Would Shareholders Give a Higher P/E to Keep Jobs in the USA ?

It used to be that if you owned shares of a public company, you actually felt like you owned shares of that company.  The concept of actual ownership by individuals is long gone.  Shareholders as owners are nothing but a concept , and echo from days gone by.

That shouldn’t be a surprise. It’s just as rare for individuals with less than 10 figures in their networth to even consider actually buying shares as a path to ownership.

But what if this were not the case any longer  ? For those of you that own shares of stocks in companies,either directly or indirectly, would you be willing to take a lower earnings per share, or on the flip side, hold your stock at a higher P/E Ratio if in exchange the company moved their manufacturing to the USA  ?

Would Apple shareholders be wiling to accept Apple moving jobs back and not sell when the announcement was made ? Name a company that you as a shareholder would be willing to hold, knowing that earnings would be lower, but jobs would come back to the USA ?

I don’t directly own shares of any companies that do manufacturing overseas (at least that i know of), so I haven’t had to consider this. I know in my own personal businesses I try not to squeeze every penny out. I just want to be profitable and earn a decent return, but I recognize that a good or decent return is not the maximum return.

I feel the same way about tax free accounts overseas. I don’t have any personal bank accounts in Switzerland. I own a house in the Cayman Islands, but I don’t have a bank account there and I wont put a bank account there. I’m pretty sure that one of the hedge funds I invested in has accounts there, but I’m not involved in its operations. So i don’t have a say.

What do you think ? Would you cut a public company slack if they brought back jobs to the USA ?

72 thoughts on “Would Shareholders Give a Higher P/E to Keep Jobs in the USA ?

  1. To answer your question, it’s a case by case situation.
    Some U.S. jobs have gone overseas for reasons such as irrational and ridiculous EPA regulations, which lead to enormous obstacles for keeping manufacturing in the U.S. Other times, employees have gone on strike, over and over, to extract massive profits away from the business—in the form of platinum plated health benefits that most white collar executives will never see, extremely high salaries given the skill set/education required for the job—-and fat pensions. Again, it’s case by case. Those “greedy Americans” some are writing about here—-aren’t always the ones on the management side of the equation. Greed is on both sides. I want to keep jobs here and grow them here—less regulation and cutting through the red tape would certainly be a good start.

    Comment by dcangelo -

  2. Another related question is for consumers – would you pay more for products you buy inexpensively today if the result were increased domestic manufacturing? We already pay more for organic foods, often twice as much.

    Here’s more on how it might happen and why we could all benefit…

    http://nextgencapitalist.com/2010/08/30/intro-to-pay-more/

    Thanks Mark!

    Comment by Chris Wilson -

  3. Community banks investing city and state pension funds LOCALLY would probably lower the margin between offshore and local production costs. The more money percolates locally, the more opportunities that get created.

    Comment by alexlogic -

  4. The financial well-being, the corporate social responsibility, and environmental sustainability are the three things that make up the triple bottom line. Corporations have an obligation, just as individuals, to better the welfare of society. Although the actions of off-shoring jobs may not show up in the financial figures immediately, we know that there are negative consequences to a company’s reputation and revenue in the long-run. You just have to weigh the costs and benefits of the decision.

    – Corporate Citizenship’s poll conducted by Cone Communications found that “84 percent of Americans say they would likely to switch brands to one associated with a good cause, if price and quality are similar.”

    – Hill & Knowlton/Harris’s Interactive poll reveals that “79 percent of Americans take corporate citizenship into account when deciding whether to buy a particular company’s product and 37 percent consider corporate citizenship an important factor when making purchasing decisions.”

    Two quotes out of my Strategic Management book. Alright, back to homework. Go Mavs!

    Comment by grantgates -

  5. The job of any company is to maximize return for its shareholders by providing the best value to their customers. When I started my company (sports equipment) I desperately wanted to manufacture our products in the United States. I even tried to make some major components here but eventually relented and moved everything overseas.

    I have observed that, on average, small/medium-size companies save about 30% if they manufacture overseas. Companies at scale( i.e Apple) probably save around 17-20% with partners like Foxconn. To maintain the same return, the base iphone would have to retail for around $800. Would Apple maintain it’s current volume at the higher price (would customers pay the extra $200 because it’s made in America)? Apple has determined not.

    I’m not saying this is right or wrong but these are the things a company considers when manufacturing because their purpose is to “maximize return for its shareholders by providing the best value to their customers”.

    If a company competes in a market that values domestically manufactured products they will do so. A great example is RED (Jim Jannard’s new company). They make professional video cameras that cost $50K+ and they do relatively low volume.

    So the answer to this blog post is NO. I imagine the majority of Mark’s companies are either entirely or majority owned – so he can make a personal choice to accept a lower return; I would too and probably will when I get to scale because I am the only shareholder.

    A complicated response to an extremely complicated issue:)

    Comment by grahammunro -

  6. Mark,

    It is not ordinary investors, or even wealthy ones like yourself that determine the PE of an individual stock. So all the responses here are sort of moot. You should have this discussion with Goldman Sachs and see if they agree. I would love to be a bug on the wall at that meeting!

    Comment by chengrob -

  7. Hey Monty, all the info from the Feb. 10th show, along with applicable links, can be found here. http://www.centernetworks.com/shark-tank-recap-february-10

    Comment by alexlogic -

  8. Hey Monty, you can probably find that person by googling their info, they probably have a website. I wish Mark would start a shark tank thread so those of us who watch the show can leave our comments there.

