Posted on 01/25/2002 7:06:47 PM PST by spoosman
I have spent most of the day trying to get the earnings data coming out of the 4th Q. This site listed a table summary of all the earnings reports that came out this week, but they had nothing of the same sort for last week, or the week before. There was another site I went to that had info for last week, but I am not sure if the site lists all the companies that reported that week. Nonetheless, after getting rid of the ones that did not have 4th Q data of the previous year available, I have a fairly comprehensive sample of 428 companies reporting.
210 lost money when compared with the 4th Q of the previous year;28 that showed a profit did not recoup the losses they incurred in the previous 4th Q, and many of those still lost money, even though their losses were less than the 4th Q of last year, which creates a reporting illusion of profitability.
As to the others, I know, for example, that the only way AMZN was able to show a profit against last year's massive loss was that they lumped a massive amount of charge offs, restructuring fees, etc, and declared "those losses do not count because that was only a one time thing" (paraphrasing an article in a recent WSJ) Basically, AMZN did not make any money, although their phony bookeeping makes it seem like they did. I can only guess that there are several other companies out there playing similar games with phony accounting.
Then, of course, there has to be several other Enrons out there, with cooked books and phony numbers. I won't take the time to research all that. I do think it is fair to say that there is at least some percentage of companies that are reporting profitable over the 4th Q last year that in real terms were not profitable at all. Their declared 'profit' was the result of phony accounting and cooked books.
So far, the way I see it, from my sample of 428, 238 lost money compared the the 4th Q last year. If we include the phoney AMZN reporting, and looming Enron Jr's, assuming a modest fudge factor of 5%, add 21 more losing companies to that, and we have 259 losers, or if we round up, 260. That means 60% of the companies reporting lost money when compared to the 4th Q last year.
For the rest that showed a profit, 81 of those companies gained a 5%, or less, revenue increase over the 4th Q of the previous year, which represents nearly 50% of the companies reporting a profit.
So we have 341 companies either losing money, or just barely scraping a profit. Many companies' earnings were down dramatically when compared to the 4th Q of last year. The point there is that profit has to be made up, and then the companies' earnings have to surge past those profits before they can 'legitimately' say they have moved beyond the current market price levels.
Now, people are betting that these companies are going to do just that by the end of the 2nd Q of this year. I say it takes a lot longer than a few months to make up a 90% earnings collpase, I do not care if the analysts were surprised that the loss was 89% instead of 90%.
It seems to me that a logical train of thought would conclude that in order for the stock market to recover, these losing companies will have to get back to the profit levels they were posting a year ago (at least), before they can even break even. That means to a logical mind that the market really can't move until this profit fiasco moves, and even then, the prices only move back to where they were, which when we look at the DOW, is pretty much right where we are. The thing is, the DOW never moved to account for the earnings collapse. How can the DOW 'catch-up' if it never moved to a place to catch up from?
Lastly, as I went to survey the statements of an assortment of various companies, I noted PEs like 37, 43, 55, 30, 29, 50, etc. These are very bullish PEs, in the sense that they do not betray any sense that there was ever anything bearish that happened to the price. But these PEs are sky high, and the boo hoo-ing about a contracting market is very premature, imo. These companies promise that profit will catch those PEs up. Well, they have been saying that for a few years now. That story is getting old.
The fact is, the profits they promised two years ago to justify the same types of PEs are not coming in. In fact, as the numbers they allow to be published indicate, we are seeing massive losses, and when there are profits, they are paltry. You can be sure that there is lots of sugar coating on those earnings statments. Any 'legal' trick a company can get away with to make a loss look like a profit, you can bet they'll be using it. And when we consider the Enrons lurking out there, we can add to that any means to juice up the earnings statement, illegal and otherwise.
What we are getting is a picture of a promise not kept, and the market clinging to the vain hope that is will be kept yet. However, the profits will have to explode in order to justify any real further upside movement in the stock market. In order for that to happen, businesses and individuals have to go ballistic on another borrowing binge from the bank, using the proceeds for all that 'profitable' economic activity they told us we'd see years ago, but not only has not been seen, but what we have seen is its precise counterpart -- losses, and at times staggering losses.
