I've said this before and I'll say it again: in the absence of a tight coupling between profit and payouts (either buybacks or dividends) the value of a stock becomes detached from the value of the company, and approaches pure opinion. When profitable companies don't pay out dividends or buy back stock, their stock price growth has nothing to peg it to the actual profit of the company. Likewise, when unprofitable companies pay dividends and buy back stock, their stock price begins to directly contradict their (lack of) growth. In short, with tricks like this available, the stock market is a bad way of measuring how the economy is doing.
It's not clear from the article whether or not the companies borrowing money are the same companies buying back their own stock. But if they are, then it's clear that the economy (as indicated by real value being produced) has already crashed, and this is just a hack to delay admitting this, so that execs and the financial sector can continue to profit. It's become clear that the government will bail out companies when this strategy inevitably fails, so it's average people who will pay the cost.
To be honest, I am a bit surprised this hasn't happened sooner. It's a fairly obvious hack: if you fail to produce value, just borrow money and prop up your stock price. Perhaps that's why: maybe it's too obvious--the people who make their money by finding new and creative ways to move money around have to at least create the appearance of investing in real value.
“in the absence of a tight coupling between profit and payouts (either buybacks or dividends) the value of a stock becomes detached from the value of the company, and approaches pure opinion.”
I think I can agree with that. Whenever I hear someone say that a stock is overvalued because it’s market cap is 15 or 20 times sales, I always ask so what? Who says 15 to 20 is too high. Why not 100 or some arbitrary number? I mean, the stock has no dividend and they never have done buybacks and you aren’t going to get a piece of their sales in the form of a paycheck! Why should you care what multiple the market cap is over sales??!!
It’s all opinion. You are just valuing it based on what other analysts think is the “right” multiple.
Sometimes I wish the stock market worked like a blind bidding auction. You can’t see the current price nor the other bids. And nobody is allowed to publish any articles expressing their opinions on any stock.
It's not clear from the article whether or not the companies borrowing money are the same companies buying back their own stock. But if they are, then it's clear that the economy (as indicated by real value being produced) has already crashed, and this is just a hack to delay admitting this, so that execs and the financial sector can continue to profit. It's become clear that the government will bail out companies when this strategy inevitably fails, so it's average people who will pay the cost.
To be honest, I am a bit surprised this hasn't happened sooner. It's a fairly obvious hack: if you fail to produce value, just borrow money and prop up your stock price. Perhaps that's why: maybe it's too obvious--the people who make their money by finding new and creative ways to move money around have to at least create the appearance of investing in real value.