    Comment by alexlogic -

  9. The number of people per community that we can put to work are in the 3-to-4 and even 5 figures per community.

    Comment by obatalamikanker -

  10. to Mark Cuban,
    this is a bit off topic,but I will pass the
    info along. Last night (Feb 10) I watched with interest on
    the Sharktank show a presentation by a PA lady regarding her
    cakemix for dogs business.
    She got shot down by all of the sharks and you (Mark Cuban)
    were very congenial to her. Since I live in Pittsburgh (Mt Lebanon) I will pass along this info and if you are inclined and
    would like to help make something happen for her then that is great.
    As you know the dominant grocery store chain in the Pittsburgh
    Metro area is the Giant Eagle chain that is run by the Shapira
    family. In the past 5 years Giant Eagle (in trying to compete
    with Whole Foods) has put up some really huge stores in Pittsburgh that are called “Giant Eagle Market District” stores.
    These Market District stores have a large amount of shelf space that include all kinds of specialty food type items and
    organic food items .All of these market stores have a large
    Pet food section. Giant Eagle does stock products by small local companies in these Market District stores since I have
    seen a local dairy from Avella PA sell their Organic Milk products in these Giant Eagle Stores.
    Perhaps there is a way that the Pittsburgh Lady with the
    Cake Mix for Dogs business can have her product displayed (for a short “test marketing” time period in a few Giant Eagle Market District stores. Maybe it would help if her Cake Mix was “Organic”.
    Monty Kimball

    Comment by kimballhlk -

  11. Hey Mark, why don’t you start a Shark Tank thread?

    Comment by alexlogic -

  12. Assuming that government isn’t subsidizing and picking winners with tax dollars then there’s is no reason to hate on a company for sacrificing profits for American jobs. I mean, that could be good strategy and increase sales revenue. As a regular trader of the markets, I don’t really care if a company has jobs here or overseas.

    But if I were running a company and profits were faltering then I may think about moving workers back into the USA at the cost of profits…because “Buy American” is marketable.

    It’s not protectionist if the government isn’t involved. When the government starts enforcing steel tariffs to protect American jobs then we should all be worried as it drives domestic costs up, shows favoritism to one industry over another, and reduces the purchasing power parity between countries (makes our dollar worth EVEN LESS than it’s worth now).

    Comment by ugasandels -

  13. Mark,

    Short answer: no, people in general would not.

    I think a lot of this has to do with the way “investing” has changed over the years. In Seth Klarman’s book Margin of Safety he makes reference to “trading sardines”. He tells a story about a time when sardines were becoming scarce and people began trading them. The price for a can of sardines became wildly inflated. One day, a sardine trader wanted to treat himself, opened a can of sardines and had one. They tasted terrible. Someone then explained to him “those sardines aren’t meant for eating, they’re meant for trading”. That is how most people “invest” today. Something like a company back-shoring (meaning bringing jobs back to the US) and damaging the net margin by a few points would scare most people off because they don’t invest for the long-term. As you mentioned, the concept of “ownership” is gone; most people are just looking to scalp a quick buck.

    My point is: the person who would dump a stock because of a slight dip in earnings due to back-shoring are “sardine traders”. If a company such as Apple back-shored jobs, it shouldn’t change the fundamental business outlook or your investment thesis.

    Another fact to consider: I recently saw an article that claimed a psychological study estimates that the majority of Fortune 500 CEOs are likely sociopaths. Growing up I always thought that if I worked hard and I was smart that someday I would become an executive. I’ve learned the hard way most of the time (obviously not in your case) it takes a lot more than that. You have to cut some throats on the way up and do some things that you wouldn’t be proud of. Thus, when a sociopath is the CEO of a company and his/her compensation is determined by how much a stock price rises, he/she will squeeze every possible cent out of a company’s earnings. It is short-sighted and I believe will ultimately damage the economy (as if it hasn’t already). Sociopaths have one goal: to win. If that means slashing thousands of American jobs and off-shoring to factories that have the most inhumane working conditions on the planet, then that is what they’ll do.

    Case in point: John Corzine and the collapse of MF Global. I think at this point it is extraordinarily apparent that he (or others under his direction) placed outrageous bets on European debt with shareholder (and apparently customer) money. He was also clever enough to cover his tracks. His business plan was “take on unlimited risk to make money and get the biggest bonus possible”. It worked for him at Goldman, but not at MF Global. What happened when everything went wrong? He pointed the finger at back office professionals (accountants, controllers, treasurers, etc). The way Corzine saw it: 1) the bets would work and he’d be worth more than his already several billion dollar net worth, or 2) he’d point the finger at someone else and use his political clout to walk away without even getting a slap on the wrist. Do you think he’s losing sleep over the fact that thousands of people lost their jobs and customers are wondering what happened to the money in their accounts because of his actions? I doubt it.

    I see this attitude everywhere today in American business. Look at how much the wealthy and large corporations are demanding lower taxes. They claim taxes kill economic growth. To some extent they do, and I agree with that. However, there is a qualitative piece that is missing to that argument: there is value in paying taxes. Allow me to state my case:

    Would you pay more for a 10,000-square foot house on the water in Malibu, or a 600-sqft condo in a bad neighborhood in Detroit? Ok, well, the same goes for choosing a country in which to do business. American taxes really aren’t that high when compared to a lot of other countries. Businesses continue to incorporate in America because of the VALUE they get for their taxes. Incorporating in America means that if you are defrauded, there is someone there to make everything right. I can’t tell you the last time I ever feared America was at risk of invasion by a foreign military. We drive on paved roads, enjoy uninterrupted electricity access, and have an overall sense of well-being and security. If the “low taxes = high economic growth” argument held true, countries with low or no taxes should be booming with unprecedented prosperity. In reality, they’re not. Those countries don’t provide the services and security that America does.

    My overall point: yes, I would continue to hold stocks of companies that back-shore jobs. I’m also not a sardine trader. Back-shoring jobs wouldn’t change the fundamental outlook of an investment for me. If anything, I may be willing to pay a slight premium for companies that keep jobs here in America because it will mean longer-term prosperity for America, my life, and (not to sound like a greedy ass) my portfolio.

    Keep preaching Mark.

    -Alex

    Comment by therealtruthblog -

  14. Dear Mr. Cuban, I would bet my entire net worth that if you started a mutual fund that backed American companies producing goods made by Americans, for Americans, you could one day become a very wealthy man. Put that loud mouth of yours to work. America needs a big kick in the a**. Wake us up – we’ll know what to do.

    Comment by hellojustme -

  15. “I would rather make less money, but do it here on our soil than be the richest man on earth, but employ no Americans. I know some say get every nickel you can but money is not everything.

    I have 65 employees here on US soil and I would not have it any other way.”

