Friday, December 4, 2015

Value-Extraction Has Replaced Value-Creation....ANOTHER PESKY FACT!

Value-Extraction Has Replaced Value-Creation

George Washington warned "…the propitious smiles of heaven can never be expected on a nation that disregards the eternal rules of order and right which heaven itself has ordained."

The prophetic warnings of corruption of America's moral ideals may have begun in 1789 with the words from America's first President, but they have been routinely revisited throughout our history.  In 1961, Dwight Eisenhower also issued a dire warning in his farewell address to the nation.    In that address he pointed specifically to the military?industrial complex, a term he coined, but words which today have far broader application.

"…we must guard against the acquisition of unwarranted influence… The potential for the disastrous rise of misplaced power exists and will persist. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together."

It is vital to give proper consideration to the improper liberties that are being taken by those with "unwarranted influence" and "misplaced power".   

Value extraction has replaced value creation in pursuit of short term, self serving benefits at the expense of long term stability and durability of corporate America and therefore the country as a whole.  

As citizens, our obligation is to be well informed, cognizant, outspoken and to vote.  As investment managers, our role is to always protect the wealth of clients through a critical view of the actions of authorities with fair and rigorous questioning of intentions and incentives.  

The words of men may temporarily suspend but they do not alter the laws of financial dynamics. The fundamentals always take precedence eventually.

Corporate profitability and rising stock markets are not translating into widespread economic prosperity as shown in the graph below comparing stagnating hourly earnings versus the S&P 500.

The growing popularity of buybacks is graphed below along with the disturbing trend in the percentage of cash invested for future growth. Similarly, stock valuations measured several different ways rival levels only seen with the exuberance of 1929, 2000, and 2007.

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