Apple as an Example of What is wrong with our Global Economy

In Saturday’s Wall Street Journal we couldn’t help but notice Holman Jenkins column where he wrote this about Apple.

“Apple …. [and] its abnormal profits are not likely to last, which brings us to this week’s decision to pay a dividend and buy back its stock.  The efficient markets hypothesis may be a poor old thing, but it’s all we’ve got.  In buying its own shares at the market price, Apple is merely exchanging one asset for another of equal value.  In paying a dividend it is merely shifting cash from one shareholder pocket to another.

 There’s only one good reason, then, for the stock to have lurched upward on the announcement, as it did:  Shareholders will be getting their hands on some of the company’s cash before management can squander it.  This week’s announcement, moreover, was but a teensy down payment on the discipline that will be needed.  Even after allocating $45 billion to dividends and buybacks over the next three years, Apple’s cash hoard is likely to grow – to as much $200 billion from today’s $100 billion according to Sanford C. Bernstein analyst Toni Sacconaghi.”

The Lex Column, in the Financial Times, Monday, March 26, 2012.

“… the news that Apple would begin paying a $2.65 per share quarterly dividend and authorise [sic] a $10 billion share buyback programme [sic].  To be sure, payouts give signals and little old ladies love receiving regular cheques [sic] in the mail.  But Apple’s worth does not change a single cent because Tim Cook chose to pay out Steve Job’s hard-earned cash.”

Reading such comments in arguably the best financial newspapers in the world make our blood pressure explode.  We are often asked, why we are doing this blog?  Simple. We can’t take it anymore!  So here are our financial concepts.  This is our voice.  Even Mr. Jenkins concedes the efficient markets hypothesis (EMH) is a load of crap, which we agree with, however he does say the EMH is all they got.  Hopefully 2008 was a teachable moment in financial history.  We need new financial theories, need a different approach.  Trillions of dollars are locked away in global corporations today.  According to our leading global newspapers, if these funds were returned to their shareholders nothing would happen.  Really?  Is this so?  Does it pass the common sense test?

“I’m getting that headache again!”

If corporations paid out this latent capital, this will lift the model price calculation in all companies taking such action.  Two things would happen, first an enormous amount of capital would be injected into the world, saving governments from stimulating excess demand by accumulating more deficits.  Second, the market would reward corporations in increased market value; assets would increase, recognizing more efficient use of capital on their balance sheets.    How do we know this?

We can pretend Apple is symptomatic of the world today.  Yes, we applaud Apple’s announcement of dividends and buybacks, however let’s look what they will be doing on our Solvency Curve.  Even with their meager give back to shareholders they will be even more solvent three years from now, if nothing is done between now and then.  See our blog “Apple Computer – A Special Dividend of $75 Billion would Reward Shareholders, Management and the Economy.”

See our formula for the calculation of the Solvency Ratio in the “Key Concepts” tab.

In much of the world today, global businesses are sliding down this same curve as Apple.  Yes, their cash piles are building however their market prices are sliding (relative to their potential), with the lack of optimal values for solvency.

We are optimists, and we can say “we will all get there eventually” in terms of a growing, functioning global economy but we have to admit it’s painful to watch the process unfold.  Also, reading comments in the newspapers, like the above, make us crazy because high placed opinions such as these will further encourage managements to hoard cash yielding more sub par growth and further government spending.

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