Rana Foroohar is an idiot and a tool

Sometimes, you read an article so blatantly stupid it ends up being brilliant. Unfortunately, Rana Foroohar’s latest turd is not amongst those: it’s just stupid. Really, really, really, really stupid. I don’t believe there should be laws restricting what people can post online, but her most recent pile of shit would make a good case for it.

Today, Apple reported insanely good earnings, pretty much as I expected. Hell, my predictions were ridiculously close. Somehow, some dipshit “analyst” somewhere managed to make it look like it was a bad thing. I mean, just read the title:

What Apple’s Gargantuan Cash Giveaway Really Means

What do you mean, what it really means? It means Apple is doing a gargantuan cash giveaway. I’m not sure what there is to interpret here. If I’m the CEO of a company and I give money to my shareholders, where’s the problem? Imagine the following scenario:

1. You invest $20 into a company worth $100
2.  A year later, the company is worth $200 and decides to pay you a $10 dividend. You now have $10 back, half of your original investment.
3. OMG GARGATUAN CASH GIVEAWAY WHAT DOES IT REALLY MEAN

This title suggest that making a ton of money and distributing it to shareholders is somehow a bad thing. What it “really” means. Yeah, right. You know, I used to really like the Time Magazine. I used to have a really high opinion of them. The Time magazine, in my opinion, has or at least used to have, high-quality, well-researched articles. But after reading a title so dumb, I am not so sure anymore. This kind of title would even get rejected by Buzzfeed.

Then again, can you really trust a website that shows an ad like this:

Canada’s best kept hotel booking secret? Since it’s advertised on a massive website, I guess it’s not such a “best kept secret” after all. Or maybe hotels are just really, really bad a keeping their “booking” secrets.

And when you click on the link, what do you find?

Wow… It didn’t take me long to find “Canada’s Best Kept Hotel Booking Secret” and apparently, that secret is simply a website.

That website doesn’t spend billions on advertising! Marvelous! Hold on… What did I click to get there already? Oh yeah, I CLICKED AN AD. “But F.S., this isn’t TravelPony paying for the ad, it’s some guy with a website!” Yes, and how do you think this guy is paying for that ad? Do you think this guy dot it out of the goodness of his heart? It says right there: he was given a travel credit by TravelPony for it! So… TravelPony is indeed paying for advertising after all!

And if TravelPony is paying to get the word out and thus paying for publicity, what savings are there to find on this website? I guess that, technically, this statement could be right: maybe they don’t actually spend billions and just millions. But how can you trust a website that lies in your face as soon as you enter? And I strongly doubt TravelPony “chose” not to spend billions on advertising. In fact, I strongly doubt a startup website has billions laying around. It’s not like every company has that kind of money, you know? In fact, very few do!

Anyway, back to Rana Foorahar’s disaster, her article is so bad it wouldn’t even pass on ZeroHedge. I tried to look more into her posts and it was always more of the same crap. Take this quote from her article “The Market Mirage” (ooohhh):

CEOs, who are paid mostly in stock and live in fear of being punished by the markets, race to hit the numbers rather than simply making the best decisions for their businesses long term.

That’s plainly not true and perhaps the most manipulative sentence I’ve read today. First, shareholders aren’t the complete idiots that you make them to be. Second, most “paid in stock” (she says that like it’s a bad thing) actually do get that over the course of several years and not at all once. Third, what numbers are they “racing” to hit anyway? That doesn’t even mean anything. Are they racing to increase profits, beat analyst’s expectations, etc? Perhaps a better way to formulate it would be to say that “CEOs sacrifice long-term growth for short-term profits,” but this is a statement that is far from proven. It’s not even an opinion (not even a poorly-formed one), it’s just a statement you pulled out of thin air.

Thin air. That’s what this sentence is, and that’s what the entire article I am about to discuss is. I mean, after Apple pretty much obliterated all estimates, what negative point could you bring out? Well, this dumbass managed to actually pull something out. Even HuffingtonPost has more credibility that this “analyst.”

Without further ado, let’s analyse and deconstruct her specious and bullshit post:

$200 billion dollars—and it only means 1 thing

It sure does. It means Apple is giving $200B back to shareholders.

Apple’s announcement today that it would increase its dividend 10.6% and give out the biggest chunk of cash to shareholders in history—$200 billion of capital will be returned to investors through March 2017—means one thing and one thing only. The market has topped.

Hold on… What?

