Juggling Dynamite

Danielle was guest today on Talk Digital Network with Jim Goddard, talking about recent developments in the world economy and markets.  You can listen to an audio link of the segment here.

Amid all the media hyperbole around record share buybacks the past few years, very few people seem to grasp the net effect.  A new must read report “Are Buybacks an Oasis or a Mirage” lays out the math for those wanting to see.

The bottom line:  the dominant motivation of buybacks has been to enable executive cash outs at the expense of the company’s health, its employees, creditors and shareholders.  To wit:

When management redeems stock options, new shares are issued to them, diluting other shareholders. A buyback is then announced that roughly matches the size of the option redemption. This facilitates management’s resale of the new stock they were issued in the option redemption. Buyback? Not really! Management compensation? Yes.

Because the stock options a company issues its management dilute the value of its stockholders’ shares, companies often repurchase their stock to offset this dilutive effect. The net impact is a transfer to management of more of a company’s cash flow than is reported as compensation on the income statement. Irrespective of the intent of the company to reduce the dilutive impact of its options-based stock issuance with buybacks, the reality is that the dilution is not always totally offset…often a company’s repurchase of its stock was accompanied by a net increase in debt.

…The reality is that publicly traded companies in the United States are issuing far more new securities than they are buying back, diluting existing investors’ ownership and reducing growth in earnings and dividends per share well below the growth of their reported profits. There is, in fact, no net transfer of cash from the coffers of U.S. corporations to the wallets of U.S. equity investors. The buyback oasis evaporates as we approach it. For investors in the aggregate U.S. public equity market, buybacks are simply a mirage.

Investors have not been complaining about share buybacks because as corporate revenues have weakened, buybacks and dividend payments helped to placate shareholders with increased earnings per share and rising share prices. Once shares begin to fall however, holders soon discover that the appearance of gain is fleeting. In reality corporate executives have ‘cashed out’ mind-boggling sums for themselves, while leaving shareholders and creditors holding risky paper in a much degraded enterprise.

In a nut shell:  OPEC says oil-inventory surplus biggest in at least a decade.
And the smarter new world of renewable energy is only getting started. We sure have been painfully dumb on the uptake here:

“We are like tenant farmers chopping down the fence around our house for fuel when we should be using nature’s inexhaustible sources of energy – sun, wind and tide. I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until oil and coal run out before we tackle that.”

— Thomas Edison to Henry Ford and Harvey Firestone in 1931

Here is a direct video link.

See: Energy hasn’t been this hot since they invented fire.

Renewables are no longer “alternative energy.” Solar power is competitive with fossil electricity in more and more places every year—watch China, India, and Chile in 2016. Global demand for the sun reached a new high this year, and solar is that rare thing that liberals and many free-market conservatives in the U.S. can agree to love. Wind power is cheaper than coal in Germany and the U.K., which may close all its coal plants by 2023.

Which brings us back to oil. Prices may stay low thanks to resilient U.S. output, renewed Iranian exports, and Saudi Arabia’s strategy to sell at whatever price it needs to maintain market share. And there’s a funny thing about oil that you might not have noticed. It doesn’t really compete with the other energy sources. It powers cars, ships, and planes. The others generate electricity.

So the true wild card for oil, beyond any 2016 price whips, is how fast cars start to run on electricity instead of gasoline.