June 3, 2003
Telling Stories

Just over a year ago SEC Insight (the newsletter) said that IBM was being investigated by the SEC. Following the report IBM shares slammed lower, and the SEC, acting as a loyal member of the PPT, immediately stated that the rumors were false.

“If the SEC does not wish to be accused of being an arm of the PPT maybe they should stop accepting after hours phone calls from Rubin and Greenspan?  Think about it: what the heck is the SEC doing looking at and commenting on daily stock quotes?”  Word.  April 12, 2002

After yesterday’s close IBM announced that the SEC was investigating sales that the company booked in 2001 and 2000. It is a shame that the SEC is also not investigating results for 2002. After all, Pitt’s August 2002 certification scam – of which IBM was a proud participant (PDF) – has not yet been tested. Regardless, IBM shares are set to open weaker this morning, and could restrain the Dow from capturing 9,000.  

Manufacturing Data

Widely reported as ‘encouraging’, yesterday’s ISM report on manufacturing still managed to come in below 50 (signally contraction). Those that doubt U.S. manufacturing is preparing to embark upon a sustainable upswing were no were to be found in the popular media yesterday. Supposedly, Iraq was the only thing holding manufacturers back.

New Bull Market?

Joe Battipaglia, who in early 2000 was touting ‘100% stocks!’ and who has maintained a bullish stance ever since, now says “Someone better call this a bull market because I'll tell you what: it doesn't get much better”.  Perhaps the emotional Battipaglia should look at market history which is littered with ‘better’ rallies inside of prolonged bear markets?

Suffice it to say, with every rally higher in the markets calls for a new ‘bull’ market grow:

It's getting harder and harder to say that stocks aren't in a bull market.
CNN/Money

More people becoming bullish on stocks.
USA Today

Waiting for the next Earnings slip

At 35 times trailing earnings and 18.5 times forward earnings estimates, the S&P 500 is hardly cheap. Nevertheless, so long as investors ignore P/E multiples in favor of a good turnaround story, valuations can remain stretched for a prolonged period of time. In fact, earnings strength is not what made the go-go 60s and new economy 90s possible.  Rather, during both instances earnings consistency was one of the main market drivers.


Using the BEA’s measure of corporate earnings, profits only dipped on an annualized basis six times during the 1990s (the most consistent decade on record).

The reasons why the type of consistent earnings growth generated in the 1990s is not likely to be replicated today are simple: the U.S. consumer has a higher debt burden today than at any time during the 1990s, corporate balance sheets are more leveraged than they were for most of the 1990s, and capacity utilization rates are mired near record lows.

In sum, investors will cheer earnings turnarounds (1Q03) and boo the relapses. There have already been 7 relapses since the first quarter of 2000 versus 6 for the entire 1990s. Keeping a long term perspective, will current fiscal and monetary stimulus plans be enough to mold earnings consistently higher so that ‘high’ market valuations can be maintained?  Or will earnings be ‘choppy’ at best in the coming years?

Whatever the case may be, and as the earnings atmosphere since 2000 aptly demonstrates, Greenspan pumping does not gurarantee consistently growing corporate profits; the story of Fed intervention has no set ending.

The Sometimes Annoying Turnaround Stories

Yesterday Tropical Sportswear (TSIC) announced that it was selling its Duck Head brand for $4 million and hiring Merrill to help evaluate strategic alternatives.  In and of itself this news would be simply good news given that acquisitions made during the 1990s (after being nearly bankrupt in 1989) have proven to be a drag on business (with the exception of Farah – 1998). However, since Carl Icahn has been purchasing TSIC shares in recent months this ‘good’ news sent TSIC shares skyrocketing yesterday – the bullish speculation being that Merrill’s services and the sale of Duck Head are being undertaken to keep Carl from busting this undervalued company up, or that the company is following Icahn’s orders.

There are always a couple of TSIC stories worth investigating. And while most company’s that have been beaten down do not look promising due to treacherous balance sheets, TSIC could successfully turn the corner.  To be sure, TSIC was, and still is, trading below its tangible book, it is a low cost producer of garments (primarily pants) in the midst of restructuring (moving its El Paso operations to its Florida cutting plant), and its outlook, while dim, is now much better with Duck Head gone.  After all, DH brands accounted for only 5% of revenues and the 16 retail outlets were mostly money losers.  Getting $4 million for this asset is almost too good to be true. 

Suffice it to say, TSIC was a company we were investigating (excel). When yesterday’s news hit we were awaiting a call back from the company concerning two issues – an updated capex estimate for 03, and the company’s stock option policy going forward (stock option benefits have significantly padded earnings in recent years).  Yesterday’s news, given that it sent TSIC shares up by more than 20%, making the company less appealing, was most unwelcome. 


No one at FallStreet has an investment position in any of the company’s mentioned above.

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