If you work in US financial markets...

trysail said:

It is a counter-intuitive paradox (at least for the mob which has an attention span of 15 seconds and a tendency to buy high and sell low) that the lower stock prices go, the higher their future returns become.

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A few understand this. Hence the phenomenon of the "dead cat bounce."

Which works nicely as long as the cat isn't too big and you're not standing under it when it hits.

Neonlyte, your post made me smile. It reminded me of the same results coming from the opposite direction as Jonathan Swift describes it in Ireland in the 1700's. Holdings were falling into disrepair and ruin because property rents were so high, and the tenants (thanks to the Penal Laws) so bereft of any option but to pay them, that the people on the properties didn't dare do anything that might add to their value for fear of the rent being raised again. It's strange how economics can generate the same result from what look like completely opposite beginnings! But I suppose that the root cause is more similar than it seems: each case has someone who's being legally prevented from acting as he or she would most logically have.

(Good to see you again, too. )

Shang, such things can work the opposite as well.

Here in Ontario we had rent control. As I recall rent raises had to be within a couple of percentage points. We also had fairly strict laws about evicting people. You could, but not on a whim.

Needless to say the landlords didn't like that.

We got a government here that amicus and Roxanne would have liked. Loose the market, punish the poor and all that.

So the above laws were repealed. My first rent raise after this was 16%.

It didn't have the effect expected. The housing market finished a long plunge and houses were cheap. Also a lot of condominiums were being built.

So the landlords still aren't happy. There's lots of alternatives to an apartment if you're reasonably middle class. Rents are so high a lot of apartments are sitting empty. Plus there's so much choice landlords have to spend a lot of money to keep appliances and facilities up to date and good working order.

I know a couple and they're taking a bath.

Don't you just hate when you get what you wish for and it's not what you want?

rgraham666 said:

Don't you just hate when you get what you wish for and it's not what you want?

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Is this a lead-in to that joke about the twelve-inch pianist?

Being a former Dungeon Master, I don't need to be hard of hearing to fuck up peoples' wishes.

You ever see that X-files with the genie?

rgraham666 said:

Being a former Dungeon Master, I don't need to be hard of hearing to fuck up peoples' wishes.

You ever see that X-files with the genie?

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I loved that one. There's an old Twilight Zone episode with a similar ending.

I liked a short story I once read in which the wisher asks for "wealth beyond the dreams of avarice." She gets nothing - because nothing is beyond the dreams of avarice. Neatly done.

neonlyte said:

Handprints, can I give you an example of yield regulation recently introduced in Portugal.

Following the 1974 revolution, property rents (residential and commercial) were frozen. The law favoured the tenant, landlords were effectively deprived of any sensible kind of investment yield from tenanted property. The law had loopholes, for example, a landlord was free to negotiate rent with a tenant and fix a new rent, and new tenants had to pay a market rent on taking up a lease, even so, the vast majority of property was on fixed and inherited tenancies. A commercial tenant could even sell his lease with the old rent in place. About fifteen years ago a right wing government tried to liberalise the property market putting in place a system of setting fair rents through local authority valuers. The local authorities refused to appoint valuers - I kid you not - and the system collapsed. All around, buildings collapsed as landlords were deprived of income to maintain their properties. For some it became a race, would the tenants or the building die first - for a landlord it was the only way out of a liability.

This situation couldn't continue, the health a safety risk alone was reaching monumental proportions, the local authorities were having to sequester properties to protect tenants and passers-by from imminent collapse. Last year, the first socialist majority government since the revolution passed a new rent law. It fixed rent yield at 4% of freehold value simultaneously publishing an index of freehold value/sq metre. For existing tenants, the new rent is phased in over 5 or 10 years depending upon circumstance. The 4% yield is geared to the building condition - if the landlord does the repair work, he gets the full 4%. The 4% yield underpins the freehold value making it possible for landlords to approach banks to obtain secured credit for repair works.

