Was corporate profit growth a bubble inflated by "financial engineering"? • Hacker News Board

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#131

Post by raincom » Fri, Mar 27, 2020, 7:06 PM UTC

zuzun wrote: post #78

This reminds me of a paper I read in the Quantitative Finance section on arXiv.org, in which the author claimed stock markets are being manipulated by big portfolio owners, because the gains happen overnight, while the intraday returns are negative. I'm not endorsing this idea, but I consider it a fun conspiracy theory and maybe it's a good time to throw this into the discussion here. https://arxiv.org/abs/1912.01708

Even if whatever this paper suggests is true, it won't contribute that much to the inflation of stocks. In this bull run, index funds have performed better than hedge funds. As long as the majority of investors (in terms of their aggregate holds) agree that the price of equities is fair, the ride will continue.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#132

Post by skrebbel » Fri, Mar 27, 2020, 7:11 PM UTC

timlangeman wrote: post #126

skrebbel wrote: post #68

Earlier quoted context omitted.

When you say profit growth was flat, that means that profit grew linearly, correct? If true then that's pretty impressive and possibly much better than what the markets ~10 years ago expected?

Sorry, to clarify, their profit hasn't been growing. Since 2014, Profit (before taxes) has been roughly $2.2 trillion every year. https://fred.stlouisfed.org/graph/?g=qx3r

Ah right. Good point then!

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#133

Post by H8crilA » Fri, Mar 27, 2020, 7:15 PM UTC

otoburb wrote: post #129

H8crilA wrote: post #123

Earlier quoted context omitted.

If, over the long term, CAPEX spendings do not produce profits, it means that the purchased assets did not produce enough payoff to compensate for their depreciation charges. You could argue with the accounting depreciation rules (i.e. how much needs to be written off per year, i.e. you think the asset is longer lived than the accounting rules say), but the general idea stands - it is a sign of bad capital allocation…

>> If, over the long term, CAPEX spendings do not produce profits, it means that the purchased assets did not produce enough payoff to compensate for their depreciation charges. Even if CAPEX generates profits, if the returns were lower than your capital cost then company would have been better off not investing and returning that instead to shareholders.

Yes, that's the 101 of being a capital allocator, like a CEO or a CFO. Only invest into anything if the returns exceed your cost of capital.

Presentation on this very topic: https://youtu.be/c20_S-QgvsA?t=730

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#134

Post by tathougies » Fri, Mar 27, 2020, 7:21 PM UTC

zby wrote: post #85

tathougies wrote: post #15

Do people not expect the market to go down when business revenues have been forced lower due to unforeseen circumstances? The fact is a valuation made in November 2019 had no way of taking this into account. This isn't to say whether or not it's a bubble, but I am surprised at the number of people who think that stock prices going down is due to financial health of companies rather than people attempting to sell stoc…

"It's like, if there are four partners in a partnership and two decide to buy out the other's shares, their shares are now worth twice as much, assuming the corporation continues making revenue." - I don't understand how you calculate that. Let's say there is a company with 4 shareholders with equal shares and with discounted future earnings of $2 million plus $2 million of cash. That makes the company worth $4 milli…

Companies capital reserves often don't count in valuations. It's just the discounted future earnings. Cash sitting in a company's coffers would often count against it, since the rate of return on capital would be lower (larger denominator), and investors are seeking a higher rate of return.

The fact of the matter is, companies should not keep 'emergency cash reserves' enough to operate for six months. The money should be returned to shareholders. Shareholders and other investors should keep liquid cash reserves for emergencies. Then, when companies face emergencies, they should issue new stock to the markets, and the saved up emergency capital can be used. That leaves individual share holders and potential shareholders to decide the fate of companies, which seems more in the spirit of democracy.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#135

Post by jcfrei » Fri, Mar 27, 2020, 7:21 PM UTC

alexpetralia wrote: post #128

vimota wrote: post #57

Earlier quoted context omitted.

I thought the same, and had to ask some friends to provide another point of view: If a company like amazon generates very little corporate profit, is that unproductive growth? Aggregate corporate profits are not the only stat that matters when discussing economic growth/value.

