Fractured Wall Street Fairy Tales #2: Awful News Is the Same as Good News

Near the end of 2008, Eaton Corp (ETN) guided investors with its expectation of earnings between $3.80 and $4.80 a share for 2009. A couple months ago the company lowered that guidance to $3.60 - $4.20 per share. If you bought either time based upon a low expected Price/Earnings Ratio (PE ratio) you were out of luck. The company declared its current earnings for the most recent quarter plunged 92% -- and it now projects that it might maybe earn "up to" $1.85 this year.

But since results topped “analysts' estimates” – which had themselves been reduced two, three, four or more times in just the first six months of the year – the stock gap-opened up 4 points (10%) in one day.

With Eaton engaged in the manufacturing of electrical components for power distribution and control, hydraulics systems and services for industrial equipment, fuel and pneumatic systems for commercial and military use, and truck and automotive drivetrain systems, we'd be hard-pressed to find a better bellwether for American manufacturing...

Eaton’s customers are primarily airlines, car and truck manufacturers, and basic industry. Yet somebody out there not only ignored the current condition of these customers, ignored the fact that ETN’s earnings were off 92%, and ignored the fact that Wall Street manipulated a gap opening by crowing how ETN had beaten (the deflated) earnings estimates. Because someone is buying shares at what is now going to be at least 25 times earnings even if the company is correct this time.

Are you and I the only investors left in America that actually look at revenue and earnings trends? Cluebird time – if a company cannot sell more of whatever it provides or produces, it cannot increase revenues. Absent revenues, the only way to jack up earnings is to cut costs. Since they’ve been slashing costs for up to two years now, I’d say most companies, if they can’t increase revenues, have only one option in order to survive: fire more people.

This is heartrending. It’s like watching Charlie Brown line up one more time for a run at the football. We all know Lucy is going to pull it away at the last second and we want to reach onto the printed page and pluck him out of harm’s way. “Not this time, Charlie Brown! Just, once, get smart!”

But many market-players simply don’t. If the markets are going up, no matter the reason, it must be a good thing. Of course companies beat their “estimates”; even The Limbo King couldn’t get under a bar placed this low. It invites humor, not respect.

I use Eaton as just one example. I could as easily have cited Caterpillar (CAT), another industrial bellwether, whose sales went from $13.6 billion to under $8 billion, Lockheed Martin (LMT), BlackRock (BLK), Merck (MRK), Halliburton (HAL), Johnson Controls (JCI), Weatherford (WFT), Dell (DELL), Nokia (NOK), DuPont (DD), or any of scores of others, including that most American of icons, Harley-Davidson (HOG). (A great ticker symbol – I wonder if they’d be willing to sell it to Goldman Sachs?)

After Wall Street dumps their long positions into the buying frenzy and these stocks return to more reasonable valuations, I think some, like ETN, CAT, JCI and WFT might be peachy buys.

Until then, I’ll stay on the sidelines and nibble a bit more at bond funds like SHY, TUZ, BND, AGG and TIP; and inverse ETFs like SKF, SRS, SBB, EUM, PSQ, SH, and DOG.

Until then, I’m involved but not committed, as I see revenues plunge, earnings plunge, bond debt come due, and layoffs rise. Wall Street, long these stocks, needs to keep them up just long enough to unload at higher prices, so they will reduce estimates, then trumpet this failed performance.

On the “Constant Noisy Bullish Chatter” station, Wall Street will send their most photogenic and articulate to express shock – shock! – at how good the numbers are. “Boy, did Caterpillar beat our (deflated) estimates or what?” they chortle, all the way to the bank.

Only in George Orwell’s Animal Farm, where all animals are equal but some animals are more equal than others, would the doublespeak of “less dreadful news is actually great news!” be considered rational. In fact, it is insane. And if no one else is willing to tell the emperor he has no clothes, it falls to thee and me. Bad news is bad news. Let it be. We will recover. Then there will be good news, and it will be real good news, not manufactured at Wall and Broad. Dear Wall Street: that wasn't so hard, was it?

We need to accept that, like a human heart, markets and economies expand and contract. If they just kept racing higher and higher, the same thing would happen to markets as does a living heart that doesn’t take a rest between beats. It will have a heart attack, like it did in 2000-2001 and again in 2007-2008.