    GOD BLESS YOU Mike

    Comment by auto112 -

  16. I think the first problem is likely that we all want public companies to have a social conscious, but they are not living, moral entities. These are a collection of resources utilized to provide maximum value to shareholders. Shareholders have diverse reasons for investing in a company based on any number of systems which may or may not have to do with what is good for society.

    The second problem is likely due to the fact that there are few majority shareholders anymore. Most are conglomerates or other investment groups or day traders.

    You can’t expect minority shareholders to care about the effects of how the work is done, because they only see money going in and “Betting” on money coming out.

    The groups certainly don’t care as long as the ROI is as expected.

    Perhaps there is the possibility to start a “Green” or “Humane” investment group which only invest according to a socially acceptable set of criteria. Or perhaps there is one already?

    Comment by teskidmore -

  17. I have worked for giant corporations that panicked at the dropping of their beloved share prices. Regardless that we were very profitable, they catered to Wall St.

    I’m all in favor of any business willing to invest in the people of the United States. Companies willing to find areas that need the help of opportunities. Your profits will come, oh yes, your profits will come.

    Comment by Mark Ploch -

  18. I would rather make less money, but do it here on our soil than be the richest man on earth, but employ no Americans. I know some say get every nickel you can but money is not everything.

    I have 65 employees here on US soil and I would not have it any other way.

    Comment by mike1675 -

  19. Protectionism of who, what and where? I would suggest that if all the money that local businesses all over the country have paid in excessive permit fees, revenue taxes, and other local and state fees and taxes that ended up in pension funds that were then invested offshore, we would need a word that is opposite of protectionism for small local businesses in the U.S. since money came back in the form of exports that can now be made cheaper than in the U.S.

    Comment by alexlogic -

  20. The concept has my approval, and I believe would have the support of plenty of others as well. The problem that I see, for many companies, is that it could sink them altogether. Prices on the products and services would in many cases I can think of would not just have to go up a bit, they would go WAY up. As an example, in the case of the Xbox 360, I remember reading the price would have to be around a grand if MS had it made in the States. How could such products compete against others that still outsource? Investors may be willing to be charitable; competitors, not so much. They may make take such an opportunity to try to drive home the advantage (ad blitz, deep sales, and such) and drive such companies completely out of business.

    One key to making it work may be in redoubling efforts to sway customers to buy American, but I think that is an impossible task on the whole. May have more success with products marketed towards the higher income brackets, though. I can’t see or expect those who are struggling to make that sort of decision on their purchases. For many of them, cheapest wins every time, even if they would rather buy American. Another issue for companies that market products would be the distributors. Wal-Mart, for example, is notorious on this, basically forcing suppliers to outsource to meet their demanded price points. Perhaps a new sales company, whether brick and mortar or (probably more viable) online, devoted to selling the goods and services of the companies who volunteer to go along with this strategy. Once again, may have more luck with higher-end, luxury items. Though I could also see office supplies and furniture meeting with some success as well; heard plenty of griping about the quality of the outsourced stuff and businesses that aren’t struggling may be willing to spend more in this regard.

    I hope I’m wrong on these potential issues though, as I really would love to see this work. Just an average person here musing on the idea. It is frustrating when I brainstorm on ways to bring jobs back and rebuild the base of the economy, since there just don’t seem to be many workable answers. It seems to be basically economic osmosis in play right now, and osmosis won’t stop until equilibrium is reached or the membrane is sealed off. The first is undesirable (though the increased standard of living in the developing nations we outsource to would create increased demand for some stuff still based here, not nearly enough to offset the damage IMO) and the second impossible. I also hope you do find the next “big thing” as I can see that you would keep the involved jobs here. :-)

    Comment by bucfanpaka -

  21. I recommend reading some of Don Boudreaux’s posts about protectionism at his blog, Cafe Hayek. Here’s a starter:

    http://cafehayek.com/2012/02/a-question-for-protectionists.html

    I personally would default to the answer you gave on the Freakonomics blog about subsidizing sports parades — “Everyone should make their own decision.”

    Comment by Seth -

  22. Pingback: Would Shareholders Give a Higher P/E to Keep Jobs in the USA? | The King is Born

  23. Mark, I’m not sure if this has been said before, but I think you are neglecting the fact that a decision to keep jobs in the USA will impact more than earnings per share. Companies are valued by discounting projected future cash flows, which will absolutely be less by definition. Therefore, I don’t think anyone would argue that the intrinsic value of the company will decrease. Assuming that the value of the company will decrease, you are essentially asking shareholders to pay more for something that is worth substantially less. The change for shareholders to eat is not in P/E, because you would expect BOTH P AND E to decrease by comparable percentages. The shareholders will eat the price change that HAS to happen because the company is worth less. It is not an earnings yield question it is a price question. I’m not sure why investors would lie to themselves and believe that a company worth $95/share should be trading at $100/share.

    Comment by matrob4321 -

  24. Mr. Cuban:

    I’m an investor in the stock market – although, I don’t think that’s the proper term for what I do. Although I put my money to work in the market, I do not hold on to companies for more than a few months. In fact, I don’t really care what a company does when I buy their stock. Let me explain.

    I buy stock patterns, not companies. If a stock appears to be setting up on my charts for a profitable trade, I execute the trade. And when the stock appears to be topping out, I start looking for a short position. So, I’m actually more of a trader than an investor.

    As far as your PE question goes, and as an accountant by training, I realize how easy it is for a company’s fundamental measurements to be manipulated. I couldn’t care less whether a company has a PE of 8 or 80. Why would I care what a company’s expenses or net income is in any given earnings season, when those numbers are easily masked by accounting tricks – and also when the numbers are at least 3 months old when made public?

    You’ve raised a question that is moot to me, since I’m not the type of investor that searches for a “good” PE ratio, or looks for any type of approval from professional analysts who use things such as PE ratios. What I do search for when looking for a stock to temporarily own is a good pattern set-up, i.e. are the “big guys” buying this stock yet (hedge funds, pension funds, big banks, etc). The big guys who have their massive servers hooked up directly to the stock exchanges are able to manipulate the markets day in and day out which is what makes it unattractive for investors to hold long term because of wild market swings, i.e. Program Trading.

