The Federal Reserve national flow of funds accounts for Q4 2005 confirm a remarkable and disturbing new trend in corporate behavior that seriously undermines the intrinsic value of the U.S. stock market.

Over the last five quarters, the annual rate of dividends paid by U.S. non-financial corporations has fallen by two-thirds, from $462.2 billion to $160.5 billion.

(See flow of funds table F213.)

The apparent reason for this negative trend is the intent of corporate management to radically increase stock buybacks in order to boost the value of executive options.

The discounted cash flow basis for stock valuation, which has been accepted by serious analysts since the 1930s, defines the intrinsic value of equities as a function of the projected rate of growth of cash dividends.

Now we have a situation in which the rate of growth of dividends is negative, and this is not a fluke occurrence in a single quarter, but a real trend that seems likely to continue.

Furthermore, the reduction in dividends has not been to reinvest in the company in the immediate term, with the objective of increasing future dividends.

Rather, the purpose has been solely to divert corporate profits into the pockets of executive managers by manipulating prices upwards in spot markets to give value to stock options.

(See: Essays on Stock Buybacks.)

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