In my specific case, we have 2 tenants paying less than 1€ per square metre per month for commercial premises, there was no way to refurbish a building on a rental income of 2,400€ p.a. One of the tenants has recently sold his lease for 50,000€ - he's been there 40 years and we calculated he received for his lease almost 3 times the entire rent he paid over the period of his tenancy. What can one say except good luck... and possibly good riddance. The new tenant is paying a market rent. His rent underpins the freehold value of both tenanted properties - virtually worthless properties have been transformed overnight and given an asset value that makes sense to the bank. We have given the other tenant notice to quit, also allowed under the new law - he can either start paying a market rent or leave. His tenancy, also granted 40 years ago, is in the name of a company, he could have sold the company and the new owners would have continued paying the same old rent.

The point: there is a point. Fixing rental yields at 4% on all property, annually indexed to the inflation index, sets a foundation that to my simple mind eliminates a degree of property speculation in both the rental and privately owned sectors. I see this as good news... but then I'm a landlord.

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In NYC of some years back, the government set rent controls. Of course the rent controls favored the numerous ******ts over the less numerous landlords. Landlords made essentially no money from their properties and did no maintenance and no improvements. Renters paid very low rents, but they lived in squalid slums. As in Portugal, properties were in such bad repair that they were dangerous to passers by. Eventually the rent control people had to upgrade the rents, so that it was economic to own property in NYC again.

BlackShanglan said:

Quote:
Originally Posted by Handprints
Broader liberty of credit is not something that particularly appeals to me as a policy goal: punitive interest rates and scarce availability of credit seem to me to be exactly what the US consumer needs right now...

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Hah! I couldn't agree more, there. I confess, that's the comment of someone who has a fixed-rate mortgage bought in low, but I thought very much the same thing before I had it.

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The US consumer has gone the entire Bush presidency with a net decline in income, accelerated offshoring of high-quality jobs, historically low job creation, runaway healthcare costs with a smaller proportion of insured persons, and drastically curtailed bankruptcy laws. Credit card interest rates have gone far beyond 'punitive' and well into 'usurious', even while credit has taken on a more important role in consumers' lives because of all the other crap.
But yes, this must be solved on the backs of consumers, not investors, and the crooks who so brilliantly bundled rats into mink must receive their millions instead of a long look at the inside of a jail cell. That's just Darwin, right?

BlackShanglan said:

Interesting thoughts on the retirement funds. It's fascinating how a well-intentioned action in one location can create such an unexpected reaction in another. I wonder, though - wouldn't discouraging some of this iffy lending in the first place be a good plan, so that there are fewer rats to dress up as mink? Something like banning teaser rates on mortgages, or setting a limit on the debt/income ratio?

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I'm no expert, but if pension funds were in such dire need of high-quality bond investments, why has the Fed had such trouble unloading t-bills that foreign governments now hold such immense positions in US debt?

What about the impact of technology companies' fondness of not paying dividends with their immense earnings, preferring to buy back stock which drives up share prices. Doesn't this shift historically 'blue chip' investments from dividend payments to price appreciation (ie, paper earnings) as their basis for return?

Didn't real-estate investor speculation have anything to do with inflating housing prices and creating a bubble? Of course not! It was all poor people buying houses they couldn't afford - and kicking them out of those houses puts them back into the rental market, where real estate investors can still make money off them so they don't have to dump their investments cheap.

It seems to me that the history of banking deregulation has brought us 'crisis' after 'crisis' of investors' crying for bailouts, while the vast majority of middle-class and poor people watch as their children and grandchildren do progressively worse in each generation.

Huckleman2000 said:

The US consumer has gone the entire Bush presidency with a net decline in income, accelerated offshoring of high-quality jobs, historically low job creation, runaway healthcare costs with a smaller proportion of insured persons, and drastically curtailed bankruptcy laws. Credit card interest rates have gone far beyond 'punitive' and well into 'usurious', even while credit has taken on a more important role in consumers' lives because of all the other crap.
But yes, this must be solved on the backs of consumers, not investors, and the crooks who so brilliantly bundled rats into mink must receive their millions instead of a long look at the inside of a jail cell. That's just Darwin, right?

