Tuesday, September 21, 2010

Stock Buybacks Getting Boring

Stock Buybacks Surge as Companies Borrow for Share Repurchases (per Bloomberg.com):

“It’s so cheap to do it now in the bond market: issue debt, fix their cost of capital, then shrink the number of shares outstanding,” said James Swanson, chief investment strategist at Boston-based MFS Investment Management, which oversees about $197 billion. “The markets are almost calling for them to do it.” . . .

“Levering a balance sheet is a good idea if you want to expand your company,” said Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management, which manages about $44 billion. “You don’t do that unless you feel secure about 2011. It may just be the corporate outlook for 2011 is better than you would gather from economic news.”

Sorry, Mr. Miller. The right way to expand your company is to abjure financial engineering. It is NOT to borrow money with which to speculate in your company's own stock. The way to expand your company is to . . . well . . . (channel John Houseman in the old ad) . . . make money the old fashioned way: earn it. Reinvest it into other profitable enterprises with return on invested capital that well exceeds what cash will earn.

Not to be tendentious, but here's the set-up. The Fed prints lots and lots of money (which I prefer to call "money"), said money exceeds what the real economy can use and thus the money-printing drives up the prices of securities, including bonds (thus lowering interest rates); companies then try to prop their stock prices (and value of their corporate options) up, leading to the above report.

What is missing is old-fashioned American dynamism.

What's present is more of the games of the past decade. Same-old, same-old.

Somehow I don't want to think that such entrepreneurs as Mr. Goodyear, Mr. Deere, Mr. Carnegie etc. who actually contributed inventions and products that helped this country become an industrial export powerhouse focused on this sort of stuff.

We need new and better products for the real world, not more and more uncreative financial products.

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