Proposal: A U.S. "Dividend Holiday"

Tapping Corporate America's Cash Hoard to Reward Investors & Stimulate the Economy

Money is like manure; it's not worth a thing unless it's spread around.

--Thornton Wilder

Let's see if I've got this right . . .

The economy is decelerating now because the federal stimulus to date has run its course, and additional federal stimulus risks drowning the U.S. (further) in red ink and endangering its very creditworthiness.

Meanwhile, corporations sit on the mother lode of all cash hoards -- an estimated $2 trillion for just the S&P 500.

All this, as shareholders have just suffered the worst decade investors have experienced . . ever: nominally down 20% from where they were . . . in 2000.

And that's before accounting for the stock market's sickening volatility, or a decade's worth of inflation that masks even more erosion in investors' wealth (my label for the foregoing toxic brew: 'risk without return').

Three Birds With One Stone

So, to summarize:

The challenge now is to get money into the hands of deserving people -- who will actually put it to good use -- without making future generations pay for it.

Anyone else have a light bulb go off?

Here's mine:

Give corporations an incentive to disburse their cash hoard; then, give shareholders an incentive to spend it.

The simplest way to do that would be to declare a Dividend Holiday through the end of 2010 during which the federal government would waive taxes on all dividends.

Carrot won't work?

Then consider a stick: taxing corporations on excess undistributed cash.

Either way, such a bold step would have three benefits (and few costs):

One. It rewards long-suffering shareholders.

Why is that important?

Abuse shareholders long enough, and eventually they will "take their marbles and go home."

After the 1929 crash, an entire generation learned not to put their money in stocks.

That attitude threatens capital formation, future innovation, and arguably capitalism itself.

Deprive savers of a return on their investment, and they lose their wherewithal to finance their retirements.

Guess where they'll turn to for help.

Two. It takes the money away from overpaid CEO's.

Incredibly, the average S&P 500 CEO now makes almost $10 million annually, up 700% since 1980.

Meanwhile, workers' wages during that time have stagnated, and investors -- to belabor the point --are worse off than they were a decade ago.

As the saying goes, money -- like manure -- isn't worth anything until it's spread around.

Three. It relieves the pressure on the Federal Reserve to print more money, and the U.S. Treasury to borrow more.

According to that famous physics theorem, the First Law on Holes, "when you're in one . . . stop digging!!"

Having dropped interest rates to zero and kept them there, Ben Bernanke is now resorting to raw injections of liquidity (called "quantitative easing") to stimulate the economy.

Enough!

There's plenty of money in the economy already.

The challenge is to get it circulating, productively, again.

Today's Investing Strategies: Buy & Hold, FIFO & LIFO

Explanation for Jumpy Markets

Want a(nother) reason for heightened stock market volatility?

More investors are switching from buy-and-hold to "FIFO": first in, first out -- and ask questions later.

Such is the aftermath of a decade-plus of negative overall stock market returns. And that's before inflation.

As I've blogged before, welcome to "risk without return."

Risk Without Return

When stocks are trading on momentum and liquidity rather than fundamentals -- as now appears to be the case -- you never know when the "jig" is going to be up.

All you know is that the exits are narrow, and that the penalty for getting out late is horrific (ask tech stock investors from a decade ago).

So, every "dip" and reversal sends skittish investors looking for daylight.

When the scare passes, these same, jumpy traders have to buy back in again.

LIFO: FIFO for Experts

Of course, there's an even higher stakes trading strategy than FIFO for profiting from precarious markets -- albeit one best practiced only by experts: 'LIFO,' or last in, first out.

Also known as short selling, it consists of betting against bubbles just as they're about to deflate.

Whereas investors who "go long" make money when something goes up, short sellers profit when whatever they short goes down.

In fact, little-known hedge fund investor John Paulson (no relation to Henry) pocketed something like $20 billion the last three years betting that housing would collapse.

As Wall Street has just demonstrated (again), the best way to profitably short-sell a bubble is to know when it's about to pop, for real.*

And the best way to do that is to have helped inflate it.

*What do you call a short-seller who is right but early (like all the pro's who shorted overvalued tech stocks in '98 and '99)?

Wrong . . . and busted.

That's because if you short-sell something that keeps going up, you face wave after wave of margin calls requiring you to put up more money.

Bank of America: Slashed Dividends, Billions in Pay

Dear Bank of America:
Who Do You Think You %!#% Work For??

First, a personal disclosure: my wife and I own a couple hundred shares of Bank of America. We've owned them for more than a decade, and they are now worth less than what we paid.

Adjusted for inflation, we've actually lost more than one-third of our original investment.

Call that risk without return.

After reaching a high of almost $50 a share more than two years ago, the stock briefly crumbled to less than $4, and has now partially recovered to just under $17.

A year ago, the dividend was slashed 98%, where it remains today.

So, is Bank of America's leadership now embarrassed and humble? Maybe even a little contrite?

Fat chance:

At Bank of America, traders and bankers are wondering how much Brian T. Moynihan, the bank’s new chief, will be awarded for 2010. Bank of America, which is still absorbing Merrill Lynch, is expected to pay large bonuses, given the bank’s sizable trading profits. “We’re paying for results, and there were some areas of the company that had terrific results, and they will be compensated for that,” said a Bank of America spokesman.

--"For Top Bonuses on Wall Street, 7 Figures or 8?"; The New York Times (1/9/2010)

Is this Wall Street's new social contract with America's savers and investors?

FDR would be (and likely is) rolling over in his grave.

P.S.: to answer the question, "Who do you think you work for?" Clearly, themselves.