The Underbelly of Corporate America: Insider Selling, Stock Buy-Backs, Dodgy Profits

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 JobCompanies 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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  • cettel

    a stellar piece by Charles Hugh Smith.

    It’s the best report on the U.S. economy that I have seen in a long time.

    He starts with a series of allegations from an anonymous self-claimed insider. Then he backs it up by links to sources documenting key points in it, to show that these things are true from the data, not merely from that poster’s allegation.

    Clearly, now, the U.S. stock market is a sucker’s game — they’re the only players remaining in it. Who are those suckers? They are institutional investors, which hold the funds invested by the American public, such as mutual funds.

    • CatherineSDarrow

      ṀỲ ḞŖİĖŃḊṠ ŚṫėṖ-ṁother ṁàkes $98 ėverỳ hour õn the computer. Şhe haŞ bėėn òut òf a jòb fòr 7 mònths bùt làst mònth hĖr pày wàs $7250 jusŧ wòrking òn the còmputer fòr a fêw hòurs. Rêad mòre òn thiŞ wĖbsitĖ

      —————————————-

      Here ­­­­­­­­­is ­­­­­­­­­I ­­­­­­­­­started….http://www.gOogleonlinewOrk/2014/2/9…..,..

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  • MOLON LABE

    Does George Soros know something we don’t about the SP 500? August 15, 2014

    Among the highlights, Soros Fund Management increased a bear-call bet on the S&P 500 in a huge way. The fund lifted a put position — a bet the market will go lower — on the S&P 500 ETF SPY -0.34% to its biggest size yet, in terms of value and portfolio percentage, making a 605% leap over the previous quarter.

    Bullion Baron, who has long kept a beady eye on Soros’s SPY moves, has summed up the latest dealings. He speculated that this could be a hedge — or Soros is really worried about something. One possible something is China, which the hedge-fund titan referred to as a global uncertainty earlier in the year, notes the Baron.

    Soros also lifted positions in Apple and Facebook and a portfolio loaded up with stocks, so he can’t possibly be all that gloomy. As for that China unease, WSJ’s MoneyBeat reports that China bears are entrenched and see stocks headed for a big fall. One strategist says it’s not good to see that stocks there have been rallying on both good and bad economic news.

    http://blogs.marketwatch.com/need-to-know/2014/08/15/does-george-soros-know-something-we-dont-about-the-sp-500/

  • elizabethhanson

    It sickens my stomach to read how these vultures are picking our bones dry. What shall become of the pension funds- to the supposedly 100% safe funds? The same vultures are at work to get all of the public money that funds public education via common core. What is it going to take to awaken the sleeping giant which I thought was the U.S. people??? http://restoregedfairness.org/latest-news/38-common-core-is-just-the-latest-of-the-billionaire-scams