Yeah, sure, blame it on 9/11/01. It is amazing how often 9/11/01 gets blamed for the poor performance when I read the statements from losing companies. But as I have argued incessantly in the past, their troubles have little or nothing to do with 9/11/01, and everything to do with money supply manipulation by the cartel; include in that the subsequent inflation the money supply bloat led to, which squeezed buyer's ability to buy stuff, which in turn slows the economy down, until either prices become more affordable, or interest rates on borrowing go down.
We know that prices are still sky high, so that did not change. But the cartel did drop the rates 11 times. Still, the little people get no direct benefit from what rates the cartel charges its 'member banks'. Rates on credit cards are still the same thing -- lower rates (~9%) if you hunt for them (if you have good credit), and higher rates (17% - 21%) just about everywhere else, for everything else. Auto loans are 0.9% for certain deals, 3.9% for others, and used cars 8 - 12%, etc. Still, those rates have been around for years. So what is the difference the FED rate campaign is making in these areas? None.
Mortgages were lower before Peter Fisher and Bob Rubin hatched the laughable plot to kill the 30y Bond. They tell us that home resales were at a record in 2001, but house deals take 30 - 60 days to close. The rates did not backfire on Fisher until mid November. Now the mortgage rates are much higher than when they were for most of 2001 and 2000. I doubt with interest rates substantially higher like they are, and in present economic conditions, we'll see the same pace of home sales in 2002.
Again, Greenspan's rate cuts don't reach the little people. Cartel rate cuts reach cartel cronies only, for the cartel cronies' purposes. The rate cuts are designed, more than likely, to try to save the cartel cronies' rear ends in this over-priced, bloated stock market, while creating a psychological lever over the masses to 'think' that all these rate cuts mean a big boom in the stock market, while all along they provide enough liquidity to make a market where the cartel cronies can unwind their massive stake in this market to a faked out, and stupid buying public. After all, 11 rate cuts by old measures should have kicked the market up to 200,000 by now. Yet here we are, still dogging on the negative side. "You just wait," they say. Well, I have been waiting. So far the threat the rate cuts pose has been a bust. In the meantime, the big boys are quietly slipping out the back door, leaving mom and pop holding the bag. Enron is the symbol of how the people on the inside of the game, with the bucks and power, always manage to transfer the risk to those who are outside of the game, and do not recognize shark infested waters when they see them. Call me a radical, but I see white tipped fins all over the place.
With earnings coming in at a disasterous pace, and with the false hope of cartel rate cuts hanging in the air, the only thing that holds this market up is mind games, threats, manipulation, and intimidation. Not a great foundation, in my view, to rest your financial future upon. And let me not forget the earnings spin, which is what got me digging around to get the facts on the earnings myself. Instead of telling us that out of 428 companies reporting, 260 are losing money when compared to the 4th Q last year, and in several cases the losses are dramatic, and will likely take years to recover, not months, CBS MarketWatch.com gives us this fluffy graphic:
This creates an entirely different impression of the reality. Of the 265 companies they are referring to, they are showing 156 above "concensus estimate" and 72 "match[ing]", and only 37 "below". A quick glance at this and someone will think, "Wow, hardly anybody is losing money! It looks like the 4th Q was much better than they said it would be!" That, of course, is far from the truth. Artificially low-balled analysts' estimates create the illusion that the companies are doing better than 'expected'. But what they hide from view, and what you really have to dig for, is the truth about what the earnings really are compared to the 4th Q last year. The truth is, earnings stink, and no amount of phony analyst low-balling can cover that up.
Still, this is just another way the Wall Street machine keeps trying to psych people out, to get them to be bullish at the highs, and to get them to pay those PEs of 40 and higher.
Besides, did not our Lord and Master, Alan Greenspan, say everything was going to be just fine? I seem to recall him saying the exact same thing at the exact same time last year when stock prices were much higher. You don't think the old gas bag is losing some credibility, now, do you?
Tut, tut. Perish the thought. Everything is juuuuuust fine.
I tend to be sympathetic to anyone who calls the Federal Reserve 'the cartel'. And I like anyone who criticizes alan greenspan because 3 years ago greenspan stood in front of the world and told people that because unemployment was dropping to almost 4.0% we had to raise interest rates. We used to have unemploymnet under 4.0% more than 90% of the time in America in pre-1970 days. Greenspan is an embarassment who should've been removed from office at that time. and if we do not think of his position as a public office, then we should re-order the Federal Reserve.
