EC No, Mr. President, There Isn’t A Santa Claus

This week Boeing (NYSE:BA) caused a jump in its stock price by increasing its dividend and announcing a future and much larger increase in its stock repurchase program. This looks defensible, until you look at Boeing’s balance sheet, where you find that not only does it have negative tangible net worth, it now has book net worth of minus $1.3 billion. In other words, the entire Boeing edifice, with $116 billion of liabilities is now carried on no base at all, financially, but is simply expected to support itself in mid-air. Since the difference between tangible and book net worth is a relatively modest $10 billion, the decapitalization of Boeing has been almost entirely caused by foolish capital repurchases, with Treasury stock repurchased of $68 billion.

We can remember, even if Boeing top management cannot, that the aircraft business is highly cyclical. At some point, Boeing will need to dip into its reserves to weather a bad year or two. However, it will then have no reserves to dip into. It may then go bust, but before it does so, it will undoubtedly conduct gigantic emergency share issues, for as much money as it can obtain, which of course will take place at a huge discount to the prices at which it bought back stock. To buy shares in the market for say $300 per share and sell them back later at $100 per share is poor business indeed. Furthermore, it is not at all clear that Boeing will be able to sell enough shares to raise its downturn capital needs, in which case it will go entirely unnecessarily bankrupt. (Disclosure: I have a very modest holding of Boeing put options.)

Boeing’s position is repeated to a greater or lesser degree across much of the Fortune 500. Through foolish share repurchase schemes, the giants of U.S. industry have destroyed their capital bases and will hence run into severe difficulties when even a minor recession hits. Since these companies will need to finance themselves through emergency share issues, the trajectory for the major U.S. share indexes is inexorably downwards. However much Trump may wish otherwise, there is no Santa Claus.

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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put ...

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Barry Hochhauser 1 year ago Member's comment

Martin Hutchinson, why do you suppose #Greenspan did nothing to correct the problem even after he identified the issue early on?

Angry Old Lady 1 year ago Member's comment

Wait a minute... Santa isn't real??

Gary Anderson 1 year ago Contributor's comment

I can't believe I just read this.

Alexis Renault 1 year ago Member's comment

Why not?

Gary Anderson 1 year ago Contributor's comment

The trend growth is likely below 3 percent. Most rational people do not hope Trump wins in 2020. He is doing great damage to our nation on many fronts, including economic policy. He is a dreadful human being on many fronts. The author does not share my views, which is fine. But it is a tough read.

Alexis Renault 1 year ago Member's comment

I agree that #Trump is a dreadful human being. Personally I can't think of a single positive thing to say about him personally. But I was under the impression that Wall Street and business in general were supportive of Trump and his policies.

Gary Anderson 1 year ago Contributor's comment

I don't think Wall Street thinks tariff wars, full blown tariff wars, can be won. Certainly, Wall Street gives Trump the benefit of the doubt, that he is negotiating. But this is really how business in the US feels about the potential tariff war, and certainly the steel tariffs are just killing American business slowly by 1000 cuts: https://www.uschamber.com/tariffs

Alexis Renault 1 year ago Member's comment

:-(