Tag Archives: shareholder value theory

VW Bugs

VW “With three Volkswagen and two Audi dealerships in Las Vegas told to stop the sale order of its four-cylinder diesel vehicles, Volkswagen AG said Tuesday that a scandal over falsified U.S. vehicle emission tests could affect 11 million cars worldwide as investigations of its diesel models multiply.” [LVRJ]

There are some interesting layers to this story.  Let’s call layer one the “regulations” layer.  We do want to set standards for the emission of nitrous oxide, which accounts for about 5% of greenhouse gas created by human activity. And, the stuff tends to stick around:

“Nitrous oxide molecules stay in the atmosphere for an average of 114 years before being removed by a sink or destroyed through chemical reactions. The impact of 1 pound of N2O on warming the atmosphere is almost 300 times that of 1 pound of carbon dioxide.” [EPA]

Therefore, it sounds like a good idea to set some standards for light duty vehicle emissions. [GPO.gov pdf]  Volkswagen, desirous of selling its products – in this case four cylinder diesel powered cars – was subject to those vehicle emission standards, just like other diesel vehicles manufactured by Ford, Mercedes Benz, and BMW. [AutoTrader]  So, why would the corporation cheat? One important reason is that the company could not manufacture a car with the three legs of the stool: Performance, Fuel Economy, and Low Pollution – and maintain its profits. [Vox]

As everyone knows by now, the corporation decided to install defeat software which fudged the numbers when the cars were being tested for emissions. In short, they could get the performance levels they wanted, at profitability levels they wanted, and this done by sacrificing the pollution part of the equation.  This explains the wide difference between the results of the road tests and the lab tests.

“The Environmental Protection Agency alleges the automaker had designed software to let its diesel cars detect when they were being tested for emissions. The software, known as a “defeat device,” was installed in some 482,000 cars, spanning model years 2009 through 2015, regulators say.” [LVRJ]

Again, as everyone knows by now, this was patently illegal.  Patently illegal behavior by a company with sales revenues of $202.46 billion in 2014; gross income of $33.88 billion; and, a net income of $10.85 billion. [MktWtch] Prior to this debacle, VW’s ROE (return on equity) was at 11.84%, Ford reported 14.33%, and BMW’s ROE was 15.61% [YCharts]

Investors like watching the ROE because:

“Return on equity (ROE) measures the rate of return on the money invested by common stock owners and retained by the company thanks to previous profitable years. It demonstrates a company’s ability to generate profits from shareholders’ equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate growth. Return on equity is useful for comparing the profitability of companies within a sector or industry.” [YCharts]

VW’s earnings for 2015 were estimated as about $234 billion. Ford, by contrast, was expected to see about $150 billion for 2015.  On June 24, 2015 VW was selling at $218.40/share; things started to go south quickly after VW hit $162.40/share on September 18, 2015, and the stock is reported at $111.50 September 23, 2015.   We are now sliding into the second layer of the story.  It’s not just that VW stock took a dive after the cheating was reported – nor that the cheating caused investors to sell – it may very well be that the very thing the corporate management feared, which caused the cheating, was the proximate reason for the Big Slide.

The Management Layer.   VW’s annual report to investors opens with a general description of board operations, “We also receive a detailed monthly report from the Board of Management on the current business position and the forecast for the current year. Any variance in performance as against the plans and targets previously drawn were explained by the Board of Management in detail, either orally or in writing. We analyzed the reasons for the variances together with the Board of Management so as to enable countermeasures to be derived.” [VW pdf]

What we appear to have at this point is Management Speak for Shareholder Value management.  It’s probably safe to assume that the discussions of “current business position” included the old standbys sales, revenues, expenses, liabilities, and analyst expectations.  We can base this conjecture on the reference to the “forecast for the current year.”  Remove the gilding on “variance,” and “targets,” and we’re most likely talking about share prices predicated on earnings expectations. 