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Tch. Now, now, climb down off of your high horse. I'm taller than that sweet little Shetland anyway, and he says that you're getting too big for this sort of thing.

The credit card interest rates here are ridiculously low compared to the ones I've seen in England. I have a fixed-rate card with an 6.9% APR here; in England, the best I could do with the same credit was 12.9%. It wasn't uncommon to see advertisements touting a 14.9% rate.

But high or low, how on earth would people taking out more debt be a good solution to the problems that you cite? If we're really in the economic Marianas Trench, then surely the answer, at least on the personal level, is to strive harder than ever to live within our means. You can't really feel that the Bush solution - Spend, consumers! Spend like it's your last day on earth! - is the answer to long-term economic prosperity or to personal financial security, can you?

By all means, strive to right those wrongs you're upset about, but I can't see how encouraging people to build up even more debt that they can't afford is part of the solution. I'm not the avatar of the Big Bad Profiteers; I just think that facing reality and trying to live within one's means, however straitened, is a better solution than taking out more debt. If nothing else, it's the option more likely to get people enegized and demanding changes to serious problems. So long as they can gloss over them by dipping further into debt, they're less likely to get really militant about finding a solution.

What about the impact of technology companies' fondness of not paying dividends with their immense earnings, preferring to buy back stock which drives up share prices. Doesn't this shift historically 'blue chip' investments from dividend payments to price appreciation (ie, paper earnings) as their basis for return?

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Now there's a genuinely interesting question. I'm curious to hear Handprints' take on it.

Didn't real-estate investor speculation have anything to do with inflating housing prices and creating a bubble? Of course not! It was all poor people buying houses they couldn't afford - and kicking them out of those houses puts them back into the rental market, where real estate investors can still make money off them so they don't have to dump their investments cheap.

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I don't doubt that real estate speculation did play a role. However, having sat watching a woman explain how she and her husband took out a $350,000 mortgage on a combined income of under $60,000 / year, and then another explain how she was caught by the deflating value of her house because she'd taken out her equity to buy a luxury car and vacations, and a man explain how he'd persuaded himself to sign to a loan whose interest rate more than doubled after five years, and that he knew the day he signed it would more than double, and that he signed despite knowing that he could "just about" make the payments on the lower rate ... I do sincerely believe that there are quite a few people out there who are the victims of their own bad judgment. I'm very sorry for them, but I am also as shocked now as I have been for years to hear people talk of selling out the equity in their homes to take vacations, buy electronics gear, or fill out a new wardrobe. The chief difference is that now, they're feeling the effect of their decisions.

It seems to me that the history of banking deregulation has brought us 'crisis' after 'crisis' of investors' crying for bailouts, while the vast majority of middle-class and poor people watch as their children and grandchildren do progressively worse in each generation.

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Handprints and I both stated specifically that we don't want to see a bailout of bank investors. I'm sorry for their losses, just as I am still sorry for anyone losing a house regardless of how badly that person handled his or her financial responsibilities. However, in both cases, I think that people who made their own decisions and went in with their eyes open need to take their lumps.

Now, is that the Voice of the Devil? Or might little Patch and I wander down the far end of the pasture to get pleasantly acquainted and let you make your way along on foot for a bit?

Huckleman2000 said:

I'm no expert, but if pension funds were in such dire need of high-quality bond investments, why has the Fed had such trouble unloading t-bills that foreign governments now hold such immense positions in US debt?

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The Fed hasn't had any trouble unloading either T-bills or longer bonds. I can't think of a Treasury issue in the past ten years that wasn't oversubscribed. The reason foreign countries now own about 22% of the Treasury debt in issue (Is that immense? It was 12.5% in 1991...) is that the US runs a very large trade deficit, which means foreign countries take in many more US dollars than they pay out. They invest these surplus dollars, for the most part, in Treasury bonds. For example, China owns about 2% of the total Treasury debt in issue, while Japan owns a little less than 1%.

