communicate the fallacy of such arrogance.”

Decadal doubling

More than 50% of commercial fish stocks are now fully exploited with another 20% classified as over-exploited, the report says, while the number of dead zones – areas of the ocean depleted of oxygen and incapable of supporting marine life – has doubled in each decade since the 1960s.
The oceans play a key role in absorbing vast amounts of greenhouse gases and slowing the warming of the atmosphere.
The report says: “…Evidence suggests that as the ocean becomes saturated with CO2, its rate of uptake will slow, a process that has already begun.”
Sea surface temperatures are rising, putting marine systems under pressure and causing fish and sea bird populations to migrate to colder areas.
Worldwatch says there must be big cutbacks in fossil fuel emissions: “If emissions continue at current levels, ocean acidity in surface waters could increase by almost 150% by 2100, creating a marine environment unlike anything that has existed in the past 20 million years.”
The Worldwatch report, State of the World 2015, examines a range of sustainability issues. It says the goal of continued economic growth – an economic doctrine which has prevailed only since the 1950s – is a threat to the sustainability of multiple ecosystems.
The world’s resources – whether its fossil fuels or water resources – cannot go on being plundered. Changes in climate – in particular the prevalence of drought in some of the world’s main food-producing regions – is threatening the planet’s ability to feed itself.
The report concludes: “There is no question that scholars and scientists who study the human economy, the earth and the interactions between them are drawing profoundly troubling conclusions…
It is time for homo sapiens sapiens to live up to its somewhat presumptuous Latin name, and grow up.”