The Wrongologist

Geopolitics, Power and Political Economy

Saturday Soother – July 8, 2017

The Daily Escape:

Marble Caves, Patagonia – photo by Clane Gessel

Any idea which investor-types are the largest buyers of US stocks? It is the corporations themselves, buying back their own stock. They are followed by Exchange Traded Funds (ETFs). Here is a graphic:

From Bloomberg:

The entities shoveling more money into the stock market than any other this year, as has been the case for the past few years, remain corporations. Buybacks are on pace to reach nearly $550 billion, or $150 billion more than ETFs.

None of that cash is going into new markets, new products, R & D, or innovation. The buyback is equivalent to the CEO saying: “I’ve got no idea what we should be doing to improve profits or market share”.  Arne Alsin at Forbes said this:

For most of the 20th century, stock buybacks were deemed illegal because they were thought to be a form of stock market manipulation. But since 1982, when they were essentially legalized by the SEC, buybacks have become perhaps the most popular financial engineering tool in the C-Suite tool shed. And it’s obvious why Wall Street loves them: Buying back company stock can inflate a company’s share price and boost its earnings per share — metrics that often guide lucrative executive bonuses.

Alsin suggests that buybacks are big because we’re in a period of technological disruption. New industries like cloud computing, electric cars, and streaming video are rapidly changing the world. But older companies are slow to adapt, and rather than investing in R & D (or simply holding onto cash) the corporate boards of legacy businesses are bolstering stock prices the only way they know how: buying back their stock.

Alsin offers Hewlett-Packard as an example:

In the last decade, the company has invested $47 billion in stock buybacks — which is nearly double the company’s current market capitalization. That risk is senseless. HP knows they are facing existential threats from upstart competitors, but instead of paying out dividends or letting cash accrue on the balance sheet, HP is choosing the riskiest option.

Buybacks are the result of several converging forces: pressure from activist shareholders; executive compensation programs that tie pay to per-share earnings and share prices that buybacks can boost; increased global competition; and fear of making bets on products and services that may not pay off.

This financialization of non-financial firms increasingly crowds out other types of investment, to the detriment of lower level employees, whose jobs are less secure. It can hurt long-term investors, who hold these stocks in their 401(k)s and pension plans.

Serving customers, creating innovative new products, employing workers, and taking care of the environment are not the objectives of these firms.

So think carefully about the companies you invest in, or buy from.

Enough worrying for this week! Time to unstress. Grab a cuppa Vermont Artisan Coffee & Tea Company’sDarkest Roast”, $11.25/lb. (It is available in decaf), settle into your favorite chair, and listen to “Ashokan Farewell” performed by Jay Ungar and Molly Mason Family Band, live in the Folk Alley studio at WKSU 89.7 FM. WKSU is Kent State’s college radio station:

Wrongo supports Folk Alley, and recommends that everyone should. Ungar composed Ashokan Farewell in 1982. It is written in the style of a Scottish lament. Ungar sometimes introduces it as:

A Scottish lament written by a Jewish guy from the Bronx.

Ungar says that Ken Burns heard the song in 1984, and asked to use it in his (then) upcoming PBS series, “The Civil War”. The original version and a few other versions are heard 25 times in the show, for a surprising total of 59 minutes and 33 seconds of the 11-hour series. For the non-math majors, that is 9% of the show!

Those who read the Wrongologist in email can view the video here.


Pacific Gas Gooses Prices: Why?

Pacific Gas and Electric is America’s largest electric utility and the second largest gas utility measured by number of customers. You may remember that their gas pipeline exploded in 2010 in San Bruno CA, just south of San Francisco, killing 8, injuring 66, and burning down 38 homes. The legal fallout is still in the courts, with the trial scheduled to begin on March 8 in US District Court in San Francisco.

PG&E announced a price increase on December 30, when few would be paying attention. SF Gate carried the customer-friendly part of the announcement:

We want our customers and their families to know that we are here to help them make smart energy choices and save money whenever possible…

That’s corporate-speak for turn down the heater, put on another fleece, buy more efficient appliances, and find subsidies available to low-income households.

The increase was effective two days later, on January 1st. It will hike natural gas rates for the average residential customer by 4.0% and electricity rates by a stunning 8.5%, for a combined rate increase of 7%, the steepest since 2006.

Utilities raise prices all the time. But maybe a few things about PG&E’s price increase are worth a look:

• Natural gas prices have fallen steadily since 2008, much of the power PG&E distributes is generated by natural gas. In fact, in its third quarter financial statement, PG&E says its cost of electricity over the first nine months of 2015 dropped 8.8% year-over-year, and its cost of natural gas plunged 36%.
• The California Public Utilities Commission (PUC) agreed in 2014 to let PG&E collect an extra $2.37 billion in revenue from its customers over three years, through the end of 2016. The additional money will pay for maintenance and upgrades to PG&E’s sprawling electricity grid and natural gas pipeline network.
• PG&E pays quarterly dividends of $0.455 per common share. With 489 million shares outstanding, dividends for a year would amount to $890 million.So for the three-year period in question (2014-2016), this amounts to about $2.7 billion, which would have paid for the maintenance and upgrades of its system.