Regarding the outrageously high PE ratios that have become so common, the author offers no convincing explanation of this phenomenon nor prediction as to the future as to whether it will hold or not.
Perhaps the PE ratios are so high because of the obvious, that a larger number of people have much more to invest today than ever before and therefore they invest it, producing outrageous PE ratios. The stock prices will falter when the investment class declines in size dramatically or has much less money for some reason. If our gdp prospers, then the investment class will get steadily more money and keep pe ratios up. If the gdp falters, then the house of cards could falter.
The economy can't falter because Boeing and GE, our best manufacturers, have already agreed to contract everything out to chinese who work at coolie wages. All the money they save in wages will boost our gdp like crazy. And as soon as the chinese contractors learn how to produce it boeing and ge won't have to. Soon maybe even Intel will contract out, our gdp will go even higher and thus push pe's up even further. />crazy talk
Since stock prices are a function of supply and demand, isn't an overpriced stock market a function of either (a) too few viable companies to invest in, or (b) too much demand? I find (a) difficult to swallow; (b) seems more likely to me. In the 90's, investing became commonplace, and tons of capital got dumped into the markets, bidding the price up. So, is there too little money in CDs, bonds and commodities? How does this all equalize?
Perceptions of supply and demand needs are fraught with emotional extremes and short term miscalculations. That's what the market does all day...it sorts it all out.
Methinks that people will start putting all that money (if they have any, that is) into servicing their debt. Right now, households spend a greater percentage of their income just servicing their debt than they have in perhaps 60 years.
BTW the stock market is not just a straight supply-demand picture. The element of market pyschology enters the arena, and all bets are off. For example, a couple billion-dollar mutual fund managers panic when their leverage turns against them, dump their stocks, and the market plummets. I think very soon the unraveling of Enron will precipitate a similar panic in the big banks as well.
So far, the way I see it, from my sample of 428, 238 lost money compared the the 4th Q last year. If we include the phoney AMZN reporting, and looming Enron Jr's, assuming a modest fudge factor of 5%, add 21 more losing companies to that, and we have 259 losers, or if we round up, 260. That means 60% of the companies reporting lost money when compared to the 4th Q last year.
Assumptions.
Then, of course, there has to be several other Enrons out there, with cooked books and phony numbers. I won't take the time to research all that.
...maybe. Maybe not. 'Cooked books and phony numbers' drastically oversimplifies the problem. Enron would still be in business today but for a falling share price that triggered debt downgrades. This accounting witch hunt will pass.
The point there is that profit has to be made up, and then the companies' earnings have to surge past those profits before they can 'legitimately' say they have moved beyond the current market price levels.
Not so, necessarily. Fails to consider asset writedowns and other revaluations. Stock market valuations are dynamic. Could be worse or better than he assumes. If earnings pick up, likely to be alot better. Other factors that are extraneous to domestic business practices also come to bear: international economies and political situations, currency valuations, 2nd Coming, etc.
It seems to me that a logical train of thought would conclude that in order for the stock market to recover, these losing companies will have to get back to the profit levels they were posting a year ago (at least), before they can even break even.
Only relative to peak share prices. Share values are not dependent solely on profit levels. There are to be considered book value, cash flow, earnings growth etc. IN some cases, share prices have been slaughtered relative to those peaks.
This is as far as I went with this. I got the gist and I thinks its sophomoric at best. Right now, the market is telling us that it expects earnings to improve. And they may, because this recession is showing signs of recovery, earnings have plummeted in the past, and stocks have been severely punished. The consumer is alive and well, and there's a whole world out there in need of goods and services and innovation.
Dow 25000 is doable. However, I'm not saying it won't go to 3800 first.
I can't believe Thompson publishes this shallow stuff.
I love this article and plan to learn more about this newsletter...thanks.
The quote about the little people...let me comment as one in this category. For us little people who don't have credit card debt, but have some safe savings in certificates of deposit it sure has made a difference. Renewals on long term CDs are down a miniumum of 35% on interest rates. I wonder where the differential is going...hmmm...