    So, the real reason savvy investors don’t hold on to their stock positions for a long time has nothing to do with a company’s prices or earnings; it has to do with the big guys I mentioned above buying and selling very large positions, taking advantage of the small retail investor and all of their 401k money that stays stagnant in long term positions like a sitting duck. The investors who haven’t taken it upon themselves to learn how to trade the right way are the ones who take massive hits in their 401k’s, or the ones who earn almost nothing on their money because they stay in cash. The days of wealth building due to compounding dividends in a relatively stable market over decades is long gone. Passively managed funds have mostly been flat or negative over the past 11 years.

    In my view, jobs have nothing to do with stock prices. Manufacturers have taken advantage of cheap labor overseas which has almost destroyed our manufacturing job market. If you were to somehow bring back jobs here, sure, a company’s expenses would increase and theoretically make it less attractive for investors to hold. But the real issue isn’t stock price, its stock volatility.

    Comment by gene2800 -

  25. tkelly1478, I disagree with your assertion that free markets are necessary 100% of the time, I guess you are a libertarian and Ayn Rand fan, big time. The problem is american businesses generally adhere to safety rules, employment age rules, pollution rules and mandatory hours per day for each worker that I believe are acknowledged as being more restrictive than in Asia.

    And why are you in Mark’s grill anyways, he didn’t fund the guy. Hopefully the made in america promoter gets his price per unit “close enough” to overseas competition to justify producing his product, which is the point of this article as well.

    And I think the gentleman had a legitimate point about his product being knocked off if he went overseas to have it made.

    Comment by alexlogic -

  26. I favor the free market. A company can do what it wants as long as it accepts the rewards and consequences of its choices.

    (Did you pass out Valium at the door before the OKC game? I’ve heard more noise in a library.)

    Comment by StNik -

  27. Hi Mark-first post,

    There seems to be the appearance of a growing percentage of individuals who would be open to this very thing. I certainly would. We haven’t just experienced a high unemployment percentage as we have in the past as a nation. We have experienced this unemployment rate on an individual level. Most of us know someone or several someone’s who are affected by unemployment. I would not only cut a company some slack for providing a lower return to employ American workers, I would pay more for their products.

    Sam Walton received the Medal of Freedom Award from President Bush a few weeks before he passed away. Regardless of your feelings for Wal-Mart as a company, the amount of Americans employed was tremendous. And Sam ran a campaign if you’ll remember: Made in America. The impact of this campaign on the NATION of the United States was staggering. Unfortunately, in the years following his death, Wal-Mart applied a tremendous amount of pressure upon its suppliers to provide lower pricing for their customers. The result was crippling to the manufacturing industry in the US.

    In their defense, I don’t think anyone could have seen it coming…they were just looking for a lower cost. And I don’t believe most people understand the impact that that decision had in retrospect. A company as large and impactful as Wal-Mart could literally make more progress on unemployment than the Federal Government and do it light years faster by simply reinstituting “Made In America”.

    I’m willing to pay more for a product if I know for a fact it was made here and provided someone a job in the process. The question, Mark, is would you and everyone else?

    Comment by razorback1218 -

  28. As a 31 year old member of the military that has spent a few years in combat, I take pride in responding to this question.
    Although Mark’s opinion that “shareholders as owners are nothing but a concept,” I would strongly oppose his opinion. For example, the 12 companies I own stock in, I take very seriously. I listen to the quarterly meetings over the internet, I always review the 10Q, and I watch the income, balance sheets, and cash flow statements like a hawk. Essentially, I’m always re-evaluating the intrinsic value of my ownership. As a person who pays close attention to the financials and leadership decisions of the businesses I own, I must admit I’d have a very hard time receiving a reduced earnings call based on a conscience decision to make less money and help the US economy.
    Now, before everyone think I’m a communist, I’ll provide my counter point. With all things, a leader/decision maker must have balance. In the blog, Mark mentions apple, so I’ll use them as an example. Right now, Apple’s EPS is 35 dollars a share. If someone proposed that moving manufacturing back to the US would decrease the EPS by 3%, I’d feel somewhat OK with the decision – especially if the leadership was candid about the reason for the decision. For me, the intent of the decision is the most important aspect to consider. If the intent is to help create jobs in the company and the community, then it’s a great decision. But if the decision results in a 10% decrease in EPS, then I’d argue the deal is unfavorable to the shareholders. In fact, this decision (especially with an emerging technology business) could have a devastating impact on the company’s ability to produce that next new product and continue to employ the current members of the team.
    All in all, this is a very interesting question. At the end of the day, the decision must be based on balance, logic, and intent. I want to help the American economy as much as the next guy, but I don’t want to be irrational when considering all the variables (and there’s a lot of them).

    Comment by prestonpysh -

  29. İstanbul’da lüks araç kiralama hizmeti veren firmamız bünyesinde 450 adet araç bulundurmaktadır.

    Comment by luksarackiralamaistanbul -

  30. As a day trader AND a manufacturer AND a father of a soon to graduate college student. Here is what I do – First rule – I NEVER leave money in the market overnight (WAY to much misinformation). Second rule NEVER manufacture goods where they don’t respect intellectual property rights. Advice to child – start seriously thinking about moving to another country – The Liberals have destroyed this one irrecoverably. History is once again repeating itself. Where to go – Consider Canada – It’s getting warmer and the economy is stable and strong.

    Comment by stumplifter -

  31. shannonclark, the micro businesses and local businesses you appear to be referring to have definitely sprung up all over the U.S.

    On top of that, people are learning how to create micro wealth themselves. If a consumer buys a product made in China for 25 dollars that allows them to cut bigger pieces of wood into small enough tinder to burn in a fireplace, and that person is able to save a couple of hundred dollars off of their winter heating bill, the line blurs as to whether all overseas products doom the U.S. economy.

    I really think local businesses are hurting most from needy cities that need an expanding tax base to take care of bloated pension fund obligations.

