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

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

#151

Post by tathougies »

marnett wrote: post #139
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?

About 7% on average I believe but I can't know about on non average days, like the past ones have been.

I know a lot of people who logged in to their accounts last Monday who never normally to sell shares and hold cash until the market bottoms. I'm guessing the retail volume in the past week has been higher than ever.

Even barring retail investors telling brokers to sell shares, there are all sorts of reasons consumer behavior can force share sales including increased expectation of withdrawals by banks, people not contributing as much to 401k. Defined allocation mutual funds rebalancing, etc. Also, today a lot of low cost brokerages sell trades to algotraders for fulfillment, so an order for the sale of 1 share of a consumer investor can end up accounting for more in trading volume

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

#152

Post by jrs235 »

alexpetralia wrote: post #116
pfraze wrote: post #107

Earlier quoted context omitted.

If we assume that corporate value is relatively unchanged from 2014 and then assume that the government bails out the companies by paying off the debt, then the stock market's growth from 2014 would be a form of inflation, wouldn't it?

Yes, asset inflation. Which we've seen (in corporate & startup valuations). We have not seen similar inflation of goods in the wider economy (except real estate, health care and higher education).

>(except real estate, health care and higher education).

All also being assets. (Health care equating to health). Who has benefited the most from asset inflation? Those well off or the lower working class?

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

#153

Post by amiune »

TheOtherHobbes wrote: post #75
amiune wrote: post #29

The amazing thing about bubbles is that you can only know that was a bubble only after it explodes but you can never predict it before.

Before 2008 it was amazing how many people outside of economics, finance, and politics were able to see a disaster coming, but almost everyone in those sectors was completely blindsided.

Ok so we just need those people to write a precise definition of "bubble" so we all can see it coming

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

#154

Post by kaesar14 »

jki275 wrote: post #125
vzidex wrote: post #124

Earlier quoted context omitted.

[flagged]

[flagged]

That doesn't mean that the system as it exists is good. The system as it exists isn't perfect. Maybe listening to those coming at it with a fresh perspective gleaned from youth would benefit society a bit.

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

#155

Post by grecy »

H8crilA wrote: post #148
grecy wrote: post #108

Earlier quoted context omitted.

> If a company like amazon generates very little corporate profit, is that unproductive growth? Of course not. There would be more employees, more taxes paid, more buildings being built, more assets, etc. thus more money going into the economy. I've always dreamed that companies should run with zero profit (like the outdoor store co-ops like REI or MEC in Canada). They could price their products so they don't make an…

This is what the government is. It's a large non-profit, in fact the largest player in the economy, that's always zipped to produce no profits. There isn't even any structure to distribute the profits (there are no "shares" of the government or anything of this sort). The whole point of profits and investing is to hook up the "skin in the game" of investors to viability of project. That's the definition of capitalism…

> That's the definition of capitalism

It's interesting though that there are certainly extremely successful companies like MEC in Canada and REI in the US who don't follow this model.

Their customers are extremely happy. Their staff get paid. The y create excellent value for customers. BUT they don't make a profit. Nobody can get rich from owning a slice of it.

Why couldn't more companies be like that?

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

#156

Post by sokoloff »

jcfrei wrote: post #135
alexpetralia wrote: post #128

Earlier quoted context omitted.

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.

Another is share buybacks (which I think are entirely fine).

Same amount of profits (DCF + discounted terminal value) spread over fewer shares implies a higher share price.

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

#157

Post by TeMPOraL »

grecy wrote: post #108
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.

> If a company like amazon generates very little corporate profit, is that unproductive growth? Of course not. There would be more employees, more taxes paid, more buildings being built, more assets, etc. thus more money going into the economy. I've always dreamed that companies should run with zero profit (like the outdoor store co-ops like REI or MEC in Canada). They could price their products so they don't make an…

> They could price their products so they don't make any "extra" money each year

Isn't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs.

> I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create.

That would be a nicer world to live, true. Unfortunately, we've created a system in which the primary reason for a company to exist is to make profits - and then we pit companies against each other to minimize profits made. The end result is a lot of creativity unleashed in the process of innovating, cheating and defrauding your way into not being a commodity.

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

#158

Post by sokoloff »

matlin wrote: post #138
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…

It also likely eliminates all but the quite wealthy from investing in one of the greatest wealth-creation engines of the modern era.

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

#159

Post by ksdale »

H8crilA wrote: post #123
ksdale wrote: post #111

Earlier quoted context omitted.

Heavy CAPEX doesn't require no profits, but it can easily result in that.

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 the profits from the CAPEX just get plowed into more CAPEX, though, you could end up looking like you don't have profits for decades, and it isn't necessarily a problem as long as you're growing.

Edit: What I'm saying is that profit is a lagging indicator of CAPEX, and your lack of profit now could be the result of bad CAPEX 5 years ago, or good CAPEX 5 years ago, plus aggressive new CAPEX now.

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

#160

Post by sokoloff »

TheOtherHobbes wrote: post #75
amiune wrote: post #29

The amazing thing about bubbles is that you can only know that was a bubble only after it explodes but you can never predict it before.

Before 2008 it was amazing how many people outside of economics, finance, and politics were able to see a disaster coming, but almost everyone in those sectors was completely blindsided.

How many of those people held that same view for 5 years before finally being right?

It’s easy to call a market reversal if you’re comfortable calling 9 of the next 2 reversals.

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