Huckleman2000 said:

What about the impact of technology companies' fondness of not paying dividends with their immense earnings, preferring to buy back stock which drives up share prices. Doesn't this shift historically 'blue chip' investments from dividend payments to price appreciation (ie, paper earnings) as their basis for return?

Click to expand...

Tech companies aren't blue chips - they're much riskier than blue chips. Their market price, when successful, also climbs a lot faster than blue chips. Price appreciation is only a "paper earning" if you don't sell or you aren't taxed on it. Tech investors, generally, prefer buybacks to dividends because they are taxed on their dividends. Once the tech company in question starts to see slowing growth and fewer opportunities for expansion (eg Microsoft), investors start to scream for dividends because, even after tax, they can find faster growth elsewhere.

Blue chips, by contrast, do pay dividends (and, in the US, at a reasonably high rate) and most CEOs of those companies wake up with shivering night sweats when they contemplate any circumstance that might cause a dividend cut.

Huckleman2000 said:

Didn't real-estate investor speculation have anything to do with inflating housing prices and creating a bubble? Of course not! It was all poor people buying houses they couldn't afford - and kicking them out of those houses puts them back into the rental market, where real estate investors can still make money off them so they don't have to dump their investments cheap.

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Buying a house you can't afford in the belief that you will sell it for a profit when the day comes you can't make a mortgage payment: if that isn't speculation, deliberate or not, I don't know what is. Knowing speculation - condo-flippers, etc - does increase prices at the margins on the way up by delaying the supply of housing to "real" users. It also decreases prices on the way down through forced sales and unwilling rentals. Rental yields in most US cities were at post-war lows before the housing crash - a lousy time to be a landlord - and are now beginning to creep back up because the value of property is falling, although rental prices are flat-to-falling as speculatively-bought properties come onto the rental market.

Huckleman2000 said:

It seems to me that the history of banking deregulation has brought us 'crisis' after 'crisis' of investors' crying for bailouts, while the vast majority of middle-class and poor people watch as their children and grandchildren do progressively worse in each generation.

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You probably won't believe me, given the tenor of your post, but market professionals treat bailout-seekers with a degree of contempt unsurpassed by amateur cynics.

(Note: cut and pasted from a long-ago post I made on another thread)
The BEA says there were 43.4m Americans employed full-time and part-time by private employers in 1950 and, in total, they were paid (straight salary, nothing about benefits, transfers or unearned income) a total of USD124.6bn. That's USD2868.42 a head. In 2005 (the most recent year for which we have comparable, fully-revised figures), the respective numbers were 117.09m, USD4,686.9bn and USD40,028.18.

That means the average private employee wage grew 4.91% annually in that period. The average increase in CPI inflation in the same period was 3.87%, according to the BLS.

US incomes have grown, relative to inflation - and by an enormous margin - since 1950

The Census Bureau puts 2000 median income at USD42,148 and 2006 median income at USD48,200. That's an increase of 14.36%, despite continuing immigration, outsourcing and an increased percentage of the population in retirement. CPI rose 15.9% in the same period. That's a result most countries would take very happily.

The truth is, America is - economically - a much more difficult place to be a moderately-educated white male than it was one or two generations ago. For everyone else it working awfully well as an engine of prosperity.

Hope that's of interest,
H

Blue chips, by contrast, do pay dividends (and, in the US, at a reasonably high rate) and most CEOs of those companies wake up with shivering night sweats when they contemplate any circumstance that might cause a dividend cut.

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I realize that this is a perfectly idiotic question, but why? I can see that dividend cuts might lower the value of the stock, but what does that result in that makes CEO's care?

I'm speaking, here, from the completely ignorant position of someone whose only investment is in mutual funds. I can't see anything I personally could do to express my ire to a CEO of a specific underperforming company, and so I don't know how people with a real and active participation in the stock market do it. I'm curious how it works. This isn't a quibble disguised as a question, but an honest query from an astonishingly uninformed equine.