    Plus, pension funds that are not investing locally but rather on wall street and overseas has really not been discussed very much. There is a TON of MONEY sitting in city pension funds all over this country that could stimulate local businesses if that money were invested locally.

    A sister question to Mark’s question could be, would ALL of the city pension funds in the U.S. be willing to reinvest their funds locally rather than overseas. If the answer were yes, cities might actually be able to drop their tax rates in exchange for the local pension fund investment “churn” created when pension fund money is invested and respent locally.

    North Dakota apparently has had the best economic environment in the country and it’s not just based on having their own oil, it’s actually based on having their own STATE BANK. So all tax based revenue percolates into the state bank and then apparently gets re-invested locally.

    http://www.yesmagazine.org/new-economy/the-north-dakota-miracle-not-all-about-oil

    As Local cities fall deeper and deeper in debt, they rely MORE and MORE on tax revenue from businesses able to generate the most sales and profits, which tend to be businesses that important product from overseas. And in a sadder twist of fate, american made products that might only be 10-15% more in cost are squeezed out by small businesses just trying to survive overtaxation by cities trying to save their over bloated pension obligations.

    Comment by alexlogic -

  32. Does nobody else see the arbitrage opportunity this would create for investors?

    The short-winded explanation would go something like this:

    Assume U and F are US and foreign based companies respectively, identical in every way except for P/E:

    U:
    Price = $12/share
    Earnings = $2/share

    F:
    Price = $10/share
    Earnings = $2/share

    Due to the otherwise identical nature of the investments, one could short U and use the proceeds to buy shares in F. Through this process the price of U would decrease and F would increase until no arbitrage opportunity existed which would result in no net change in P/E.

    In other words, the money you would use to bid up the stock price would go straight into the pockets of another investor.

    Comment by sledge2k -

  33. The P/E issue is not a real issue to me since that’s largely a backwards looking and contrived number. I think that people who work at publicly traded companies should get profit shares. The profit shares should be only for those in the US. Public companies that have factories outside of the US need to police those more carefully to properly protect their workers. Those who run publicly traded companies are overpaid and those who do the work are underpaid. The pay scales needs to be controlled by a well defined and fair law to avoid the kind of piracy we’ve seen. Stock options also need to be policed by well defined and fair laws. Publicly traded companies are not being policed by the SEC the way they should be. There are far too many problems with how Wall-street works to enumerate them all here.

    Comment by thisusernameismine -

  34. P/E is one factor on the shareholder side, but what about the competition factor. Would a company be competitive with others if it’s products were persistently priced 10%-20% higher than the competition. Maybe Apple could do this because it has a highly differentiated product, but it seems if a company such as HP did it it would be doomed to fail.

    Comment by rayisonit -

  35. Mark,

    There are a number of companies (more than you might think) that already do manufacture in the US. The issue that high tech firms face is that the entire supply chain isn’t available here in the US anymore – with most of the key electronics suppliers only being available overseas these days (for things like Flash Memory, most screens and countless other key components).

    It is also the case that many of the companies building manufacturing plants here in the US aren’t “US” companies (see Toyota, Honda and many other “foreign” car companies who often make most of the cars they sell in the US here in the US)

    I think it would also depend on the market the company was in and whether they were able to leverage local, US based manufacturing for a competitive advantage (including perhaps a pricing and margin advantage). If they can use local manufacturing, rapid turnarounds for new products and high quality (assuming they can achieve that here in the US – no longer always a given) they could be able to command premium pricing – which might also mean premium profits even with the added expenses of making things here in the US.

    For some examples of this (on a small scale) look at companies such as American Apparel as well as some smaller scale firms like Portland’s http://www.grovemade.com/ (just one example that I remember immediately – I haven’t actually bought anything from them myself so can’t speak about their business personally). There is an increasing number of such small scale made here in the US firms – often focused on relatively premium goods (where pricing isn’t the only or even the main factor in demand for their goods). I think done well these are really interesting businesses.

    Comment by shannonclark -

  36. Pragmatic ideas and a well thought out post. Please endorse politicians publicly Mark, so we know your wise words are being heard by people who can influence policy.

    I loved your thought on how you don’t try to squeeze every penny. I for one would subscribe to long term investment on firms like that over firms that extract extra cents and dollars on the back of getting rid of good American jobs.

    Comment by shyamuw -

  37. The repeated cry that some people make to “buy american” so we can “keep jobs in this country” represents a failure of the system to teach basic economics concepts such as comparative advantage. More people prosper when goods are made the most efficiently. It does nothing positive for the economy to bring Apple’s jobs back to the US if its not the most efficient option. The middle class in this country isn’t dying because low-quality manufacturing jobs aren’t here. Apple can be criticized for a lot of stuff, but I don’t think this is something to criticize them over.

    Comment by stacyshelves -

  38. I would absolutely pay more for a stock if a major company took a stand and moved their manufacturing back here. Too many companies give lip service to corporate social responsibility while engaging in economically damaging practices.

    It’s definitely been a big trend over the last couple of decades for American companies to believe that they should outsource everything they can. But the effects of moving the majority of our manufacturing overseas have been rising unemployment, stagnant wage growth and increasing economic polarization. All of those things have been good for the owners of companies but not for American workers, and overall not for American society.

    Look at Germany. They have been so successful in recent years because their society has kept more of their manufacturing jobs, and they have policies that encourage companies to keep people employed.

    Henry Ford paid his employees higher than average wages because he knew it would be good for business. If employees made enough money to buy his cars, he would have more sales, and more profits.

    I subscribe to the Warren Buffet school of investing, and I think of myself as an owner of any company whose stock I hold. I care about making money, but I also care about the sustainability of any business I own a piece of. As a shareholder with a conscience, if one of the companies I own stock in let shareholders vote whether to make less profit but do more good for society, I’d vote for it.

    Comment by jamesgerber -

  39. It’s not up to the manufacturers/business owners. It’s up to the Consumers. When consumers demand products be made in america by voting with their wallets then the companies will find ways to meet the demand and as you pointed out Mark, most shareholders will have no choice or say in it.

