https://www.wsj.com/articles/the-markets-tough-love-delivers-1495403585
Foot Locker’s stock imploded on Friday—crashing down $12, or 17%. It happens all the time, one of the great features of the stock market. A week earlier, Snap, which went public two months ago, saw a chunk of value disappear. It dropped almost 25% overnight after the social-media firm revealed that sales were up only 5% and the number of users was a little light—oh, and that it had lost $2.2 billion. That’s billion with a “b.” Even if you take out one-time costs, the company lost $200 million on $150 million in sales. Impressive.
Did I mention CEO Evan Spiegel got a $750 million bonus for taking the company public? Investors who bought the stock didn’t want to ruin the party, figuring it was going turn into the next Facebook. Snap’s stock was selling at 44 times future sales, on the expectation that growth and profits were coming. Or not. After lousy earnings, investors basically shouted, “Enough!”
No one sits around and says, “we need to teach Snap a lesson.” Rather, it’s the collective selling that sends the message. That same day, CEO Travis Kalanick of Uber, another company with gargantuan losses and personnel issues, tweeted and then deleted, “Thank God we’re not public.” But Uber should be public. If only for the discipline of the public markets that its board of directors refused to impose.
Many people think the stock market is a cesspool of Wall Street greed. I look at it differently. To me, the stock market is the greatest enforcer ever invented. No person controls the market. Investors separately make decisions every day to buy and sell. But collectively they enforce discipline on corporations.
Buy and sell orders have more sway over CEOs than corporate boards, Congress or any White House.
United Airlines stock fell 6.3% before the market even opened after it “reaccommodated” a passenger, in the wording of its CEO. Twitter ’s stock is down almost 75% from its 2014 peak and has been in penalty box since early last year after revelations of lame user growth. Yelp was pummeled by a 28% drop a few weeks back and is now exploring markets beyond reviews. The stock market gets the job done.
Going public also provides CEOs the cheapest form of capital: You issue pieces of paper giving claim to a share of future profits. You can use that capital to do anything and don’t ever have to pay it back. But if you want more, you’d better get yourself on a path to growth and profits. It’s that simple.
But the Faustian bargain is that you live by the rules of the enforcer: Feed success, starve incompetence. That’s it. Markets provide cheap capital to those that can grow productively and profitably, and make funds expensive for the rest. This is how capital is allocated efficiently. The more human hands touch the process, the worse the outcome (see Chrysler, Solyndra).
No one likes layoffs. No one looks forward to closing divisions or firing CEOs. Instead, the stock market does the dirty work, mimicking Col. Jessup— Jack Nicholson’s character in “A Few Good Men”—who says, “You don’t want the truth because deep down in places you don’t talk about at parties, you want me on that wall. You need me on that wall.”
As Amazon stock hits all-time highs 20 years after its initial public offering, retailers are getting whacked. You’d think they’d have seen it coming, but the stock market sent the wake-up call. Sears peaked in 2007 and has since been starved of capital. Macy’s peaked in July of 2015. J.C. Penney halved in the past six months. Both Target and Dick’s Sporting Goods were down last week, and both are scrambling to upgrade stores and increase digital sales.
The enforcer shakes up politicians, too. On Sept. 29, 2008, the Dow Jones Industrial Average fell 777.68 points on news that Congress had rejected the bank-bailout bill. Message sent. The Troubled Asset Relief Program was signed into law Oct. 3. That’s action. The Brazil stock market dropped 10% last Thursday with troubles surrounding the country’s president. In the U.S. the Trump bump hasn’t let up, but investors got queasy on news of a special prosecutor.
We used to have the same enforcer in the debt market, the so-called bond vigilantes. When federal deficits got too large, the vigilantes would squawk, driving interest rates up and forcing some budget discipline on Washington. Those days are long gone, aren’t they? The Ben Bernanke-Janet Yellen regime at the Federal Reserve maintained interest rates at virtual zero. As Phil Gramm and Thomas Saving pointed out on these pages last week, the Fed bought over half of Obama -era Treasury debt. With no discipline, Congress spent like a Snapchatting teen with a stolen credit card. We need the enforcer back on that wall, giving Congress the Foot Locker treatment.