There’s more: In September, PG&E asked the PUC for another $2.7 billion in revenue increases for the three-year period of 2017-2019. That particular amount of money would be used ostensibly to prepare for natural disasters. But, as Wolf Richter reports, over the same period, PG&E would pay out another $2.7 billion in dividends.

The PUC, already under federal grand-jury investigation for its ties to PG&E about the San Bruno disaster, hasn’t voted on this increase. If PG&E had a real regulator, it would be forced to pay for maintenance and upgrades with funds it sourced from something other than rate increases. Particularly when its fuel costs are plunging, and it’s paying out an $890 million annual dividend.

PG&E’s is following the “maximize profits and shareholder value” dictates of a modern market-driven corporation. But in the case of private utilities, the state regulator is supposed to review rate applications and ensure the company is not reaping excessive profits and is charging fair prices.

That the CA PUC allowed these price increases perhaps demonstrates incompetence, or excessive favoritism. Help may be on the way: SF Gate reports that Gov. Jerry Brown shook up the five-member utilities commission, nominating one of his former top advisers, Michael Picker, to be its new president. He also nominated Liane Randolph from the state’s Natural Resources Agency to join the commission. So, perhaps the back-room deals are over, but Californians will have to wait and see.

Capitalism, like any game, needs referees who are beyond influence. The clear operating strategy of the “free market capitalists” is to have regulators of all stripes squeezed by lower funding and by packing the regulatory boards with industry insiders. Far too many of the referees (regulatory agencies) are insiders in the industry game.

Maybe there is help on the way in California. If not, maybe it’s time to put a few corporate heads up on pikes in the California sun!


More About Taxpayers Subsidizing Corporations

Yesterday we talked about how apartment rents can’t be afforded by minimum wage workers. Today, we look at one industry with low wage workers, the full-service restaurant industry. Full service restaurants are the large name brands like Appleby’s, Cracker Barrel, Chili’s, Outback and Olive Garden.

Full service restaurants employ over 4 million people and that is expected to grow by nearly 10% by 2022, which means that these companies are in a profitable market segment. The top 5 full service chains made $705 million in profits last year, while paying out another $751 million in dividends and stock buybacks.

A new report by the Restaurant Opportunities Center (ROC), shows that five of the ten lowest paid jobs as reported by the Bureau of Labor Statistics (BLS) are in full-service restaurants. Since many full-service restaurant workers receive wages below what is needed to meet their basic necessities, these workers rely on taxpayer-funded programs in order to meet their basic needs. We pay the full-service restaurant industry a double subsidy:

• High numbers of full-service restaurant workers are on public assistance
• By paying a less-than-minimum wage, customers are paying restaurant workers’ wages directly through tips

The ROC’s analysis looked at utilization of public assistance programs to estimate annual benefit expenditures for families of full-service restaurant workers for the years 2009-2013. Here is a summary of their findings:

• Nearly half of the families of full-service restaurant workers are enrolled in one or more public-assistance programs
• The cost of public assistance to families of workers in the full-service restaurant industry is $9,434,067,497 per year (that’s $9 billion for the math-impaired)
• Tipped restaurant workers live in poverty at 2.5 times the rate of our overall workforce
• The taxpayer underwriting of social programs for low-wage workers in a single Olive Garden is $196,970 annually.

ROC estimated that low wages and lack of benefits at the five largest full-service restaurant companies in the US cost taxpayers an estimated $1.4 billion per year. They focused on the major means-tested public programs that provide income supplements for working families. These included Medicaid and Children’s Health Insurance Program, or CHIP, the federal earned income tax credit (EITC), food stamps (the Supplemental Nutrition Assistance Program, or SNAP), basic household income assistance (Temporary Assistance for Needy Families, or TANF).

Since 1991, the federal tipped sub-minimum wage has been set at $2.13 per hour, but states may establish a minimum wage that is higher than the federal government’s. So restaurant workers in 22 states receive the federal sub-minimum wage of $2.13 per hour, while restaurant workers in 20 states receive higher state sub-minimum wages of up to $5.00 per hour. Restaurant workers in eight states receive the full minimum wage.

Women make up 66% of all tipped workers, and people of color make up 40% of the total. Unsurprisingly, their poverty levels are higher in states that pay a $2.13 sub-minimum wage than in states that pay one minimum wage for both tipped and non-tipped workers.

You will pay more for a meal at most of these restaurants than at the fast food places. And that cost will go up if you believe in a fair wage for a fair day’s work. Naturally, the industry, represented by the National Restaurant Association is fighting any increase in the minimum wage for restaurants. This is something ALEC has been working with the National Restaurant Association and state governments to fight.

