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How Wall Street Distorts Corporate Thinking

Andrew Carnegie
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GM announced today it will increase dividends by $5 billion, and spend an additional $5 billion on buybacks of GM shares. This last move will have the illusory effect of increasing EPS for the remaining GM shares.

As of the end of 2014, GM had nearly 30 billion in cash or short term investments, and total company equity of some $36 billion.

Equity will fall by 10 billion, taking it down to $26 billion when all dividends and buybacks under today's announcement are completed.

Meanwhile, Silicon Valley firms as varied as Tesla Motors, Google and even Apple ( I think;might be mistaken there) are spending billions on R&D to bring to market cars that do not rely on the internal combustion engine -- something Detroit has done very well at bringing to market since the 1920s.

It's just one example of a huge corporation that once was associated with American supremacy in global Capitalism, showing the C-Suite executives of many large public corporations live in fear of 20-something Wall Street stock traders on floors around the world, in alliance with high frequency computer programs run by hedge funds and other newer Wall Street financial firms, lest GM actually invest some of that $30 billion in cash in R&D tech, hiring new employees, training existing employees to increase their skills and hence their productivity per hour worked, and investing in new GM factories.

I've seen how this is supposed to work right here on EOS. If a firm I run does not keep up with R&D, it doesn't matter how many units of some product I produce. Eventually, competitors will take over market share. In EOS , there is no "foreign" competition. In the real world, obviously, there is.

While few Americans even know who Janet Yellen is (she's Chair of the Federal Reserve), her insistence on keeping interest rates at near zero percent for over night rates takes away all incentive for corporate executives to invest in property and new employees in the U.S.

I'm sure tax policy does play a role in influencing corporate investment decisions, but the first thing they look at is how easy is it to tap capital markets to invest in continuing or expanded operations. And for the past 6 years, since the end of the Great Recession, there has been one of the weakest periods of corporate investment in their U.S. or even overseas operations.

Well, I'm sure GM shareholders will be happy -- in the short term. I'm not so sure how happy they'll be when GM inevitably runs into a brick wall due to a lack of spending today on product innovation and employee training.
Len Peat
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The Bun is called an Ithycorus.

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