Another point. I sold mutual funds this year, to (1)fund fixed income IRAs and (2)to open a stock account as a vehicle for learning. I've stopped trading (didn't lose my shirt, actually made a little money to buy a few) because Enron has me distrusting the data. I'm sitting in companies with low debt, logical and innovative products, and no spin with quarterly reports. I wonder how many people are thinking this way...let's just hold back until we're sure the reporting is honest?
BTW, I am a futures index trader. I am very defensive. The market has been a real drag for sometime now because I feel like now more than ever I am trading with a gun to my head. This has really cut my volume down, which really isn't that high anyway compared to most traders. If I trade more than 3 times in a week, that is a lot for me. I am very particular.
Yes, I am assuming that there are companies out there that are cooking their books. There is always somebody cooking the books. Also, numbers on earnings reports are very suspect. Companies will always strain to make the numbers to look as good as they can. It is naive to take anything like this on its face. I do think it is amazing that so many companies have actually admitted they are making less money.
I trade listed equities and I have similar experiences. This market IS scary becuase it is acting sick. Poor depth. It's easy to see how desperate some specialists are to pick pockets. This tells me that they are hungry, and hungry specialists mean think markets.
Well, they are obligated to. Anyway, this is just another business cycle. A big one. Maybe a Kondratieff wave. But not the end of the world, necessarily.
The point there is that profit has to be made up, and then the companies' earnings have to surge past those profits before they can 'legitimately' say they have moved beyond the current market price levels.
and
It seems to me that a logical train of thought would conclude that in order for the stock market to recover, these losing companies will have to get back to the profit levels they were posting a year ago (at least), before they can even break even.
I am simply touching on only one idea, one facet. There are numerous ways to slice this info up, but the thought is reasonable, and when considered in the larger context of several other factors, the idea supports the conclusion that unless there is explosive earnings growth, the stock market really has nowhere to go.
I think the stock market chart looks scary. Is that a massive , two year, head and shoulders top? Maybe. But I just don't agree with the conclusion. Unless the economy domestically or internationally blows up, earnings will come in. The SP is loaded with growth stocks. The potential for growth is enormous...as long as the money keeps flowing, and the people are confident.
PE's are forward looking. They are speaking about anticipated growth. If the PE/'s were 15, then the market would be saying, ho-hum.
It is a polarizing subject, there is no getting around it. The day I would love to see dawn is the day the other guy hopes he never sees. I just do not believe that the money supply should be controlled and rigged by a private cartel of global aristocrats, which is exactly what they are. The best way to shut them out is to bring the gold and silver back in. Of course, they'll work like the devil to slither back in, but gold and silver makes their job much more difficult. As it is today, a few keystrokes, and millions of people lose their jobs, or are priced out of their homes. That is not a free market. If the free market prices people out of their homes, hey, they are priced out of their homes. But when it is the result of elitist chicanery (and that type of thing is only the tip of the ice berg) that stinks. Process is everything. I can live with the results of an honest process. Gold and silver helps keep the process honest. Fiat is an invitation to evil.
But, yeah, hey, you could be right about PEs. It is interesting, though, that the PEs have been hanging around in historically unprecedented high territory for over three years now and those earnings still are not catching the market up. It kinda makes me wonder if too much time has elapsed for the promise for getting caught up to be made good. The time grind is what gets to me.
Besides, and again, this is onlymy view, their are deep systemic flaws resting at the core of the entire financial system. You just never know when the Achilles Heel of the fiat game will come back to bite us in the butt. My attitude is to wait until someone else is walking around with a big part of their rear end missing, and maybe I can play with the fiat kings at the lows. But this stuff ... I dunno. So when I put it all together, my bullish thoughts just do not come to me like they used to.
Working on commission as I do, this is a huge relief for both me and my bank account..LOL..
But that is jusy what I think. Lots more to consider than just some of the stuff I posted above. Lots more. I have not even gotten into the Rubin gambit of 2001 to defend the Rubin low of 1998. I can't help it. I still feel pretty strong about that 2001 low breaking. But even if it does, it'll be a heluva fight to get down to it and past it, you can be sure of that.
