The Fate Of The Fantastic Four (Of Financial Engineering)

And while this precarious financial position should not inspire much confidence in shareholders, the fact that these stocks are still more expensive than they were at prior major market peaks (let alone troughs) should be even more worrisome. For this reason, the potential for further downside, even after losing more than a third of their values already, is significant.

So the question becomes, ‘Why did these companies sacrifice long-term financial health for short-term stock prices gains?’ The answer lies in a little-noticed line on their cash flow statements labeled, “stock-based compensation.” On average, these companies each spent $200 million per year on issuance of options to top management. Those very same managers were the ones who decided it was a good idea to leverage the balance sheet to buy back stock. At the very same time, they also decided it wasn’t a good time to be a holder of those shares and so they sold, collectively, over half a billion dollars worth of their own shares in the open market. As I wrote about a year ago, “If This Isn’t Stock Manipulation, I Don’t Know What Is.”

In conclusion, it looks pretty clear to me that the decision to leverage up the balance sheet to buy back stock had nothing to do with returning capital to shareholders or any other such nonsense. It was done entirely to boost earnings per share ensuring executive bonuses that would become even more valuable if the shares they were paid in were inflated through persistent manipulation by the company itself. In other words, management got rich in the short run at the expense of the long-term health of the companies they ran. I guess we’ll see how well that continues to workout for their remaining shareholders.

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Disclosure: Information in “The Felder Report” (TFR), including all the information on the Felder Report website, comes from independent sources believed reliable but accuracy is not ...

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