October 30, 2002 |
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Yesterday’s consumer confidence report was entirely terrible. And while it is true that the conference board’s take on consumer confidence is not always accurate – after all, the board surveys only 5,000 people of which 3,000 usually reply -- when combined with recent consumer ‘confidence’ and ‘sentiment’ readings (Mich. ABC, CNNfn, Gallup’s) the report does foretell of weak consumer spending ahead.
During their earnings releases 5 companies (GM, HON, JPM, MCD, T) warned that further (job) cuts loom, 5 companies either raised or warned (others have kept quiet) about increased pension liabilities (AA, GM, IBM, IP, MMM), and 1 company (SBC) warned of further reductions in capital spending next year: SBC initially wanted to spend $9.2 billion in 2003 but now the company says it will spend $7.5 billion (down from $11.2 billion in 2002). As for those Dow companies bucking the weak trend: MSFT is a monopoly, GE appears destined to never miss an earnings estimate until their accounting policies blow-up, a handful of companies (CAT, DD) squeaked by because of lower taxes, Coke warned of future problems, Kodak couldn’t have performed worse in 3Q02 than in 3Q01 if they tried, and a collection drug, Tobacco, and financial stocks (AXP, C, MO, JNJ) generally performed well. Of the 25 Dow companies that have already reported, revenues were up by less than 3% and net income was down by 18.8%. The net income data was dragged lower because of AT&T’s 3Q01 spin-off of AT&T wireless. Backing out AT&T’s numbers net earnings on the Dow are actually up roughly 18% in 3Q02. Conclusions Whereas year-over-year revenue comparisons are telling of a weak economic rebound the net income comparisons are more encouraging. For certain, many of the best run companies in America, supposedly what the Dow 30 contains, were able to better manage their costs and produce better earnings results. Needless to say, the methodology used to attain such results varies from company to company – the above chart attempts to highlight first call data (backing out charges in some cases while including them in others). The market watcher should remember that 4Q02 results will be compared to 4Q01 results. Not only were 4Q01 earnings results 4.2% higher than 3Q01 results (S&P 500), but 4Q02 operational results are expected to be lower than 3Q02 operational results. Point being, and based upon current economic speculations, it is probable that annualized revenue comparisons on the Dow will be weaker in the final quarter of 2002 than in 3Q02. Yes, weaker than a mere +3%... Buy and Buy The stock markets are coming off of a respectable rally that has been fueled, in large part, by ‘corporate earnings’. A couple of accounting rule changes, as last weeks core earnings data demonstrated, would dramatically reduce these earnings. Baring seasonal factors and/or Fed rate cuts, there is not many fundamentals which will lead the investor to believe that current stock market conditions warrant further exposure. As such, and unless low(er) interest rates can be considered the gospel when investing, it is time to preach prudence. Quite frankly, the investor should only hold an equity position (and this is my opinion) if they are prepared to purchase more shares if prices drop. We are not yet at the point when it is easy to make solid investments in cheap stocks, and seasonal/interest rate gambles are simply that. DIMON Wish List company DIMON held its annual meeting today and raised its dividend. Continuing the ‘turnaround’ theme for the company, the dividend increase is encouraging. The company’s earnings call is scheduled for November 6. As an example of how we try to allocate our capital when investing – we are prepared (and would welcome) the opportunity to purchase more shares of DIMON at a significantly lower price. This is not say we believe that DIMON’s shares will drop – we don’t. Only that when equity market liquidity dries up few companies are spared. Put simply, unless a company is undervalued based upon its break-up price (the gutted assets) no share price is safe if, and likely when, investor’s start chanting ‘new low!’ 10-Months Wasted Not unlike a well rehearsed comedy skit, during today’s Open Meeting SEC Commissioners quibbled about the different interpretations of the words ‘may’, ‘remote’ and ‘reasonably likely’. To put these words into context – SEC members were theorizing about the impact these words would have with regards to the commissions’ current off balance sheet proposal. Quite frankly, the new SEC off balance sheet proposal fails miserably. After listening to the meeting the investor can be left with only one question: WHY IS THE SEC GIVING COMPANIES ANY LEEWAY AT ALL? Investors do not want to read Corporate America’s opinion of their off balance sheet financings. This deplorable undertaking by the SEC, to have companies report confusing summaries of off balance sheet debts, is nothing more than a gigantic waste of time. In fact, the SEC went so far as to debate how ‘burdensome’ it would be for companies to report off balance sheet financings, and members repeatedly questioned that if the standards are too strict this would make the amount of information being disseminated ‘extraordinarily unhelpful’ – providing the investor with ‘information overload’. What the SEC fails to understand is common sense. I suppose this comes from living in an information vacuum – a place where companies and lobbyists are the primary parties feeding you advice. Investors do not need a CEO and CFO to figure out if their off balance sheet interests could impact their business based upon the ‘realm of what is reasonably possibility’. Rather, the investor would benefit most if companies report the data – ALL OF IT! Then the SEC could waste decades trying to figure out a way to structure the data afterwards. I am quite sure that investors would have benefited from knowing that Enron had hundreds of off balance sheet entities, most of which were offshore, with billions of dollars in assets (‘what are these assets’? the investor could have asked years ago). Furthermore, I am also sure that if companies can take the time to set these financing schemes up they can record the activity and report it to shareholders with literally no ‘burden’ whatsoever. Is it a burden for GE to sponsor a SPE and then boast its earnings from a gain on sale to the SPE? No, they do it all the time… The SEC’s off balance sheet proposal is expected to pass in January 2003, or after a few more months of pointless debate (no one at the SEC is even suggesting companies should consolidate OFBS interests). If all goes according to plan, a couple people within each company will decide what information gets disseminated to investors.
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