So, in order to keep the earnings expectations nice and high, and thereby secure higher share prices – the management decided to roll the dice and hope that no one caught on to the Defeat Device.  More simply stated: Shot. Into. Own. Feet.

If there were a better reason to chuck the Share Holder Theory of Management – or at least to modify it such that it doesn’t drive the decision making process into the nearest convenient ditch – this just might be the appropriate occasion.

Note that it is not that Volkswagen wasn’t a profitable company.  It had a perfectly acceptable RoE (11.84%) with earnings expected to be in the $230B range for 2015.  Nor did the 4 cylinder diesel engine cars constitute a major portion of its sales.  While the total number of cars involved isn’t clear yet, VW has shut down sales of the 2015 and 2016 “clean diesel” models, noting that 23% (7,400) of new cars sold in August were diesel. [NYT]  Volkswagen Group manufactured some 10.2 million vehicles in 2014. [Stat]  The North American production for 2015 was estimated at 0.64 million. [Stat]

It almost defies common sense to perceive how cheating on the emissions testing for a group of products which were not a major part of the American market was really supposed to enhance the bottom line.  Unless, we revert to the “every penny counts” mindset in maintaining a certain targeted profit level.  Let’s take an educated guess that it was more important for VW management to maintain profit (and thus share value) than it was for them to develop and produce cars with legal levels of emissions, acceptable standards for performance, and reasonable fuel efficiency.  They were more interested in making money than in making cars? More interested in short term profits and rolling those dice against long term losses?

It wasn’t that long ago that Volkswagen wanted to be the global leader in unit sales, but as a CNBC commentator put it: “Volkswagen is learning that getting ahead at all costs eventually catches up with you. So much for being the leader on a global basis on auto sales.”

The international layer.  Diesel powered cars are much more popular in Europe than in the U.S.  Thus, economists are trying to sort out what the impact will be on the Eurozone economy [Express]  The company is now facing litigation in Italy over fuel economy related issues. [Telegraph]  And, there are reports that the EU is looking at stricter rules to close the gap between laboratory and road test results. [EuObs]  Ironically, a company that didn’t want to play by the rules may find itself facing a more rigid regulatory regime in the very part of the planet where it had 25% of the market.  As of yesterday, there were calls for greater scrutiny of all automobile manufactures in Europe. [MrktWtch

Perhaps even more ironically, a company that wanted to increase its value managed to cause a 30 billion Euro drop in market cap in two days. [MrktWtch]  The CEO has resigned, the Chancellor of Germany is calling for a prompt investigation, [Telegraph] and the UK is entering the lists for a probe of what went so ridiculously wrong. [Guardian]

What went wrong?  What’s been going wrong for a while now – the story sounds entirely too familiar?  Financial institutions which sold and then bet on the value of financial products on which they could not place a value (Lehman Brothers et al.) in the U.S. in 2007-2008? Subprime CDOs?   Bankers colluded to fiddle with the LIBOR rate?  Does it sound like the same motivation as seen in the Worldcom and Enron?  It’s founded in the same swamp land all the other egregious examples have inhabited – greed.

Perhaps it’s too easy to forget that money isn’t the root of all evil; it’s the LOVE of money, or  that “For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.” [1T 6:10]  There will be sorrows aplenty – in the regulation layer, the management layer, and on the international scene.  There is a relatively fine line between seeking economic growth and downright avarice, and when it’s crossed the results can be catastrophic.  The question becomes: How many more times do we have to see this play before we get the point?

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Filed under ecology, Economy

Income Inequality Matters for Nevada’s Children

child poverty

We ought to be embarrassed.  The Kids Count Data Book 2015 edition is out, and the numbers aren’t pretty.