The S&P500 is currently valued at 19.5 trillions USD. Apple is valued at $760 billions. How exactly does the acts of one company – worth around 5% of the S&P500, which covers only 500 companies – get to dictate when the market has topped?

And why does a dividend increase of 10.6% and a share buyback signal a top? This just makes no sense. It just has no relationship with the overall health of the stock market. In fact, it doesn’t change anything when it comes to valuations. Here’s why:

1. Your company is worth $100 and you have 100 shares. Each share is worth $1.
2. You use $20 to buy back 20 shares and. You destroy those shares
3. Your company is now worth $80 and you have 80 shares. Each share is still worth $1!
4. Let’s go further. You decide to give a $0.50 dividend for each of the remaining 80 shares.
5. Your company is now worth $40 and you still have 80 shares. Each share is worth $0.50, but each share granted its shareholder $0.50 in cash.

How does a dividend and a buyback signal a top? It has nothing to do with it! In each case, you still have the $1 in share you originally invested. Nothing has been created and nothing has been lost. Dividends and buybacks do not change the value of a company (barring taxes/commissions/trading fees, of course). It modifies the psychology behind a stock (some prefer dividend-paying stocks, some don’t want any dividend in their portfolio), but from a “market top” point of view, neither changes anything at all.

What you wrote is just false.

As I’ve written numerous times in recent months, share buybacks and dividend payments of this type don’t signal underlying economic health so much as they indicate a market riding on a financialized sugar high, one built on easy money, cash hording and tax dodging, which will eventually crash

Actually, dividend and share buybacks DO signal underlying economic health. Here’s why.

Let’s say you are a company. You believe your stock is underpriced. What do you do? You do a buyback, of course! Apple, for instance, bought back shares at a average price of $111 last quarter, far below the current price of $132 or so. Would you pay $111 to buy something worth $132?

The same goes for dividends. When a firm pays a dividend, it typically means that not only it believes it has means to pay a dividend, but that it actually has the means to maintain it. No decent CEO will begin a dividend with the intent of cutting it later on. Oh, they might be forced to cut it if business tighten, but establishing and/or increasing a dividend indicates confidence in one’s business, not the opposite.

What exactly is a financialized sugar high, Rana Foroohar? This is pretty much as meaningless a statement as can be. You know, we are talking about a massive markets with thousands, of not millions of actors, not one kid that decides to sniff a candy bar and starts running around. It’s not like today’s valuations are crazy high neither. In fact, the S&P500 trades at a pretty decent P/E ratio:

http://www.multpl.com/table

Adjusted for growth, we are trading at around average P/E. There is no “sugar rush” here, sweetheart. Then, you say, “one built on easy money” and “cash hording” [sic]. Which one is it? Did the market go up because of easy access to capital (and, thus, the ability to finance business easily and cheaply, increasing overall profits) or because company “horded” cash?

Make up your mind.

Carl Icahn himself admitted as much to me when I interviewed him back in 2013, for a TIME cover story that looked at his quest to get Apple to give back $150 billion worth of cash to investors. “This market will break,” he said back then, even as he and many others were pushing for America’s richest firms to give investors more of the $4 trillion on their balance sheets (about half of which is held offshore). The only question now is when.

You know what I love? When someone quotes four words out of an entire interview.

What a shoddy piece of reporting. Absolutely insane. For all we know, perhaps Icahn said “This market will break records.” You don’t know because this is a stupid quote with no context without even a iota of a hint of what Mr. Icahn was talking about.

“The only question now is when?” What?

Indeed, one of the reasons that Icahn and others have been able to demand such huge payouts, and that companies like Apple have been able to deliver them, is that the Fed has poured $4 trillion into the market over the last few years, and kept interest rates at historic lows.

You have no idea what you’re talking about. How did this end up on the Time’s website? Who writes this crap?

You are referring to the FED’s quantitative easing program. Even if your argument was right (it is not), that program has ended in October, so how is the market still moving higher?

Also, Apple’s payout has nothing to do with QE. At best, one could say that the low interest rates allowed Apple to borrow money at a lower interest rate –  but this will drive the stock up, not down!

That’s a crucial part of understanding this massive Apple payout. Despite having nearly 10% of corporate America’s liquid assets on hand, Apple has borrowed much of the money needed to do its capital return program over the last few years,

This is a strawman argument. What does Apple having 10% of “coroporate America’s liquid assets on hand” (whatever that means) has to do with borrowing money?

