Down with the Stock Market

I wrote this blog last week, before the Stock Market started its tumble. Am I a prophet? No, I’ve just had experience.

Today’s stock market is one giant Ponzi scheme. As the S&P Index jumps higher and higher in the bidding war between brokers, price has no relationship to value. Two weeks ago Netflex raised its monthly fees. The stock jumped from $100 a share to $300. To me it made no sense to pay $300 a share for a company which has never shown a profit.

Uncertainty over raising the debt ceiling caused the market to drop a little. Since all stocks are overpriced, the market may collapse as it did in 1929. That’s unlikely, due to the way the market operates these days. Little guys with 401K’s in mutual funds will be hurt, as they were when the housing bubble burst. But the rich guys will continue to get richer and richer.

In the 1970's, when I first bought stocks, a company whose price rose to more than ten times earnings would split the shares and all the stock holders would benefit. My son was in junior high when I gave him 25 shares of Mobile Oil under the Illinois Gift to Minors Act. With dividend reinvestment, ten years later, when his father refused to pay for his college tuition, David sold his 156 shares for enough to pay tuition for his junior year at the University of Illinois.

Once the initial offering is sold, a company receives no benefit from the rise in price for its stock. Today, instead of stock splits or increasing dividends as income goes up, boards of directors give big salaries, plus stock options and blocks of stock to themselves and senior management, who can sell them for enormous profit for themselves, but not for the company.

My late husband John worked for International Truck for 40 years. He believed in those big International trucks. To save for his retirement, he invested in company stock, paying as much as $40 a share. Then came the recession of the 1980's. International Truck almost went bankrupt and became Navistar, Inc. John was forced to take early retirement. He sold his shares for $4 each.

After we married, I urged John to buy 100 of those $4 shares “for sentimental reasons.” Soon after John died, the board of directors voted a “stock reduction” scheme to increase the value of the remaining shares. My 100 shares became 10. Later the company offered to buy them back for $32 a share. I’m keeping my 10 shares just so the company will send me annual reports.

Navistar continues to build trucks. In 2010 the C.E.O. received stock worth $646,567, plus options worth another $2,670,606. The C.E.O.’s total compensation for 2010 was $10,382,469. The company has not paid a dividend to stock holders since 1980.

I own other stocks which pay good dividends, based on the price I paid for them 20 years ago. Two years ago I sold my house. Since then I’ve had a chunk of money sitting in my checking account. I’ve searched for a place to invest my house money. If the stock market continues to crash, I will buy stocks. But I continue to have contempt for overpaid C.E.O.’s and their boards of directors.