“Nevada ranks 47th among states in overall child well-being, up one spot from last year. The study found that Nevada ranks 43rd in family and community development indicators, like children living in high-poverty areas; 46th in health statistics, like low birthweight babies; 46th in economic well-being, including parents lacking secure employment; and 50th in educational achievement, including 69% of Nevada’s children not attending pre-school.” [LVSun]

Yes, there we are, ranked down there with Louisiana, Mississippi, and New Mexico.   Overall, things aren’t looking up for children, and there’s an explanation:

“Although we are several years past the end of the recession, millions of families still have not benefited from the economic recovery,” Patrick McCarthy, president and CEO of the Casey Foundation, said in a statement. “While we’ve seen an increase in employment in recent years, many of these jobs are low-wage and cannot support even basic family expenses.” [LVSun]

And why might this be a correct assessment of the situation? There has been income growth since the end of the Great Recession, but the recovery has benefited those at the top –thus much for anything trickling down:

“The states in which all income growth between 2009 and 2012 accrued to the top 1 percent include Delaware, Florida, Missouri, South Carolina, North Carolina, Connecticut, Washington, Louisiana, California, Virginia, Pennsylvania, Idaho, Massachusetts, Colorado, New York, Rhode Island, and Nevada.” [EPI]

Nevada has made some improvements – if bouncing off the bottom is an indication of progress – in health, for example, 5% fewer children are without health insurance, and education in which 69% of our kids aren’t attending pre-schools, up from a previous 72%.  But, the economic picture is bleak at best.  23% of the youngsters live in poverty, 34% are in families experiencing what’s euphemistically called “employment insecurity,” and 39% of the kids live in a situation in which housing costs are eating up the family budget.  [AECfnd]

If we tread deeper into the income inequality waters we can see why the numbers for Nevada youngsters didn’t improve. Here’s the answer: “In four states — Alaska, Michigan, Nevada and Wyoming — average income increased exclusively for the top 1% and declined for the bottom 99%.” [247Wallst]  So, in the Silver State, not only did all the income growth get sucked up by the top 1% during the recovery, but the bottom 99% actually saw their incomes decline.

Most analyses get the first part right.  In the last downturn the bottom fell out of the construction sector in Nevada; the housing bubble burst, and employees were laid off.  Laid off employees have less discretionary income to spend, and less income equates to fewer purchases.  Fewer purchases yield less economic activity in the community, and everyone starts to go down hill.  When we get to the middle part of the explanation some analysts start getting fuzzy.

First Law of Staffing

The question in the middle is how to encourage more employment.  For the umpteenth time here’s the answer:  There is no rational reason to hire anyone to do anything unless the DEMAND for goods and services is greater than the capacity of current staffing levels to provide an acceptable level of customer service.  Amen. Again.

The Small Business Chronicle offers some very sound advice which expands on this generalization.  Their five step process asks: (1) Are your projects or other business activities getting done on time? If yes, then you probably don’t need any additional employees. If no, or the business is thinking of more marketing to drive up revenues then ask (2)  if you were to increase your marketing efforts could your present staff handle the additional work load? The next step (3) is to look at your overtime records. One sure sign that the business is understaffed is increased overtime from current employees.  In the first step the business owner gauged the project or work time, in the next (4) step it’s important to look at the issue from the customer or client’s perspective – if the business is monitoring customer wait time and it seems (or is reported to be) excessive, then the business is understaffed. Finally, in Step (5) a savvy business owner will determine if the increases in demand are continual or seasonal. If seasonal, then temporary employee hiring may be the solution.

What’s not under consideration here?  The advice offered above didn’t include a question about whether Nephew Lester needs a job. Familial ties are wonderful, but they don’t constitute a reason to hire an employee.  Hiring veterans is a healthy business practice – but again, no matter the benefits, if his or her skills aren’t necessary to get things done or made on time, and if a barrel of overtime isn’t on the current books, there’s no rational reason to make a new hire.  Tax breaks for hiring the unemployed are fine – but just as in familial or socially beneficial cases, there’s NO reason to hire anyone for any tax break if there is insufficient good old fashioned demand for the products and services.   It’s at this point that the conservative, trickle down, no new taxes, barrage of talking points becomes almost ludicrous.

