Bloomberg Quote of the Day: “Without friends no one would choose to live, though he had all other goods.” – Aristotle. Well, save for a few CEO’s and hedge fund/private equity managers!
…that is what we are told daily on CNBC. Then they trot out the usual trailing and forecast p/e ratios, that are as useless in predicting the future as hedge fund or mutual fund performance…it’s all bunk! Why?
Because we have just come off the best string of record earnings…accompanied by a record string of stock buybacks which have literally thrown shareholders money away…of course management will say, yes but where would the price of the stock be if we had not done the buybacks. Just what were those buybacks? Instant bonuses for management…first of all the stock was not retired in most cases; second, much of it was used in options and thus recirculated; third it inflated per share stock price and thus lowered the p/e ratios; fourth: it was a trifecta for management! Yee haw! Besides if they had paid it out in dividends…investors would have had to pay that confiscatory 15% dividend tax, right? Think of the millions of stock investors…excuse me, 90% of those are in tax deferred accounts…only the top 2% or so who control the bulk of the wealth in this country benefit from the dividend tax…but do they spend it? Nope, they invest more…if like Paulson & Company’s John Paulson who was the highest paid hedge fund manager…or anyone for that matter last year…with a cool $3.7 billion…and of course we want to just tax him 15% or he will take his money and go home as the risks are just too great. Sorry, to digress but this is not only at the crux of this but is also the reason that the majority in this country is mad as hell. (Would someone please tell Hillarious and Obama however that $103,000, which qualifies one for the top 10% of all taxpayers, is not a lot of money…certainly not in New York or California! By the way that number was $89,000 in 1982…you do the math!…$3.7B…$103k…hmmmm)
History shows that growth of sales, earnings, whatever reverts to the mean…yet we are led to believe that these earnings are here to stay…in spite of being in the biggest credit crisis of all time…certainly in size and it is breaking the bank…literally…with the Fed having committed more than 50% of its assets to it and now the Bank of England is going to solve the problem by extending credit which will force it, according to Goldman Sachs to issue massive amounts of long Gilts! Good for the Pound, bad for bond prices. Yet, we use statistics only to support our theories…didn’t we just see that with the derivatives created by subprime lending? History also shows that stocks do not become attractive in a major selloff until revulsion sets in…meaning the market p/e falls below 10x. In case you haven’t noticed the p/e on the ‘dirt cheap’ S&P 500 is 22x with a paltry dividend yield of 2.19%…after all we need that money for the CEO’s bonus…oops, stock buybacks which are the best way to enhance shareholder value! Remember too that that 22x p/e is based on fewer shares outstanding, right? Note that the p/e on the Dow is now 68.9x due to several companies with negative earnings…notably Citi and BofA…but heck the dividend is 2.49%! How about the Nasdaq 100 which boasts a 29x p/e and a dividend of just 0.5%?
Take a look at the famous ‘four horsemen’ of the Nasdaq 100: AAPL 36.9x trailing, 32.5x est; AMZN 71.6x trailing, 43.8x est…for God’s sakes folks this is a bookstore!; GOOG 37.8x, 26.9x est; RIMM 55.8x, 33.6x est. The average of the four is 50.5x trailing and 34.2x estimated…do you have any idea how small an error it takes to spoil your whole portfolio with those multiples and no dividend? Is there any reason to believe that even five years out they will maintain their competitive advantage? Yet these four stocks made up more than 25% of the Nasdaq earnings last year. (TB shaking his head)
Now let’s get to the whacky world of financials…who have for the most part proven that they have no understanding of risk!…nor the value of capital…as they are now giving it away and bank stocks then rally in the belief that they will start lending again and make gobs of money. Horse manure! This is about survival and meeting required capital ratios…try drawing down your home equity loan…or getting a new mortgage. Banks are like sheep…and for that matter so is Wall Street…how else do we explain all of them getting on the same side…sans Goldman who has made some bad mistakes in the past as former Chairman John Corzine pointed out…he attributed it to luck…is that what bonuses are based on: luck? Is that why Goldman paid out those humongous bonuses when everyone else was bleeding only to take huge writedowns in the next quarter? Is that why Exxon Mobil paid outgoing Chairman Lee Raymond $400 million?…because the price of oil went up? Makes sense to TB even as share prices fall…XOM excepted along with other energy stocks due to soaring prices…but is that good for the rest of the economy?…they keep trying to tell us it is…especially stocks…and that folks is why it is early in the game.
Take a look at the recent earnings…most disappoint, a few like CAT excel, GE lost credibility, and a few like McDonald’s have a nice profit jump but either hit the estimates exactly or barely surpass…you don’t want to disappoint and thus have people think ill of you, do you?
An article on Bloomberg today by Peter Robinson asks What’s an Analyst Worth?…not much as much of what we are seeing is accounting gimmickry. Yesterday WSJ reported in Heard on the Street how companies like Merrill could have had $3-5 billion more in losses with the stroke of a pen. First, earnings were inflated by mark to market…and mark to model accounting…and now they are “understated” by the same rules when the bid disappears…and while we are talking about those earnings think of the boost being given brokers and banks by the Fed! Borrow at 2.5%…what a deal…and there is suspicion that banks are understating their cost of funds (LIBOR), so they don’t show they are having to pay up for funds. Robinson says that at least 27 companies have matched or topped Wall Street estimates in every quarter since 2000 including Coach and Starbucks. GE just ended a streak of 32 consecutive quarters. Thomas Russo, a money manager is quoted: “Companies are smooth and steady and growing, right up until the point they collapse.” The article goes on to say that the reason this happens is something TB has frequently groused about: guidance! What a joke! Former SEC Chairman William Donaldson headed a group that called for abolishing quarterly forecasts and reducing the amount of executive compensation tied to quarterly earnings per share. Donaldson called the whole game: silly!
That is the monster we have created and it is time to pay the piper…expect more volatility…lots more!
Hope you all have a good day…but if you believe this market, and those who promote it, you are in need of serious help. Everyone you hear has a vested interest…except TB…he just wants the truth…even if he can’t handle it….can you?
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful.
Copyright TBD Capital LLC April 22, 2008