It is not "unproductive" from the perspective of the economy, but it is "unproductive" (i.e. low-returning) from the perspective of shareholders. We would not expect to see share prices rising if corporate profits in aggregate are not rising (unless there is some financial engineering going on).

We would expect it under certain circumstances. One explanation could be falling interest rates. Lower rates on bonds incentivize investors to take on more risk (moving more money into equities) in order to still meet their return targets.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#136

Post by tathougies » Fri, Mar 27, 2020, 7:24 PM UTC

01100011 wrote: post #23

tathougies wrote: post #15

Do people not expect the market to go down when business revenues have been forced lower due to unforeseen circumstances? The fact is a valuation made in November 2019 had no way of taking this into account. This isn't to say whether or not it's a bubble, but I am surprised at the number of people who think that stock prices going down is due to financial health of companies rather than people attempting to sell stoc…

> I am surprised at the number of people who think that stock prices going down is due to financial health of companies The financial health of many companies is significantly affected by virus mitigation strategies. Companies that were healthy in January may be on the brink of insolvency in June. The market is pricing that in to some extent.

Yes, this is due to the virus, not the previous financial health of the companies. YOu have companies in danger of folding because creditors may be hesitant to give fixed-term loans to a company for which no one can determine a business resumption date. That does not reflect on the pre-virus financial health of the companies. Any company would find trouble with liquidity when its business model has been suspended suddenly and indefinitely.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#137

Post by engineer_22 » Fri, Mar 27, 2020, 7:25 PM UTC

riffraff wrote: post #122

H8crilA wrote: post #90

Earlier quoted context omitted.

Sadly, I believe you're right, and this scares the shit out of me. To put it bluntly - we will not have capitalism any more. Capitalism must provision for and handle failures, and this is not currently allowed to happen.

The real question is: was it ever allowed to happen? There have been bailouts in some form since forever, it seems.

can you provide a list of examples?

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#138

Post by matlin » Fri, Mar 27, 2020, 7:41 PM UTC

LeoTinnitus wrote: post #6

It's certainly more nuanced than that. However, it does point out the fact that corporations focus too much on shareholder value as opposed to just making a good business system...except for the major players that is. These the so called "too big to fail" types of companies which borderline monopolize market sectors like Amazon and Walmart. But they don't care during recessions because they're fine. They essentially…

I agree. I think one of the more interesting approaches to solve this particular problem as well as private companies staying private too long is the Long Term Stock Exchange. I don't know a lot about it but from my understanding, it aims to eliminate short term investors which removes a lot of the speculative nature of public stocks. Not sure that this would eliminate stock buybacks but the long-term investors might be more interested in traditional dividends.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#139

Post by marnett » Fri, Mar 27, 2020, 7:44 PM UTC

tathougies wrote: post #15

Do people not expect the market to go down when business revenues have been forced lower due to unforeseen circumstances? The fact is a valuation made in November 2019 had no way of taking this into account. This isn't to say whether or not it's a bubble, but I am surprised at the number of people who think that stock prices going down is due to financial health of companies rather than people attempting to sell stoc…

> because they suddenly need the liquid cash on hand (due to job loss)

How much market volume do you think is attributed to retail investors?

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#140

Post by Ididntdothis » Fri, Mar 27, 2020, 7:52 PM UTC

vzidex wrote: post #117

Ididntdothis wrote: post #106

Earlier quoted context omitted.

Remember this joke? ‘A banker, a worker, and an immigrant are sitting at a table with 20 cookies. ‘The banker takes 19 cookies and warns the worker: “Watch out, the immigrant is going to take your cookie away.”’ If the ruling class plays it right the working class will go after each other instead of the ruling class. And so far they seem to do really well.

Hah! I've never actually heard that joke but it's a good one. And yes, that is definitely what they'll do - every time something major happens in our society I've observed the mass media following the playbook from Chomsky's "Manufacturing Consent" almost exactly. That being said, every "big event" is an opportunity for mass radicalization of the working class and these "big events" are happening more and more often.…

Electing Trump was already a response to these events but unfortunately people chose a billionaire who mainly cares about themselves. The Russian revolution and the nazis were also a response to events but in either case the people made bad choices....