tax incentives accounting There is a wonderful leap of logic, stretching that term to its extrapolated limits, in asserting that more tax incentives, tax breaks, tax forbearance, tax limits, tax deductions, and tax treatments will magically yield more employment.   What is required is to believe that if a company is more profitable it will automatically hire more people.   Yes, a more profitable firm is capable of hiring more but NOT if there is no increased demand for the goods or services.  A more profitable firm has the potential for more hiring – but not if it is corporate policy to put more effort into mergers and acquisitions than into actual plant expansion. A more profitable company may hire additional workers but not if the firm has decided that it will put its revenue into stock buy-backs, dividends, or management compensation. Potential may be a powerful argument, but unless it is translated into a realistic appraisal of company or corporate intentions and vision it’s as ephemeral as a fruit fly.  And it’s not really useful for putting food on the table for the kids.

And, now we return to the economic problems of children. If the jobs available for their parents are seasonal, temporary, or permanent but low wage then all the job “expansion” in the nation isn’t going to improve their prospects.

Seasonal employment is relatively easy to understand.  It’s everything from harvest time to Christmas sales.  The sector of the labor market into which more parents are finding themselves is the temporary work force.  About 75% of Fortune 500 firms are relying on third party logistics companies to handle their warehousing, and employment in transportation and materials moving and production now accounts for some 42% of temporary hiring. [NELP]   The advocates of temporary hiring note that only about 3% of the workforce is on temporary status, which is true but doesn’t include the fact that temporary employment grew from just a bit over 0.5% in 1983 to over 2.5% as of 1999. [BLS] Further, the trend is increasing as this graphic from Staffing Industry illustrates in YOY growth from 2013 to 2015:

temp jobs trendsAs this sector of the labor market increases the “employment security” of parents becomes more tenuous.  As long as this trend continues we’ll likely find more youngsters in that “parents lack secure employment category.” 

There’s no reason to believe that corporations in Nevada are functioning any differently than those in the rest of the country in terms of staunch adherence to the Shareholder Value Theory of Management, the interest in mergers and acquisitions rather than plant expansion in general, and the interest in utilizing temporary labor for logistics, warehousing, and service jobs.

In sum, there’s no rational explanation for hiring (temporary or permanent) which doesn’t relate directly to demand – and there’s no reason to expect demand to increase if the jobs created are temporary, low wage service or retail sector, and with reduced hours or misclassification of employees. Meanwhile the kids need housing, clothing, food, medical attention, and school supplies.

We ought to be embarrassed, but we probably won’t be until we can shake the 1% awake to the fact that profitability doesn’t necessarily equate to employment. To the fact that potential employment isn’t actual employment. To the fact that temporary employment isn’t secure employment, and to the fact that taxation has precious little to do with hiring the parents of Nevada’s children.

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Filed under Economy, family issues, Nevada economy, Nevada news, Nevada politics, poverty, Taxation

Profits Without Prosperity

If there’s just one item which ought to be remembered from Vice President Biden’s recent  speech in Las Vegas it’s this – If the minimum wage were to be raised to $10.10 per hour this would add $19 billion into the national economy.  For 256,000 minimum income earners in Nevada that would pay for 19 months of groceries and three months worth of rent.  [LA-AP] So, if we really are “pro-business” then this information should be well received?

Once yet again to the point of unmentionable redundancy, here’s how we measure the growth in our national economy:

GDP formula

Consumer spending + business spending + government spending + the difference between imports and exports = the GDP.  So, why all the gnashing of teeth and tearing of hair over spending?  Why not promote that which will increase consumer spending? And why the inordinate attention to national spending?   Because the tail is wagging the dog.

The titans of finance – the banking sector – are wary of inflation.  That which puts more money into the hands of middle and working class families may cause inflation – the banker’s big bug-bear.  However, they’ve not mentioned the other side of the ledger; if income levels are dropping or if they remain stagnant those same bankers might be looking at deflation.  “The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.”