    Much like organic produce. If you would have asked the question 5 years ago, would you grow organic produce because you think it’s the healthier thing to do, most would have said no. now with consumer demand ramping up for natural & organic produce, growers are finding ways to meet demand.

    So my answer is the Shareholder has no say and would probably say no, But it’a all up to the consumer!

    Comment by eastsidescott -

  40. Great topic. I am getting tired of executives that say that it isn’t possible to manufacture in the US while at the same time enjoying the standard of living that we have here.

    http://www.newaustralianews.com

    Comment by newaustralianews -

  41. Did you post this right before tip of the Mavs game?

    Not only should shareholders not give a higher P/E to keep jobs in America (if that’s the only reason), but it would arguably be un-American to do so.

    Apple’s an interesting example. How much wealth (in the US), jobs (in the US) and companies (in the US) did Apple create by outsourcing jobs? Don’t answer.

    There are 22 Americans with jobs in Plano, TX, because I hired two Romanians to write code in 2009. I could’ve hired .5 of an American instead of two Romanians, but I would’ve only created .5 of an American job.

    Free markets are only manipulated by pacifist shareholders or consumer activism in the short-term. Want to create more jobs in America? Build companies for the global economy.

    Comment by mosimmons -

  42. According to a recent article in the New York Times, in 2011 Steve Jobs told President Obama–in a face-to-face meeting–that the 20,000 jobs that Apple has outsourced to Asian computer suppliers are not going to come back to the U.S. Although Apple originally built computers here as recently as the early as 2000’s, they were forced to outsource jobs to Asian suppliers, because in part because that’s what all of their competitors had done.

    Now, the major component suppliers to the computer industry are located in Asia. It would be cost prohibitive to start making computers here again. Thinking that these manufacturing technology jobs are coming back to the U.S. is believing in an airplane that is never going to land.

    http://wp.me/pQr4T-vc

    Comment by pepper268 -

  43. Loved you on Shark Tank when you invested in Mr. Draw a Cat. Hated that you seemed to have sympathy for Mr. Must Make in America.

    Economically speaking, we don’t live in America. We live on Earth!

    It is better for everybody everywhere in the medium and long terms if jobs go to the Earthlings that are best situated to do them.

    I am both amazed and astounded that a billionaire like yourself can get to such an exalted business position without understanding the fundamental and indisputable economic fact that free trade benefits everybody, every where, all the time, in the medium and long runs. If you don’t believe it consult the excellent economics faculty at George Mason University or the blog, Cafe Hayek.

    Comment by tkelly1478 -

  44. Speaking of Checks and Balances, part of this mess may have been caused by the HUGE nationwide city pension funds that chose to go for the biggest return and went to wall street, who in turn went offshore to create those bigger returns.

    So the cruel irony is local businesses have to now compete against the taxes they have paid in the past to the very cities that now want to raise taxes even more to help fund their pension deficits.

    Comment by alexlogic -

  45. koalacapital, What you just described is a system of checks and balances.

    However, as time goes on, there are less checks (backed by actual cash) being written by americans as our trade imbalance increases.

    Comment by alexlogic -

  46. Parties’ interests are mis-aligned. “Rational” Investors / fund managers want return maximization (=profit maximization = lowest costs). “Rational” managements’ want profit maximization (= lowest costs or tax breaks that = lowest costs). Employees want income maximization (jobs onshore). Governments was maximum employment (jobs onshore). Therefore need a central policy mechanism to intervene, rather than investors’ boybott of stocks of labor outsourcing companies which, while admirable, is unlikely to be done voluntarily by investors at large.

    Comment by koalacapital -

  47. I was told once that Canada only allows a certain percentage of imported products into their stores, the rest MUST be Made in Canada. This could explain the even trade balance with the U.S.

    Comment by alexlogic -

  48. To your question – will I be willing to cut a company that makes the effort to manufacture in the US some slack – the answer is yes. Will I look for the government to intervene – the answer is no. I am willing to invest in a company for lower returns if it retains manufacturing in the US, because it benefits me longer-term to have that knowhow here. As this one argues effectively (http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/). Disagree with some of the folks comments that an individual making such a choice is engaging in protectionism. I am expressing my freedom of choice – if I want to pay more for something that is my own business.

    Comment by shivajisainik -

  49. I saw the shark tank episode as well. That made in america segment was a powerful moment in television. The “guppy” was only asking for 50,000 and the simple answer would have been to ask the workers to take less up front and get the business going for the long run.

    I do think the guppy should have presented a lean and mean budget that came within 10-12% of the price of overseas as a failsafe option.

    The irony to Mark’s question here is that so many stocks offer NO DIVIDENDS, so the stock buyer is really just gambling that they can hold onto to the stock and then eventually sell it higher than what they paid for it, whereas a dividend can make the stock more of a true investment over the long haul even if the price doesn’t go up or down very much.

    Best moment of last night’s Shark Tank episode belonged to Mark when he came out of nowhere to make an offer to a guppy with a sinking product, and the guppy didn’t grab the lifeline and “close the deal”. I suggest entering that segment for emmy consideration, it was that good.

    As for taking “less”, I think americans are willing to pay up to 10% more for a product made in america, perhaps 12-15% more for a product completely made in america, but not necessarily on a big purchase like a car, in that case maybe 5% more.

    Comment by alexlogic -

  50. America must have a competitive edge somewhere for it to be fiscally advantageous to move manufacturing jobs back home. Labor wages are out of the question to lower due to public pressure, but our corporate tax rate being the highest in the world is a variable that can and ought to be changed. In other words, know who you’re voting for because it matters.

    Comment by lallig -

  51. Mark,

    Judge Posner answered this quite simply:

    “The managers of have a fiduciary duty to maximize profits for shareholders.”

    Period.