That’s like saying: “Oh, I have $10M in cash, but I can’t borrow at 0.9% to buy a car so that my cash position remains intact in case I need it later.”

at the lowest rates in corporate history, in order to avoid taking money out of offshore tax havens and paying the U.S. corporate tax rate on it. (CEO Tim Cook has said he would support repatriating some of the money at a lower rate as part of a wider deal on offshore holdings.)

Wow, this is actually correct.

I can’t wait for you to somehow turn this into something “bad”

Not only does issuing debt in order to hand over cash to investors save Apple billions, it almost always boosts its share price

Correct!

buybacks necessarily do that, since they artificially decrease the amount of shares on the market

Hold on… Artificially?

Buybacks do not “artificially” increase a stock price. In fact, there is no such thing as “artificially” increasing a stock price safe for fraud, which buybacks aren’t. You don’t even understand the most basic part of finance.

without actually changing the real value of the company via true strategic investments

Yeah, you know you can do both, right?

You do know you can increase the price of a share BOTH by buying back shares and doing R&D? Both are not mutually exclusive, Rara.

If only Apple could have introduced a new product recently… I don’t know, something you put on your wrist and that gives you time, maybe.

“Guys! Tim Cook just announced a share buyback! Oh noes! We have to stop working on the Apple Watch right now!”

like research and development, worker training, or anything else that might bolster the underlying prospects of the firm. More broadly, buyback wizardry

Buyback wizardry?!?!?!?!? WHAT?!?!?!?!?!?!?!

I think this sums up your comprehension of share buybacks perfectly.

I am reporting her to the Times magazine. I admit I burst out laughing reading that. This is just plain retarded.

“Hi, I want to buy back shares because I believe they are underpriced.”

“OMG A WIZARD! MAGIC!”

underscores one of the great ironies of American business today–the country’s biggest, richest companies have more contact with investors and capital markets than ever before, yet they don’t actually need any capital.

Let’s assume your point was right (it is not), that is, that firms do not need capital. Tough shit, they do: how else can they pay their employees?

Anyway, what you meant to say is that they do not need to RAISE capital, which is a totally different story. Yes, many companies today can afford to grow without borrowing or selling new shares. How is that a bad thing?

“Hey guys, we have enough money to run our business. In fact, our company is going so well that we are going to increase our dividend!”

“That’s horrible! PANIC!”

And you know, your point is not even true. Oil stocks, for instance, recently did a round of new capital raising. And IPOs are still raining on the market – Godaddy, Etsy, etc.

Someone call Godaddy and tell them they didn’t need the capital. Cancel the IPO, someone!

Apple, one of the most admired firms in the world, now spends a large chunk of time thinking about how to create value via financial engineering. This is by no means just about Apple, which is pouring a lot of its wealth into noble pursuits such as green energy even in places like China and some limited factories in America.

How did this make it past a serious editor?

I’m not even going to comment it. Make what you want of it. It’s pure bullshit.

But there is a larger uncomfortable truth here that many economists have begun to suspect

Which ones? Where?

on a wide scale, has a lot to do with our permanently slow growth economy. One key part of the theory of “secular stagnation,” which is being bandied about by experts such Larry Summers, is that financial markets are no longer serving the real economy because they funnel so much money away from it. Others go further, believing that financialization itself is a core reason for slow growth and the decreasing competitiveness of U.S. economy in a global landscape.

Here is the GDP growth of the top 10 economies in the world right now. The US is not doing so bad, being 4th in terms of growth right now. Then, you say this, “because they funnel so much money away from it.”

This doesn’t mean anything. Funnel so much money away from what? The economy? They funnel that money where exactly? In heaven? I have read this sentence four times and it still makes no sense. Where does the money go, Rana?

And you know, you can’t quote a massively long article and then act like you have a point. In fact, the article is very loosely related to your premise in the first place.

The biggest economic conundrum of our age–why many companies aren’t investing the cash they have sitting on their balance into our economy in things like factories, workers and wages—turns out to have an easy answer.

Our prophet has the answer! When is she advertising her book?

It’s because they are using it to bolster markets and enrich the 1% via capital return programs instead. A recent paper from the Roosevelt Institute shows that as borrowing to fund paybacks to investors has increased over the last few years has increased, investment into the real economy has decreased.

What the hell are you talking about? You do realize not just “the 1%” has stocks, right? Many people such as myself are very far from the 1% yet hold tons of stocks in their personal portfolios, 401k, etc.

Also, when someone makes money, you realize that money is going somewhere? Take the $15,000+ I will make from my Apple calls. I am going to use that to buy an Apple Watch. This will stimulate the economy.