In other words, for average families the income will be spent.  Increasing the minimum wage would put more money into local businesses – furniture, appliances, groceries, clothing, entertainment, food service, hardware and home improvement, and so on.  However, for the top .01% whose income is primarily derived from investment earnings, increasing the minimum wage is of relatively little interest.  They are more interested in The Market (read Stock Market) than in the grocery market, the furniture market, the home improvement market, or the clothing market.

Not sure how this works?  Witness the plans for Hewlett-Packard to split up:

A close follower of the company’s stock price, Ms. Whitman may have also decided that the two separate companies would be worth more on Wall Street. Since Ms. Whitman became chief in September 2011, HP shares have risen about 50 percent. [NYT

HP also confirmed the split will result in the loss of another 5,000 jobs, in addition to the 45,000-50,000 layoffs announced with the company’s second quarterly earnings report for 2014 back in May. HP plans to invest the money saved in research and development, and projects full year non-GAAP (Generally accepted accounting principles) earnings of $3.83-$4.03 per share in 2015, not including one-time tax costs of the split. The companies will each have more than $57 billion in annual revenue.” [SDTimes]

There are structural reasons for the split, but the bottom line is that investors have decided the corporation would be more profitable split into at least two entities. And those 5,000 jobs lost?  The layoffs announced in May 2014?  The Market won’t be bothered by those at all; the value of the stock will increase whether or not the former employees are able to find new jobs, or have money to spend on housing, food, clothing, entertainment, furniture, etc.   The value of the stock is the pinnacle of success in the “Shareholder Value” construct of modern American capitalism.  There’s really nothing dramatically new about this – when share value for the sake of share value becomes the primary force in management then other considerations are necessarily secondary.

Hewlett-Packard’s focus on shareholder value isn’t unique either. Remember how the old Trickle Down Hoax was supposed to work? Corporations were supposed to have more revenue to invest on research and development, more to spend on expansion and hiring, more to spend on marketing and product sales?  Not. So. Much.

“Instead of investing in new plants, equipment and products, instead of paying their taxes and giving a long-overdue raise to their employees, big corporations are spending their record profits — plus gobs of newly borrowed money — to buy back their own shares and those of other companies.” [WaPo May 2014]

And we’re not speaking of just a few corporations, and the arithmetic is fairly simple:

“Meanwhile, the corporations of the Standard & Poor’s 500-stock index spent $477 billion last year (2013)  buying back their own shares, a 29 percent increase over 2012 and the most since the peak year of 2007. The idea behind buybacks is that they are a tax-advantaged way to return profits to shareholders by boosting the market price of their shares. Since the stock market tends to value companies by multiplying the profits per share times the number of shares, reducing the number of outstanding shares has the arithmetic effect of boosting the stock price. [WaPo May 2014]

During 2013 this “tax advantaged way to return profits to shareholders” was applied by 80% of the companies on the S&P 500.  This is precisely how Wall Street and the Corner Offices can see profits without prosperity. What we need to observe is the interplay between value creation and value extraction.  The Harvard Business Review explains:

“For three decades I’ve been studying how the resource allocation decisions of major U.S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U.S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what I call “sustainable prosperity.”

This pattern began to break down in the late 1970s, giving way to a downsize-and-distribute regime of reducing costs and then distributing the freed-up cash to financial interests, particularly shareholders. By favoring value extraction over value creation, this approach has contributed to employment instability and income inequality.”

Does that last sentence sound familiar?  So, we know that stock buybacks were popular as of 2013, how about 2014 – it’s now reported (Bloomberg) that 95% of the S&P 500 have engaged in the activity – of value extraction rather than value creation.   The Economist chimes in on the subject:

“Over the past 12 months American firms have bought more than $500 billion of their own shares, close to a record amount. From Apple to Walmart, the most profitable and prominent companies have big buy-back schemes (see article). IBM spends twice as much on share repurchases as on research and development. Exxon has spent over $200 billion buying back its shares, enough to buy its arch-rival BP. The phenomenon is less extreme in other countries, but is becoming popular even in conservative corporate cultures. Led by firms such as Toyota and Mitsubishi, Japanese companies are buying back record amounts of their own shares.”