    Comment by jmallard1 -

  52. Mark, you identify the problem and the solution with precision. The problem is simply this: A company makes greater profits manufacturing products overseas and then importing them back to the USA market to sell to consumers. US foreign trade deficit has today grown to a record $1.3-trillion (US Census Dept numbers as of September 1, 2011), and oil imports account to only a small portion of that number. China exports more than $1-trillion a year to US markets while China imports only $30-billion. Canada imports as much US products as China, but exports about the same to the US as it imports. What will bring the equation into balance? The same thing that will rescue the downsliding US economy. Rekindling the US manufacturing base. What motivates business? Money,Profits, Growth. The US can place restrictions on imports, place taxes and tariffs on those Apple products manufactured by the half-million Apple employees in China, and sold by the 40-thousand Apple employees in the USA. Or… The USA can motivate business giving them greater profit incentives and greater benefits for growth by locating their manufacturing base in the USA. I say that the US should place zero taxes on products made in the USA, and should give business owners a 25-percent rebate in salaries for new jobs created in the USA for the first five years. US government should remove the obsticales that block businessmen from getting manufacturing open in the USA too. We have been trying to open a firearms manufacturing plant and headquarters in Colorado Springs, and meet nothing but obsticals for the past three years. Politicians who say they want to create jobs do not have the first clue, and when we approach them it is like talking to idiots. What do you do? We will employ 1500 Americans, mostly US military veterans within our first five years, once we have the factory open. Yet we are hamstrung by dead wood in our way. If you have lots of cash, that moves the wood, but we are just regular businessmen making an outstanding product with a good plan, and working from our bootstraps. If we want to get manufacturing back in America, we first need some people in leadership who understand economics, business, and leadership. Lawyers do not cut it.

    Comment by Charles Henderson -

  53. I wouldn’t buy a company for a more expensive PE. I would buy on the other hand if there was no net effect on PE or margins because consumers were willing to pony up more for the product. NYT article said American iPhone would cost $65 more and I’ve heard lots of folks say they would pay $65 more for an iPhone. Also I think this stat is ceteris paribus…we currently give taxes advantages to outsources and none to “insourcers”, If the tax situation was flipped and we ended up paying $25-$45 more for an iPhone I’d venture to say there would be a great number of Americans willing to “buy American”

    Comment by lobbyistdantelynch -

  54. With all the under-employed MBA’s out there, can one of them put down their xbox and come up with charts/figures showing what the ramifications would be if we became more protectionist? ie: What would the retail price of an iphone be if it were made in the US, and how would those costs be offset by additonal US jobs/wages to be spent?

    Comment by Bad Bad Leroy Brown -

  55. Was this sparked by the last episode of Shark Tank?

    Comment by mjdarr -

  56. The question the Shark Tank “investors” should be asked is how much their suits and personal items cost? Do they buy off the rack from JC Penny, or are they tailor made for them? They want quality as much as Joe 6-pack wants quality… in life and in business, you get what you pay for. More expensive workers, in general, equals better quality and more profit.
    Germany is one of the few countries that isn’t hurting… ask yourself why. Is it because they pay their workers low wages to produce low quality goods, that sell in Wal-Mart?
    9 out of 10 times, you get what you pay for.

    Comment by davidyaronnik -

  57. There is a cyclical nature to all this. Think about it, manufacturing leadership has moved US, Germany, Japan… Now it’s China but the Chinese will eventually rise up and demand better wages, housing and individual rights, it’s a basic human truth. We all want more for ourselves and our families.
    See this as well: http://blog.euromonitor.com/2012/01/china-leads-global-manufacturing-output-.html
    “However, China is losing its advantage as a low cost environment for labour. The country’s one-child policy is resulting in shortages of labour, permitting workers the leverage to demand better wages. Rapid population ageing is narrowing the labour pool, while high inflation is increasing export and transportation costs. Wages per hour in manufacturing increased by 63.1% in real terms over 2005-2010″
    So maybe the question is, which American manufacturer will be first to move manufacturing back to the US because they need to? It’ll probably be some time but the one that does it first may gain competitive advantage and much good will from the American consumer.

    Comment by PhilCalz -

  58. The idea of voting for a more inefficient use of capital with our personal investment dollars goes against american capitalist ideals and tried and true methods of market forces. It would be anathema to buy stock from companies that employ more expensive workers when the global marketplace for less expensive workers is so wide open and easily accessible now. Better to put restrictions on products made in factories that do not maintain the same labor, safety, and environmental practices we do, and only allow products into our country where we can verify the conditions under which the products were made.

    Comment by metrosetter -

  59. Forget the naysayers. They’re not thinking clearly. Your proposal is terrific. It is not protectionism as one suggested. It is a strategy for survival. If all of our manufacturing jobs and IT jobs and other employment is overseas, there will be no one here to purchase goods sold and soon all of the companies will be overseas and we’ll be a 3rd world country, drowning in poverty.

    As the 3rd world merges with the 2nd and 1st world countries, the cost of manufacturing in those countries will catch up with the cost of manufacturing in the US. This has already happened in a number of countries. But the problem is that if we wait for the economics to reach an equlibrium, the damage will already be done.

    Comment by aspfl -

  60. This is the kind of concentrated logistical infrastructure they have in China, manned with scores of engineers that do jobs that most engineers or engineering students in the US aspire to be heavily overqualified for.

    It’s about a lot more than the cost of labor for Apple.

    http://en.m.wikipedia.org/wiki/Foxconn

    We have A LOT to do to build an overall and comprehensive new manufacturing infrastructure in the US: But we can do it and I know how.

    I do believe Apple and many other companies will be glad to move operations to the US: But it MUST be made logistically possible for them: It currently is not, and no amount of profit they’d be willing to sacrifice will change the logistical issues.

    We need to conduct a massive-scale change in this country in regards to manufacturing. The good news is: It is very possible, will be extremely exciting and:

    With the right strategy will be simpler than it may sound on the surface. ;-)

    Mr. Cuban, please call? (sent email to your office email separately)

    Sincerely,

    Isaac

    Comment by isaacbarham -

  61. Great topic. I am getting tired of executives that say that it isn’t possible to manufacture in the US while at the same time enjoying the standard of living that we have here. I wish if they feel so strongly about sending our money abroad that they would move to these countries that they are sending our wealth to. I would cut companies slack so that we build a sustainable future here in the US. At the same time we need to remake our educational system so that not everyone has to go to college to have a decent paying job. We are losing (maybe lost already) the technical/engineering skills that helped us get where we are today.

