March 30, 2005
Does Quarter’s End Mark New Beginning For Bears?
By Brady Willett

Were it not for the fact that Todd and I are finalizing the Wish List this week, I would be joining the bear crowd for a protracted cheerleading session.  After all, the Nasdaq is trading below its 200DMA, rising oil/commodity prices and interest rates fears have trumped a positive earnings outlook from GE, and the summer doldrums are just around the corner. With this in mind, you get the feeling that unless the markets can bounce in early April the equity outlook – at least from a momentum and herding standpoint – is anything but good. 

But alas, time if of the essence, so I will keep my comments brief. 

GM Watch

One item of interest not catching many headlines is GM’s financial statement revisions in the company’s last two filings (10K&10Q).  Not only did GM tweak numerous numbers in its income statement and balance sheet over the last two quarters, but the company also admitted to a gigantic cash flows gaffe.  To better understand GM’s explanation of this mistake the following quote will suffice:

“The Corporation's previous policy was to classify all the cash flow effects of providing wholesale loans to its independent dealers by GM's Financing and Insurance Operations as an investing activity in its Consolidated Statements of Cash Flows. This policy, when applied to the financing of inventory sales, had the effect of presenting an investing cash outflow and an operating cash inflow even though there was no cash inflow or outflow on a consolidated basis. The Corporation has changed its policy to eliminate this intersegment activity from its Consolidated Statements of Cash Flows and, as a result of this change, all cash flow effects related to wholesale loans are reflected in the operating activities section of the Consolidated Statement of Cash Flows for 2004.”
GM.  2004 10K.

Did no one at GM realize that the company was buying cash flows? Perhaps. However, what is more likely the case is that no one at GM cared. That is, of course, until the SEC called up and asked what was going on. Suffice to say, the ‘reclassification’ was massive:


I am not sure how the latest chapter of the GM story will end, but, ultimately, use of the words ‘junk’ and ‘bailout’ seem logical.  As for GM’s tedious 158-page 10K, at the end of the day you either believe what GM tells you or you do not. To be sure, FIN46R (‘primary beneficiary’ leeway) has not made the investor’s job of deciphering financial exposure easier.

“GM and GMAC use off-balance sheet arrangements where the economics and sound business principles warrant their use.”

The Numbers Are In…Almost

Our Dow 30 financial snapshot is nearly complete, and is available for download here. To note: these numbers have not yet been double checked for errors and stock prices are only current as of March 25.  Before the final set of numbers can be revised AIG’s revisions and WMT’s 10K remain.

What the data tells us that UTX is one of the few Dow components that is currently trading at 1-year valuation highs (p/b, p/e, and price/fcf). What the data – and charts - also tells is that CAT (which had a cash flow revision issue of its own in 2004), MMM, and XOM have been strong in 2005.

Why is it worth paying attention to UTX, MMM, XOM, and CAT?  Because when combined these four companies make up 23.97% of the price-weighted Dow 30 (as of Mar 28, 05). In other words, major declines in Dow components (i.e. GM) have hurt the average, but have been easily offset (fixed? smoothed over?) by small gains in the four companies mentioned.  Some defensive components (JNJ, MO), and som