Yes, stock buybacks can artificially elevate share prices, and give quick bucks to the short term investors.    Someone needs to flash on a yellow caution light.

“In 2013, 38% of firms paid more in buy-backs than their cashflows could support, an unsustainable position. Some American multinationals with apparently healthy global balance sheets are, in fact, dangerously lopsided. They are borrowing heavily at home to pay for buy-backs while keeping cash abroad to avoid America’s high corporate tax rate.” [Economist]

Yet when we have a corporate compensation system which rewards share value why would the CEO of Hewlett-Packard, or IBM, or any other major corporation NOT focus on share prices? Even if they are in peril of having lopsided ledgers. Even if they are extracting more value than they are creating?  Even while they are avoiding America’s corporate taxes? The GAO calculates the actual tax rate paid by these corporations at 12.6%. [CNN]

So, instead of creating value (building new plants, new equipment, new products, paying taxes, or raising wages and salaries) the companies are busy trying to extract value at the risk of making themselves uncompetitive. The financialists, focused as they are, on short term investments, in debt incrusted corporations, are far more interested in value extraction than in value creation, and that’s how we get profitability without prosperity.

Capitalism requires value creation, a balance of consumers and producers, and the accumulation of assets. Financialism is focused on value extraction, feeds on the notion that one firm’s debt is another M&A firm’s asset, and demands that “costs” whether for plant upgrades, employee wages, or research and development not impinge on the “tax advantaged ways to return profits to shareholders.”   The Economist closes the argument: “shareholder capitalism is about growth and creation, not just dividing the spoils.”

The creation of value means investing in more products, better products, more goods, better goods, more services, better services – and now we’re back to the point at which we need to restart the conversation about how to increase aggregate demand for these goods and services – by increasing the minimum wage.

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Filed under Economy, financial regulation

Cracks in the Economic Mirror

cracked glassWhy not come out and say it? Wall Street is not your friend. At least it’s not your friend if you are among the group casually known as American Workers.  I know, much has been said about our “Nation of Investors” and how millions of Americans have a stake in the financial markets.  [SEC] However, all that palaver papers over the obvious.  Wall Street’s financial markets are dominated by institutional investors, and such connection as the average American does have is often limited to the tertiary strings which attach to retirement savings accounts and pension funds.

There are forces which generate revenue for Wall Street investment houses that have a negative impact on those American Workers, for example — when Walgreen Inc. decided to eschew a corporate inversion, keeping its headquarters in Chicago the Market pounced and instead of rewarding the company for maintaining its American identity and retaining its American workforce at the Chicago HQ the Wall Street Wizards dumped its stock. [CBS]  More examples?

Merck, Cisco Systems, AOL, HP, Citigroup, Bank of America, and Wells Fargo — all companies which were rewarded by Wall Street for cutting expenses (read employees). [MoneyCNN] Cost cutting (read layoffs) will be rewarded because…? If revenues are at least stable and expenses are reduced there will obviously be more profits for shareholders.  If Wall Street has an anthem it must be “Onward Shareholder Value.”

The problem with marching to this tune is a loss of corporate focus.  Henry Ford’s big idea was to manufacture automobiles.  Merck may be the oldest pharmaceutical company in the world, beginning with Friedrich Merck’s purchase of an apothecary shop in 1668 — a firm which grew to sell the first commercial small pox vaccine in the United States in 1898. [Merck]  Henry Wells and William Fargo started their San Francisco business in 1852 offering banking and express services. [WF] In each of these instances the founders, whether a middle western mechanic, the descendents of an apothecary owner, or the bankers during the Gold Rush, opened their doors to provide products or to deliver a service.

A firm gets to be an institution by providing goods or services, sold to people who need or want them. There is no other way to build a business.  However, when the management of a company is more interested in the stock price than in the goods or services rendered to the public we start to see the cracks in the system.