I realize that there must be something that stops stable and established companies from paying no dividends, tanking the value of their own stock, buying it all up on the cheap and getting out of paying dividends at all, but I don't know what it is. I can see that you wouldn't want to do that if you had any hopes of selling stock in the near future, say to raise capital, but if you were one of these stable retirement-fund-sought-after companies that doesn't pay much in dividends because you're in good financial shape and there isn't much risk, why do you want your stock value and dividends to remain high?

(And, of course, feel free just to stick a dunce cap on me instead of spending valuable time writing up the Ladybird Book of Corporate Finances for Foals, with bright, happy pictures on eight waterproof, chewable pages.)

BlackShanglan said:

I realize that this is a perfectly idiotic question, but why? I can see that dividend cuts might lower the value of the stock, but what does that result in that makes CEO's care?

I'm speaking, here, from the completely ignorant position of someone whose only investment is in mutual funds. I can't see anything I personally could do to express my ire to a CEO of a specific underperforming company, and so I don't know how people with a real and active participation in the stock market do it. I'm curious how it works. This isn't a quibble disguised as a question, but an honest query from an astonishingly uninformed equine.

I realize that there must be something that stops stable and established companies from paying no dividends, tanking the value of their own stock, buying it all up on the cheap and getting out of paying dividends at all, but I don't know what it is. I can see that you wouldn't want to do that if you had any hopes of selling stock in the near future, say to raise capital, but if you were one of these stable retirement-fund-sought-after companies that doesn't pay much in dividends because you're in good financial shape and there isn't much risk, why do you want your stock value and dividends to remain high?

(And, of course, feel free just to stick a dunce cap on me instead of spending valuable time writing up the Ladybird Book of Corporate Finances for Foals, with bright, happy pictures on eight waterproof, chewable pages.)

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Dividend cuts signify lower profitability, resulting in a market response of lowering the stock price. The decline in profitablity compared to the decline in stock price is never linear. Reducing the equity of stockholders is never a good thing.

In case nobody noticed, the DOW was up 298 at close today.

The Federal Reserve Caves Again


I am no fan of Larry Summers or George Soros or the blowhard shindig known as Davos, nonetheless in this case I agree with their thinking (see below). Everytime the U.S. government and the Fed bail out reckless, irresponsible parties not only do they inflict punishment on the prudent (a/k/a the liquid and solvent) they create expectations that they will continue to do so in the future- thus encouraging further reckless behavior. The crybabies have, once again, been rewarded. Eventually, there will be a day of reckoning and the longer it's put off, the worse it's going to be.

======================================================
Summers Points at Central Banks on Asset Declines
By John Fraher and Simon Kennedy
Jan. 23 (Bloomberg) -- The U.S. Federal Reserve and other central banks are partly to blame for the financial-market slump that's now threatening to derail the global economy, said investors and former policy makers at the World Economic Forum.

``It's hard to give central banks a very high grade over the last couple of years on recognition of bubbles and actions taken to address them in the policy or regulatory spheres,'' said former U.S. Treasury Secretary Lawrence Summers in a panel in Davos, Switzerland. Billionaire investor George Soros said central banks have ``lost control'' of financial markets.

The Fed, which yesterday announced its first emergency rate cut since 2001 as U.S. recession fears rose, has been criticized for paying too much attention to economic growth and not enough to so-called asset price bubbles. By cutting rates to protect growth when bubbles burst, the Fed only encourages investors to take bigger risks in the future, said Morgan Stanley's Stephen Roach.

``It's a dangerous, reckless and irresponsible way to run the world's largest economy,'' said Roach, chairman of Morgan Stanley in Asia, who was also in Davos.

The U.S. central bank yesterday cut its benchmark rate by three quarters of a point to 3.5 percent a day after the MSCI World Index fell 3 percent, the steepest decline since 2002. U.S. stocks dropped for a sixth day today, the longest losing streak since April 2002.

Mortgage Bust
Fed Chairman Ben S. Bernanke is facing the same objections leveled at his predecessor, Alan Greenspan, who was slammed for not doing enough to prevent the Internet stock boom and then cutting rates too low to limit the fallout.