So I am not worried about the end of the world as much as getting past all the artificial crap, and the false hopes of a misguided crowd, and then when I see the Clinton era pricing taken out, that is when I will likely start thinking like a bull again. I wanted to think like a bull this year, but they rocketed off the lows in the 4th Q, and screwed everything up. So screw it. I am negative, and will have to endure probably months of BS while we wait for this thing to break back to the 2001 lows so we can get it right.
The thing is they have gone to so much trouble painting the chart to get people all bulled up, up here at the highs, that if we do break to 2001 lows, I'll be thinking about 6K while buying 8, and 7 etc. Eventually I still say there is a very good possibility that we will break 6K, get into the 5s and 4s, and from there work it out. But no massive stock market collapse happens in a vacuum. That means we will see some serious s* hitting the fan in the world at the same time. Not the end of the world, just some serious stuff. After all, the ruling elite must always have a scapegoat for way they have stolen all of our wealth. You can count on only a few feeble hands pointing in the right direction.
I agree, only it will take an act of God to bring it to pass.
I agree with much of what you've written here, but I've moderated over time feelings that were perhaps more extreme. The reason is that I have come to respect benevolent dictarships. We've had on for a long time. It appears to be coming to an end. Too tired to defend this tonight.
If you hadn't been so credible so far, I'd wonder whether you had a conspiracy streak. Can you describe what you mean here? I've often wondered how investing life might be different for the uppermost crust.
I'm holding my breath that bad reports from Wall Street won't spook everyone again; we will be fine without further jitters from that quarter...
That may be valid, and supports the mother of all head-adn-shoulders I think im seeing on your index.
Course bullish thoughts don't come, it's a bear market. I have to learn how to trade all over again.
I never cease to be amazed at the resiliency of the markets...going back 13 years now. I remember thinking 4 thousand something was absolutely tops. Then I recalled a line from the bible that says, in the end times, people will be buying and selling, just like normal. I realized one of the greatest deterrents to people turning to God is wealth, and so I figured, OK, this market might just go to 10000. Doomsday aint gonna come the way most people think it will. At that time, it was only me and John Templeton saying that that I know of.
Given that, new highs wouldn't surprise me. I wouldnt be surprised by 25000. However, i feel we are in a different stage, and catastrophic breakdown could happen. After all, everything you've said about the financial situation is correct. What I don't lack is faith in the resiliency of free enterprise (whats left of it) when the lows are finally made. It is an amazing thing to watch.
You know, the head and shoulders of 1987 is just a blip today. If you extrapolate that chart to eternity, the dramatic rise in the spooz doesn't look so dramatic after all. Anything's possible.
Here's what really scares me. Our national debt is, well, maybe a little like Enrons, or any other highly leveraged co. Now, that's fine when we're not under scrutiny. But with the Euro coming on line, all of a sudden there is real competition in the marketplace for financing national debt. US Treasury's aren't the only game in town any more. The EC could outbid us for financing, and we could collapse without it. This sobers me up enough to say, the Euro is an act of economic war against the US. No exaggeration. And we need to treat it as such. Shoot. I may move to chicago and trade currencies...
To keep the bank system floating.
Right on! In addition, IRA, 401k, etc. have become the norm as opposed to defined benefit plans. The P/E ratios have zoomed since the stockmarket is widely perceived as the "only game in town"!
The BIG question is, what will happen when the "baby boomers" start to retire and draw down their retirement funds from the market? Will there be sufficient replacement funds invested to maintain the high P/E ratios? If not, stagnant stock averages may be the best possible outcome while, a long slow decline in market averages is more probable!
Diversification is critical to retirement planning and that means ASSET DIVERSIFICATION, not just spreading your funds among stocks in various industries and/or countries!
You might find this interesting:
Time also comes into play. The sooner one starts contributing to retirement funds, the less risk one will have to assume later on in life. Easier said than done. If I would have practiced what I preach, I would be retired at 43:~)
Two or more years ago there were a few of us that started posting info about the economy that indicated major problems. We were shouted down on those threads by "expurts", most with vested interests in continuing the scams, and with long, boring "analysis'" of how wrong our thinking was.
I labeled it a "Fictitious Economy" and that was shouted down. A couple of us started posting the Massive Job losses. That was criticised.
Now the results are starting to no longer be able to be manipulated. Tough Luck to the "Expurts".
BTW, good analysis!
Did we have less inflation on average in pre-1913 federal reserve founding or post-1913?
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