Category: Corporatism

Friday Music Break – October 10, 2014

Today, we review the song “Sixteen Tons”. Here is the chorus:

You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store

The song is about economic exploitation of coal miners. Depending on your view of history, the song was written by Merle Travis in 1946, or George Davis in the 1930’s as “9 to 10 Tons”. Of course, older readers know of the 1956 Tennessee Ernie Ford version of the song. It sold 20 million copies as a single!

Part of the exploitation was that miners were paid in scrip, not in cash. Scrip is non-transferable credit vouchers which could be exchanged only for goods sold at the company store. Workers also lived in company-owned dormitories or houses, the rent for which was automatically deducted from their pay. This had the feature of lowering the costs of labor for the mining companies, while making it impossible for workers to accumulate any cash savings. In the US, the associated debt bondage persisted until after the 1914 Ludlow Massacre.

The Massacre was the result of a strike against the Colorado Fuel & Iron Company, owned by John D. Rockefeller, Jr., the Rocky Mountain Fuel Company, and the Victor-American Fuel Company. The strike resulted in the violent deaths of at least 19 people.

Howard Zinn in The Politics of History described the Ludlow Massacre as:

The culminating act of perhaps the most violent struggle between corporate power and laboring men in American history

The Ludlow Massacre quickly evolved into a national rallying cry for labor unions and eventually helped lead to New Deal labor reforms. But over the years, the tragedy in Ludlow Colorado has been largely forgotten.

Here is the Wrongologist’s favorite version of the song by Jeff Beck and ZZ Top’s Billy Gibbons, who toured together this year. They are supported by Tai Wilkenfeld on bass:

Note that the performance ends at 3:49.

Now, please ask yourself how much you are worth. Then look around you and realize that you are also a part of the most underpaid workforce since the days of the company store.

If politics is about power, then the powerful will always have the advantage. There will be an endless loop of the more powerful crushing the less powerful, with any change in the balance of power simply a random fluke, like what happened after Ludlow catalyzed the United Mine Workers.

If politics can be about policy, then power will not have an insurmountable advantage, and progress can happen again.

 

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Stock Buybacks: Who Benefits?

Bloomberg reported this week that companies in the S&P 500 are poised to spend $914 billion on share buybacks and dividends this year, or about 95% of their corporate earnings. Data compiled by Bloomberg and S&P Dow Jones Indices show that money returned to stock owners exceeded profits in the first quarter and may again in the third quarter of 2014.

The proportion of cash flow used for stock repurchases has almost doubled over the last decade while it’s slipped for capital investments. So, who is benefiting? From Bloomberg: (emphasis by the Wrongologist)

Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300% since March 2009. Now, with returns slowing, investors say executives risk snuffing out the bull market unless they start plowing money into their businesses.

The S&P 500 Buyback Index (yes that is a thing) is up 7.5% percent this year through October, compared with the 6.5% advance in the S&P 500. It did better in the past, beating it by an average of 9.5% since 2009. Excluding the two years in which we had a recession (2001 and 2008), dividends and stock buybacks have represented 85% of corporate earnings since 1998. So, there has been little reinvestment in the business going on. Stock repurchases have helped buoy the bull market since 2009 by about $2 trillion.

Consider that corporate revenues have had an average growth rate of 2.6% per quarter in the past two years, while per-share earnings grew at 6.1%, more than twice as fast, says Bloomberg. Since earnings per share (EPS) is the ratio of the total earnings divided by the number of shares outstanding, you can either increase the numerator or decrease the denominator in order to grow EPS.

Corporate America has decided it is easier to reduce shares rather than to grow earnings.

This translates into bad long-term corporate strategy. During the same period, the portion of earnings used for capital spending has fallen to about 40% from more than 50%. This use of cash to fund buybacks has left US-based companies with the oldest plants and equipment in almost 60 years. Bloomberg says that the average age of fixed assets reached 22 years in 2013, the highest level since 1956, according to annual data compiled by the Commerce Department.

Today, shareholders are the most mobile of corporate stakeholders. The days of “buy and hold” investing are over; it is now just for the smallest of investors. For example, high frequency trading (HFT) represents 70+% of trading by volume. The HFT “investors” often hold share ownership for fractions of a second. The HFT firms are in bed with professional fund managers who own large chunks of equity in public companies. Together, these shareholders ONLY want corporate strategies that maximize short-term profits and increasing dividends. Coupled with the growing trend of limited, or little, voting rights for stock ownership by the public, professional managers have a free hand to get wealthy without responsibility for longer term corporate performance. This plays into the hands of CEOs and other C-level managers who derive most of their compensation from increasing value of stock. Equilar, an Executive Compensation firm, reports that about 63% of S&P CEO compensation is in the form of stock.

This is not managing a business, it is liquidating a business. While it may be in the individual executive’s short-term interest (company stock appreciation and bonuses) ultimately, it will kill the US economy. Look for more complaints about the American workers when they are unable to compete, using worn out, or obsolete equipment.

We need different ideas to inform our effort to steer the ship of state to higher GDP growth and full employment. How about tying executive performance to adequate return targets for all STAKEHOLDERS rather than to a maximized return to shareholders who no longer buy and hold shares?

You can only go so far with financial engineering before you actually have to improve your business with real revenue and profit growth. Companies have done about all that they can in terms of maximizing the ability to do these buybacks.

What would be wrong with trying some new ideas?

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