In 2003, the Fed reduced its benchmark to a 45-year low of 1 percent, leading to a house-price boom that turned to bust in 2006. That prompted a collapse in the market for mortgages to risky borrowers. It's now derailing financial markets because so many banks bought derivatives linked to those mortgages.

``Central banks lost control of the situation when they allowed financial institutions to develop new financial instruments which they themselves didn't understand,'' said Soros.

Too Difficult
Greenspan and Bernanke counter that it's too difficult for central banks to spot bubbles before they emerge and raising rates to curb higher housing or stock prices would risk derailing the rest of the economy.

Nor was the Fed alone in slashing rates at the start of the decade. The ECB cut its benchmark to 2 percent in 2003, the lowest since the aftermath of World War II, and the Bank of England reduced its key rate to a 48-year low.

While house prices surged in the U.K., Spain and Ireland, those booms have now withered as contagion from the subprime collapse spreads.

Some Davos attendees came to the Fed's defense, saying it's difficult to identify bubbles and more attention should be paid to better regulation.

``We could pierce bubbles but we'd pierce a lot of non- bubbles and take a lot out of gross domestic product,'' said John Snow, also a former Treasury Secretary and now chairman of Cerberus Capital Management LP. ``We need to reform regulation.''

The ECB nevertheless argues that it may be possible for central banks to ``lean against the wind'' by raising rates in the early stage of a bubble to head off future gains.

``It's good for a central bank to ease when the risks are of a crash in the global economy, but that means you have to have a more systematic approach to asset bubbles,'' said Nouriel Roubini, founder of New York-based Roubini Global Economics LLC, in Davos. ``If we have a `Greenspan put' or a `Bernanke put,' then we will create over and over again a distortion of excessive debt and leverage.''

BlackShanglan said:

I realize that this is a perfectly idiotic question, but why? I can see that dividend cuts might lower the value of the stock, but what does that result in that makes CEO's care?

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The answer lies in the difference between theory and practice, to a large extent. In theory - exactly as Trysail notes - a company's stock price is just the net present value of all its future earnings plus the sale value of the land, plant, equipment and goodwill it owns. (Goodwill is one of those awkward intangible assets like a brand name: being able to call your drink Coke is worth something more than being able to call it Slurm...) In theory, it doesn't really matter whether some of those earnings are paid out as dividends or used to grow the company - all of it counts in the stream of earnings that are used to calculate stock prices. In fact, since you can only pay a dividend out of retained earnings (the cash you're left with after you've paid off all of your expenses for a given period), they're already counted in the stream of future earnings...

In practice, people with different needs gravitate towards different kinds of companies' stocks. If you're retired and living on your investment income, you might find a company which is always rich in cash, well able to pay its dividends and has a track record of raising its dividend rate every few years quite attractive: it has made a commitment to giving you cash back regularly, which helps fund your retirement expenses. The same company might be very attractive to you if you run an equity income fund and have promised your investors that you'll return 4% of their investments to them in cash every year.

If the main reason your shareholders like your company is your ability to pay a dividend, cutting that dividend is going to make your shareholders very unhappy - militantly unhappy, in some cases. Typically, in such cases, the first thing pissed-off shareholders want is a new CEO.

On the other hand, if you're a well-paid 25 year old, this kind of company may look much too slow-growing and dull - after all, you've got all the time in the world to make up any losses caused by over-ambitious, cash-swallowing company growth. You'll prefer fast-moving companies that are reinvesting every penny of earnings in their own growth. Equally, if you're an older, wiser investor with an analytical bent, you might find yourself heartily sick of saying such things as "biofuels are the future" or "the internet changes everything." You might come to realise that not only is there as much money to be made spotting beaten-up companies about to turn things around as there is spotting "new concept" winners, you can also use you analytical abilities, rather than scapulimancy or chicken entrails, to find them.

These distressed/turnaround/special situations companies may not actually be in the valley of the shadow of death but they can often hear the echo... Their investors very often want them to cut the dividend and use that cash to prop up/sort out the areas of their business that are bringing them to an early grave.

Already you've got three groups with wildly varying attitudes to dividend payments. That takes us to blue chips, and the sweating CEOs of my earlier post.

