When and How to Return Capital to Shareholders

This is a good article on what to do with a big cash hoard with Apple as the example par excellence. I am with Felix. I don’t like financial engineering. I have seen too many good companies hollowed out just to juice the stock (often with little effect) only to leave them with financial risk that comes back to bite a few years down the line (ala Private Equity). And I don’t like roll-ups. I have seen too many companies raid the cookie jar either to keep the growth for growth sake game going (at a much lower quality level), or for ego purposes or because they don’t know what else to do with the money (because they have no vision). The underlying thought or dislike is that we mouth epithets to shareholder value creation and returning capital to shareholders but the reality is that management controls the show. It is not too far from the truth that management does most things to benefit management. Being disciplined with cash is just as important for a company as it is for an individual. From an investor/shareholder perspective I am quite happy with a firm accumulating cash and maintaining a strong, clean balance sheet. If the cash stock is beyond what is reasonable (as is the case with Apple...ironically) then it can be returned in the form of a dividend (drip it out), rather than buybacks that sound good in theory but I never seem to see any real effect (other than juicing EPS for management stock options).

http://blogs.reuters.com/felix-salmon/2013/10/29/apple-should-be-like-bloomberg/

Playing With Fire

Central banks of the world really are playing with fire. Their margin for error is much reduced. Their capacity to expand their balance sheets is now more limited. All of which means their options are diminished.

What they really risk is the markets confidence in their ability to manage the process evaporating. If that were to happen, then all bets are off.

Japan looks to be the poster child for so much. First for the demographic shift the developing world will be experiencing over the next 20-40 years, but more presciently for how the market and economy respond to unlimited QE.

Short term, the effects of QE, whether in the US, Europe or Japan, have been impressive - at least from a market perspective. Each successive policy implementation followed by a surging market response only reinforces the belief that you "don't fight the Fed." And it doesn't hurt that there appears to be some causative correlation with economic improvement. In this environment it is easy to be lulled into a simplistic notion of cause & effect which misreads the visible immediate causes against the less visible long term effects. Beware. The longer term effects are still to be tallied.

Disconnect

We're seeing signs of a disconnect.

General economic trends are moving in the right direction, earnings are coming through better than expected.

And yet, the market is getting sold!

Welcome to a balance sheet recession.

We have hollowed out core economic institutions (bankrupt state governments, overleveraged consumer, increasing financial risk on the sovereign) which mean bombs can go off anytime (after all it is a confidence game) and there is less margin for error.

Greater market volatility likely to ensue.