How much longer is that crap?

It’s a trend that has reached a fever pitch in the last decade or so, and particularly the last few years. From 2003 to 2013, the 454 firms in the S&P 500 index did $3.2 trillion worth of buybacks, representing 51% of their income, and another $2.3 trillion on dividend payments, which represented an additional 35% of income.

First, do you know what income is?

Do you even know what a “cash flow” is?

I’ll sum it up for you. “Net income” is what remains after every expense related to selling your product and service has been paid. Interest rates, taxes. R&D, depreciation, Capex, etc. It’s basically money that appears in a company’s bank account.

What is that company supposed to do with that money? Sure, sometimes, it will buy other companies, but more often than not, this money either 1) stagnates in a bank account 2) is reinvested, often in the stock market or in bonds. Paying a dividend or buying back shares makes a lot of sense and is just another way to put that money to work. There is nothing “evil” with it.

By 2014, buybacks and dividends represented 95% of corporate income, and if the trend continues, they’ll reach over 100% in 2015.

You can’t say stuff like that. You can’t say “from 2003 to 2013, the percentage was on average 86%, in 2014 it was 95% and in 2015, if the trend continues, it will reach over 100%.” This is purely speculation and total bullshit. It could fall to 90% in 2015 for all you know.

Also, I’m about to blow your mind, but some companies pay over 100% of their earnings in dividends and buyback! Crazy, I know!!!

Compare that percentage to EBITDA or even gross profits and you’ll see that net income is just one of many, many factors used in a balance sheet.  In fact, no serious investor will even compare the dividend payout ratio to net income because it makes no sense. You are cherry-picking data. Lastly, the reason the figure was 95% in 2014 was because of oil crashing and lower oil companies profits. You know, oil companies used to be massive dividend payers. With their profits lowered, many have cut their distributions significantly.

This is infuriating to read.

The bulk of these buybacks, which sped up following the low interest rate, easy money environment following the 2008 financial crisis, were done during market peaks

What are you talking about?

What world are you living in? The market has been going up since 2009 or so. There was no “market” peak during since 2008. None whatsoever. Look at the S&P 500 during that period!

Do you see a peak there? I sure don’t.

belying the notion that such purchases represent firms’ own belief in a rising share price. Many of them were done with borrowed funds (corporate margin debt is at record highs). The buybacks didn’t help make companies more competitive, but they did enrich executives, who took between 66% and 82% of their compensation in stock over the last seven years.

This is utterly meaningless.

What this means on a practical level is that the claim from corporate leaders about how tight credit conditions, a lack of consumer demand and an uncertain regulatory environment has kept them from investing their cash horde back into the real economy is not the case. William Lazonick, a University of Massachusetts professor who has done extensive research on the topic of buybacks, says that the move from a “retain and reinvest” corporate model to a “downsize and distribute” one is in large part responsible for a “national economy characterized by income inequity, employment instability, and diminished innovative capability.” I couldn’t agree more.

I tried to make sense out of that paragraph many more times that I like to admit, but couldn’t understand a thing. Maybe if I smoked whatever it is you smoked, I could discuss what this “professor” has done with his one paper that was published in an University journal (way to do “extensive research on the topic of buybacks”). I tried to read that study, but quickly grew bored with it. It doesn’t seem to go anywhere. Take this for example:

Missing from agency theory, as from neoclassical economic theory generally, is a theory of innovative enterprise. The “efficient” firm in neoclassical theory is one that optimizes subject to given technological and market constraints, whereas the innovative enterprise uses its strategic investments in productive resources to transform technologies and access markets.58 From the neoclassical perspective, the forces of market supply and demand determine the strategy and structure of business enterprises, whereas in the theory of innovative enterprise the strategies and structures of innovative enterprises that come to dominate their industries determine the ways in which markets for labor, finance, and products operate

Yeah, fuck that. Bloviating asshole.

You also know you have a problem when your tables are done in Excel.

So… What is there to say?

I’m ashamed that Rana’s article made it into the Times. It’s not even shoddy journalism, it’s not journalism at all. It’s a big, sick joke with no factual information. It’s a manipulative, completely false piece of writing that should be kept on the lowest confines of ZeroHedge.com – if that.

And what is our friend Rana Foroohar’s education? “She graduated from Barnard College, Columbia University in 1992 with a B. A. in English literature”

Stick to English Literature, Rana. I’m sure you are excellent at it.

I can’t believe The Time would seriously publish that.

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