Blue chips are companies which attempt to hit the golden mean of investing: they use (allegedly) unparalleled market knowledge and reach and high-quality (I'm talking theory here) management to deliver both sustained dividends and faster-than-the-broad-economy earnings growth. They're the surf and turf of mature companies. If they have to cut a dividend, it implies to the average investor that the either the high-quality management failed to foresee a cash need somewhere in the business or, alternatively, that said management is taking more risks to obtain growth than it has been letting on. Since premium quality execution of the business plan is these companies' main selling point, their CEOs become almost as unhappy at the prospect of cutting dividends as do their peers in the first group of low-growth, high-cash companies.

For context, if you ask Jack Welch (ex-GE) about his two-decade record of growing earnings every quarter, he'll point to his simultaneous record of raising the dividend every year as the real evidence he knew what he was doing: he delivered both growth and income, the hallmark of the blue chip.

BlackShanglan said:

I realize that there must be something that stops stable and established companies from paying no dividends, tanking the value of their own stock, buying it all up on the cheap and getting out of paying dividends at all, but I don't know what it is. I can see that you wouldn't want to do that if you had any hopes of selling stock in the near future, say to raise capital, but if you were one of these stable retirement-fund-sought-after companies that doesn't pay much in dividends because you're in good financial shape and there isn't much risk, why do you want your stock value and dividends to remain high?

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You want your stock price to stay high (or at least grow reliably) for a few reasons: your stock is a store of value that lets you do things like borrow and acquire other companies; your shareholders, however interested they are in dividends, like to see some growth in the value of the shares, even if it's just to offset inflation; you and your employees are paid partly in the form of stock options, which grow in value only if the share price goes up. I'm not really sure I understood the rest of the question: in the long run, the value of your company really is just the net present value of its future earnings, whether you pay dividends or buy back your stock. You'll succeed, in the short term, at changing your investor base as the pissed-off dividend-seekers leave but your real market value won't actually change very much: a higher price times many fewer shares.

BlackShanglan said:

(And, of course, feel free just to stick a dunce cap on me instead of spending valuable time writing up the Ladybird Book of Corporate Finances for Foals, with bright, happy pictures on eight waterproof, chewable pages.)

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Please, I deal with trainees every day (who already have two or three years on the street plus a second, business-oriented degree). They're the ones who ask the really dumb questions (as I'm sure I did at that age...)

Best,
H

trysail said:

Everytime the U.S. government and the Fed bail out reckless, irresponsible parties not only do they inflict punishment on the prudent (a/k/a the liquid and solvent) they create expectations that they will continue to do so in the future- thus encouraging further reckless behavior.

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I was in short pants during the Nixon/Martin years but I can see the parallel. I really can't count the number of conversations I've heard here in Asia and over the phone in Europe over the last couple of days about the horrible, globally-damaging precedent Bernanke has set here. I'd really rather not be relying on Trichet to be the example-setter... The last thing the US needs is a central banker who's been pwned by Jim Cramer.

Best,
H

Thank you for the walk-through, Handprints. It's very helpful. Gradually some of the fog is receding. *laugh* I'm just carefully feeling my way along trying to ascertain what the next very obvious thing I don't understand might be. I have the sensation of making that half-wincing, squinked-up grimace one makes when feeling about blindly with the knowledge that one is going to get a wall in the face at any moment.

I think some of the rest of my confusion is coming from the fact that I think about finances like an individual and not a corporation. My goal as an individual is to pay off my debts for things that other people own chunks of, like my house, and make them completely mine. I wouldn't object if the holders of my mortgage debt grossly undervalued it; if I could get them to rate it extremely low and then buy it back from them, that would be good for me, because I'd be buying my own debt back cheaper. That's roughly how I was looking at company stock; if you sell shares of your company and then buy them back for less than you paid for them, you would have a net gain of money.

Your point about dividends and re-investment ultimately both being part of the value of the stock clarified that a bit. I can see now that you couldn't necessarily drive down the value of the stock just by not paying dividends. So long as the money was somewhere in the company, the stock would probably still hold its value pretty well, and just attract a different set of investors?