How about if the 535 well-coiffed rubber stamps in Washington start by raising the wages on any companies where public assistance subsidizes payroll wages? Why should taxpayer money be going to fund stock buybacks and bonuses to restaurant chain CEOs?

We could dream big, of tying the minimum wage to the cost of local resources like housing. Given the problem we reviewed yesterday, the minimum wage could be linked to how many hours is necessary to pay a month’s rent and utilities.

Every low wage worker needs a place to sleep when they aren’t working. It shouldn’t be on the street so that their employers can repurchase more stock.

On our dime.


Monday Wake Up Call – November 3, 2014

Are you tired because you got an extra hour’s sleep last night? Let’s get your brain started with a question: Who benefits it the government funds the development of new technology?

Answer: Private corporations.

Economist Mariana Mazzucato’s book about the role of the State in innovation, The Entrepreneurial State says that the image of a useless State at odds with a dynamic private sector is a myth. Mazzucato reveals in multiple case studies that the opposite is true; the private sector is only willing to invest after someone in a garage has a good idea that must be commercialized, or after the State makes a seed investment.

She describes how it worked with Apple’s iPhone and Google’s search engine. In both cases their popular consumer products benefited from state financing of basic research. For the iPhone, some of the technologies that make it “smart” were funded by the US government, such as the global positioning system (GPS), the touchscreen display, and the forerunner of the voice-activated personal assistant, Siri.

As for Google, development of its fundamental search algorithm was funded by the National Science Foundation. Plus, of course, there’s that thing called the Internet, another government funded venture, which makes the iPhone “smart”, and makes Google searches useful and valuable.

The right-wing myth is that the government needs to be completely out of the way of business, except for providing tax and regulatory incentives for private companies, to make them “want” to create the products they sell.

But, in the real world, many successful companies harvest the work of others and repackage proven technologies into successful products. In the 21st Century, companies often just mine the surface of their technology estate. When “innovative” companies are hugely profitable, often they buy back their shares and/or raise dividends, but do not invest that much in their long-term futures.

Finally, despite the fact that some companies directly benefit from taxpayer-funded technologies, they “underfund” (via tax breaks and holding profits offshore) the government that helped develop technologies that led to their success.

The obvious way for the public to ‘profit’ from socialized risk is to retain some ownership of the technologies that underlie those successes.

Another myth that needs to be exploded is that companies will not introduce new products if they can’t own 100% the intellectual property behind the products. Not true. Today, they often share their technology ownership with other firms. And it is inconceivable that a growing public estate of licensable technical know-how would sit under-exploited, if it could be licensed by corporate America.

Monday’s breakfast buffet of linkage:

Heard of the 27 Club? The idea is that pop stars are more likely than the general population to die at age 27. Not true, but they do tend to die much younger than the rest of us.

Of course milk is good for you! Well, maybe not as much as the milk-industrial complex wants you to believe. Swedish researchers took two groups, one with 61,000 women and the other with 45,000 men, and followed them for 20 years to see if milk intake was related to fractures or to death. Apparently, not so much. Maybe you should give Almond milk a try.

Using CDC data, a study finds that high rates of ADHD diagnoses correlated directly with state laws that penalize schools financially when students fail. An ADHD diagnosis can take a student out of the statistics. The five states that have the highest rate of diagnoses — Kentucky, Arkansas, Louisiana, Indiana and North Carolina — are all over 10% of school age children. The five states with the lowest percent diagnosed — Nevada, New Jersey, Colorado, Utah and California — are all under 5%.

The US has changed its H-1B record retention policy. The US Department of Labor said that records “are temporary records and subject to destruction” after five years, under a new policy. But, the H-1B visa lasts 6 years. The total database is about 1GB, so what’s the issue?

The Air Force doesn’t have enough mechanics for its new F35 fighter: The reason is political. The Air Force was counting on training A-10 mechanics, but Congress is blocking the Air Force’s plan to retire the A-10 aircraft. It could take 12 months longer than proposed to get the F-35 in the air, if the A-10 stays online.

International News:

Japanese journalists didn’t do independent reporting about the Fukushima melt-down, they simply reported the press releases of Tokyo Power and the government. Now some are speaking out. Sound familiar?

The war between the banks and phone companies over mobile banking in Kenya heats up. After the huge success of mobile banking in Kenya, commercial banks began to invest in mobile phone-based banking, including selling their own SIM cards instead of using those issued by mobile phone providers. Now, the mobile phone operators are crying foul.

When the TuNur project in the Tunisian Sahara comes online in by late 2018, it will provide clean and reliable power to more than 2.5 million UK homes. The project will be connected to the European electricity grid via a dedicated cable from Tunisia to Italy. The UK participated in funding the project.

Your wake-up song is from Trigger Hippy, a new roots super-group founded by Black Crowes drummer Steve Gorman, and singer Joan Osborne. It is an amalgam of country, blues, soul and rock. Here is “Rise up Singing”, so time to rise up:


Let this thought guide your week:

Service to others is the rent you pay for your room here on earth. – Muhammad Ali


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?