    Comment by Mike Martel -

  62. There is nothing wrong with greed/making more money, but to cut your nose off to spite your face, never works out in the long run.

    Comment by davidyaronnik -

  63. Yes, Shawngualt.. my thought was last weeks Shark Tank, too. Didn’t I see 5 sharks take a pass on what all considered a good product with great potential because the entrepreneur wanted to keep manufacturing in the US? All the sharks said “no” and a few actually tried to talk him into taking the manufacturing overseas, but he declined. In fact, Apple was used as an example by one of the Sharks .. saying they “know” they need to manufacture overseas, and this new businessman should take that advice to heart. So if sharks (high income investors) take a pass, the question is now should the little guy (individual investor with lower relative impact) go for it?

    Comment by SMARTePLANS -

  64. Great topic spin off from the last episode of Shark Tank. I think that this is a subject that really interests a lot of people and they want to learn more about the economics of manufacturing domestically but don’t really know where the resources are to learn.

    It would be great to see some type of rating index from both a consumer perspective and an investor perspective that rates companies and products on their impact to the US economy and the impact to foreign economies. Something that simply conveys to the average person how dedicated a product or company is in the US.

    Comment by shawngault -

  65. Apple claims that the workers they need to manufacture iPhones(lower to mid-level engineers) don’t even exist in the US in adequate numbers. They need engineers with equivalent of 2-years community college approx: And A LOT of them. Also, the other parts of their supply chain are concentrated in China. Apple could build iPhones in the US for only $65 more per unit: IF the logistical requirements were in place.

    Comment by isaacbarham -

  66. Ps. I meant hundreds+ communities to work, not hundreds+ people. The number of people per community that we can put to work are in the 3-to-4 and even 5 figures per community. Not kidding.

    Comment by isaacbarham -

  67. My question is: Are we going to sell our souls to make a big profit? We often complain about labor laws and working condition in China, yet we ship our manufacturing jobs over there.

    Comment by Noel Williams -

  68. MC,

    This past weekend’s Shark Tank had that issue, did it not? From what I remember, you were of the opinion that the entrepreneur needed to sacrifice US jobs in the short term by manufacturing overseas and then being able to hire employees (in sales, etc) in the US. And you brought up Apple as an example, as to how they manufacture overseas but employ 10,000 people here in the States. It seems that the message you made on Shark Tank vs the message you are making here are in conflict. If you can reconcile the two I would appreciate it. ]

    From MC> Go back and watch it again. I said i dont agree with the others who wanted to move things overseas. I turned it down because it would take a ton of cash and time to get him to a point where the business would be successful

    To answer your question: I don’t think “main street” investors such as myself control the way the markets fluctuate. The professional investors that trade on movement do. Those myopic investors ruin long-term thought/investing for the rest of us and America as a whole.

    Go Bulls.

    Comment by Bad Bad Leroy Brown -

  69. The issue with today’s business mind set is, instant gratification and the bottom line. It is a culture that has been accepted in our society for decades.
    Long term growth is vital for every business, and a long term strategy is necessary for that growth. To change peoples perception will take time, however, the long term benefit to moving jobs back here will drastically out weight the cost. The issue is with the short term memory and lack of long term focus in our culture.

    The shortsightedness of CEO’s and CFO’s today is the problem. Lets look at it in a micro view: You live at home with your family and had a maid clean the house every 2 weeks, even though you had the time to do it yourself, but money was good and you could afford letting your income go outside your house to someone else. Now money is tight, do you still want to pay someone who has no investment in your house hold to do a job you can do and are willing to do? Maybe your kids can do it and earn their allowance and keep your wealth inside the family?

    The point is that jobs over-seas are great when an economy is in a boom cycle, but there needs to be retraction when there is a recession… keep the money inside our economy. What ever happened to owning a company’s stock for decades because they improved growth slowly and at a steady pace? Fast times at Ridgemount High was a movie, it shouldn’t be the moto of how to run your business.

    Comment by davidyaronnik -

  70. no. protectionism is a sucker bet all around. if people want jobs back in the US they need to get rid of debt and reduce corporate income taxes. give customers money and let entrepreneurs do their jobs and the jobs will come back in no time. mess with this process, though, and the jobs will stay away for a long, long time.

    there are some stocks i own and treat like an owner. for them i take direct registration of (not street registration, the default option, which has the stock in the broker’s name). the american dream of owning a company this way is close to dying, but it’s got a few breaths left.

    Comment by kidmercury -

  71. I agree with you in theory Mark, however in reality it just isn’t possible. If every American wasn’t greedy, this could happen, but the reality of it is that people are greedy, and if the P/E of a company that has all of its labor out of the US is 6 and one that has all of its labor in the US is 12 mutual fund managers and hedge fund managers are going to put their money with the lower P/E. Because in this game of money management, the hedge fund managers job is to get the best return, it is not to buy companies that have jobs in the United States.
    That is what markets do, money will flow to where P/E is lower, it is just the nature of the beast of capitalism.
    In my opinion a better way to attack this problem was what you said in an earlier post, which was to give businesses incentives to keep workforce here in the united states. Another thing you have talked about in earlier posts is giving tax breaks to businesses just starting out. If you want a work force in America, you have to give businesses a reason to start business here in America.

    Another point I would like to bring up is that the government should be giving more start up companies that are trying to rid the United States of its oil addictions. This is a problem that in our lifetime will slowly get worse and worse unless we begin to do something about it now. There are many different ways of attacking this idea.

    In theory its a great idea Mark, however, with the way the stock market is set up, this will never happen, people are greedy and hedge funds, and mutual funds, want the best return possible. They don’t care about anything else but the bottom line. That will never change, as long as we are in a capitalist society.

    Comment by Brian Pivar -

  72. Mr. Cuban please call. We’re doing a ton of manufacturing in the US. There’s more to this than you might expect or anyone would even try to claim without being able to back it up. Give me 2 minutes? I’ll send email separately with my info. We must increase manufacturing in our local communities: We’ll address scaling to hundreds+. Please don’t dismiss this Mr. Cuban: We have to put people to work.

    Comment by isaacbarham -

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