But I suppose that there also isn't really some one person who wants to just pay off the debt of a public company and own it, is there? Not usually? It's the shareholders who own it, so there's no one who would benefit from reclaiming those shares in the way I would from reclaiming the bank's stake in my house. Is that a piece I was missing? The company as a whole hasn't got a motive to reclaim its own stock and own itself?

Unless ... if I owed the majority of the stock in a company, and I wanted to get its earnings all to myself ... then I would have a motive to try to make the stock value drop by making alarming cuts in dividends and trying to scare people into thinking it was all going south so I could buy it up. Wouldn't I?

I feel like Dr. Evil over here. I want my one MILLION dollars, and I'm willing to go to any lengths of incompetence to get it!

Thank goodness I have as modest financial goals as I do. I think we can all see who *not* to put in charge of the stable's Alfalfa Dividend Funds.

Cheers -

Shanglan

BlackShanglan said:

But I suppose that there also isn't really some one person who wants to just pay off the debt of a public company and own it, is there? Not usually? It's the shareholders who own it, so there's no one who would benefit from reclaiming those shares in the way I would from reclaiming the bank's stake in my house. Is that a piece I was missing? The company as a whole hasn't got a motive to reclaim its own stock and own itself?

Click to expand...

The company doesn't have much motive to buy itself up. It may occasionally buy up some of its shares when it hasn't got anything better to do with spare cash but if it buys up all of its own stock, there's nothing left for people to trade, which rather defeats the purpose of being a listed company... That said, it's commonplace for someone else to want to buy up all of a company's stock and own it outright.

BlackShanglan said:

Unless ... if I owed the majority of the stock in a company, and I wanted to get its earnings all to myself ... then I would have a motive to try to make the stock value drop by making alarming cuts in dividends and trying to scare people into thinking it was all going south so I could buy it up. Wouldn't I?

Click to expand...

This, broadly speaking, falls under the heading of moral hazard when the CEO and other senior members of the company decide they'd like to buy it outright. They can - and, in small, out-of-the-spotlight companies, do - screw around with earnings, dividends, and other things to lower the price but that's equal parts illegal, obvious to investors and inelegant.

It's in situations like these, where someone wants to own a listed company outright, that the board's role as a guardian of the interests of all of the shareholders comes to the fore. Their job, in this circumstance, is straight out of Matthew 25:40 - "Verily I say unto you, Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me." The board is required essentially to quarantine the CEO/majority shareholder/whoever, ensuring nothing can be done which alters the playing field to the disadvantage of the smallest shareholder. Naturally, their success in doing so sometimes leads to both lawsuits and prosecutorial attention but the idea's right: all shareholders may not be equal but they get equal treatment regardless.

Tanking a small company in order to own it is reasonably straightforward: lend it money until it chokes on the debt, convert the debt into shares, then make a bid for the rest once you've acquired a 99% interest. It happens every day on the Amex and penny share markets. Tanking a big company - one with a long list of professional shareholders - to own it is a more difficult job. It's essential to be either chairman or CEO (being both helps immensely); fill the board with superannuated reactionaries who fear change; never take any risk with any product/client/practice; hire as many planners/analysts/sub-group managers/"office of the chairman" staff and consultants as you can find; make sure your factories/plants/offices are all marvels of 19th century design, sitting on very expensive land and staffed with highly-paid (preferably on a seniority system), poorly-educated workers who live in expensive nearby cities. After five years or so, go find a Private Equity company and show them a three-year plan to undo all of the above. You'll be off the market faster than a ripe melon and with only a modicum of luck, you'll soon be shopping for his'n'hers megayachts.

Because this is much more difficult to do in a large company than a small one, it only happens every month or so, rather than every day...

Best,
H

Hah! I liked the sting in the tail of that one. Most illuminating.

Thank you again, Handprints - I'd better step back from things now, or I'll start imagining that I understand them. Shallow draughts intoxicate the mind, and all that ...

Shanglan