The mythology takes over — We, say the managers, must guarantee to our shareholders (owners) the highest possible return on their investment.

Crack Number One:  How long must one wait for the return on the investment?  We have a relatively recent example of what happens when the management of a commercial enterprise decides to cash in on quick returns instead of waiting for long term results. Back in 2003 CBS News asked “Who killed Montana Power?”  The short answer is the management. Montana Power management took a blue chip company, a formerly solid investment, a source of economical electric power, and transformed it into … a disaster.

Crack Number Two: Institutional and professional investors aren’t investing in long term corporate strategies which they expect to grow over the next 90 years. They are instead attuned to the quarterly reports, the earnings estimates, and the pronouncements of the analysts.  Volatility, not stability, is the key to high and quick returns. Stability protects long term investors, volatility rewards short term speculation. [BusIns]

Crack Number Three:  When the Finance Department meets the Production Department who wins?   In the 1990s the financial sector accounted for about 20% of all corporate profits, by 2011 the sector rebounded from the Mortgage Meltdown and accounted for approximately 29% of all corporate profits. [HuffPo] The process happens in the remainder of the economy as well. Consider the recent information coming from General Electric.

The company’s industrial division (medical equipment, oil & gas drilling equipment, aircraft engines, locomotives, and gas turbines) reported revenue increases of 9%, its oil and gas revenues were up an impressive 25%, its financial services were up 7%.  In fact, the financial services end of the business, Synchrony Financial, is to be spun off getting GE out of the private label credit card business by 2015. Oh, and by the way — the corporation is planning to get rid of its appliance manufacturing. “Mr. Immelt made a promise to investors that the company would expand its industrial businesses and get rid of non-core segments.” [MBN]

The company formerly synonymous with nearly all things electrical is going to profit from selling off its private label credit card operations and dropping the appliances end of the business.  There’s nothing intrinsically wrong with the evolution of a corporation moving with the tides to stay profitable — but this does illustrate how a firm can move from manufacturing into financials as a core segment of its business.

Meanwhile there are several Wall Street investment banks no longer in existence that were enamored of generating fast revenue in derivatives markets and moved with another tide — out to sea.

Crack Number Four: Insert the hedge fund managers here.  Its one thing to argue for shareholder activism when speaking of the managers of pension funds, 401(k) funds, or the like, it’s quite another when the shareholder activists are hedge and wealth management types.  The Harvard Business School issued a report (July 9, 2014) coming to the following, rather depressing conclusion:

“As in prior research, we find positive announcement-period returns of around 4% to 5% when a firm is targeted by activists and a 2% increase in return on assets over the subsequent one to five years. We find that activist directors are associated with significant strategic and operational actions by firms. We find evidence of increased divestiture, decreased acquisition activity, higher probability of being acquired, lower cash balances, higher payout, greater leverage, higher CEO turnover, lower CEO compensation, and reduced investment.”

We can lump “increased divestiture, decreased acquisition, higher probability of being taken over, more debt, and less investment” under the general category of short term interests.

What is a pension fund or 401(k) administrator to do?  If pension funds, both public and private, are to be invested in corporations increasingly likely to be managed for short term revenue results, and those results are all too likely to be hinged on a swinging door of price volatility; and, if corporations are more likely to be managed with an eye toward the financials, coupled with increased divestiture and greater leverage — how does one invest for the long term in a short term environment?

So, here comes the dilemma.  The fund managers and administrators may decide to swim with the sharks — to go along with the short term investment strategies and applaud the volatility of the financial markets.  However, we’d have to ask: Does the very volatility of the markets or the acquisition of more indebtedness actually work against the best interests of the people who are paying into those retirement or pension funds?

Those who are now working, expecting retirement benefits or pension payments, seem to be at the mercy of a financial sector which rewards their layoffs and applauds the divestiture of their firms.  The message is reflecting from a cracked mirror: If you are lucky and the financial markets are up on your 65th birthday you can retire — If not?

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Filed under Economy, Nevada economy, Nevada politics