There is no shame in recognizing the essential cyclicality of markets, nor in the inevitability of reduced sales and earnings in times of contraction. But with Wall Street’s “guidance” many are tempted to don rose-colored glasses as if none of this is going on. People losing their jobs? Yes, but fewer than might have! Home foreclosures rising? Yes, but less than we expected! Commercial loans rising? Hey, at least some companies are still current on their loans!

And still we listen to the same talking heads from Wall Street whose greed and arrogance brought us here. As I wrote here, admittedly tongue-in-cheek,

“Consumer confidence was down briefly on the news, but less than expected by economists. Residential and commercial real estate sales were down, but less than expected by analysts. Employment was down, productivity was down, and real wages after inflation were all down but all were down less than some clueless lunatic expected. All is well in ToonTown.”

Hello Lucy van Pelt, goodbye heart.

Full Disclosure: We own short-term bond funds like SHY and TUZ and slightly longer-term (5-10 years) BND, AGG and TIP; and inverse ETFs like SKF, SRS, SBB, EUM, PSQ, SH, and DOG.

The Fine Print: As Registered Investment Advisors, we take our responsibility seriously to advise that, since we do not know your personal financial situation, the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Past performance is no guarantee of future results, and it should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Finally, we will always disclose whether we own or are buying the investments we write about.

Comments

[Davewmart:]

Unfortunately, absolutely and devastatingly accurate.

Jul 22 06:16 AM

[Tim Plaehn:]

Tough to be short when the market is going up. Using leveraged ETFs like SKF and SRS as longer term trading holds is very dangerous business. Every single position listed is a short. I hope you do not actually have customers money invested this way. Maybe a few of your newsletter followers will go broke and give up also.

Jul 22 08:57 AM

[vince v:]

loved the barb using HOG for Goldman (Golden Sachet?)

Jul 22 10:01 AM

[Appleton:]

Joseph, it must be hard to keep disclosing your positions in the Ultrashort ETFs. Since you stated that you were starting to invest in these positions, they are almost all way down. Have you been holding them all along? Unless you get in and out very quickly in the ultrashorts, they are a bit of a scam. You must be getting killed, and not only that, but take SRS for example, in the past 3 months 1st it is down 38% (vs. S&P +13%) now just to get back even you need it to rise 61%. I know youve consistently said that you would rather get out a little early than too late, but with losses like this, wouldnt you say that you got out way, way too early?

Jul 22 12:33 PM

[Alan Young:]

Mr. Plaehn has it right. Mr. Shaefer is quite right on the fundamentals, but "the market can stay irrational longer than most people can stay solvent." And holding *leveraged* inverse funds makes it worse, since simple sideways volatility quickly erodes their value (as has been illustrated many times by many posters).

Jul 22 01:39 PM

[Joseph L. S...:]

Responding to Appleton and Alan Young,

Thank you both for your comments and concern. You are correct that it is difficult to maintain even a small short position during such a period of euphoria. Fortunately, we are well-cushioned by the 90% of our holdings still in bond funds, long positions, and the income we generate from those long positions.

For perspective, we said in an article published March 30th, we were
“Long the following preferreds (partial list:) CHK-D, USB-E, G & J, WFC-J, WSF, FWF, WCO, HCN-G, HCP-E &F, KVN, AIV-G, KVF, KVW, KTN, PNH, PNU, PNC-L, KEY-A,B,D,E & F, WRB-A, and SIVBO. We will sell any and all as they are 60-80% above our entry prices. Currently holding oils like RDS.B and XOM, natural gas like CHK, ECA and IMO, and coal land-lease firms NRP and PVR. We will sell 50% of all if/as the market rises toward 8500 or so and will sell more if it goes to the 9000 area. We will also place our first limit order for the first of the inverse ETFs we plan to buy: EEV at a limit of 36.”

Those preferreds soared anywhere from 40 - 87%, providing a gain for the year that will be difficult to blow! And of course, we got killed on the early purchase of EEV, which we still hold (averaged down to 27.) Fortunately it is less than 1% of our total portfolio; all shorts taken together are less than 10%.

We also continued to buy other high-yield value offerings line Australia & New Zealand Banking Group (article of 31 March) and Gabelli Global Gold, Natural Resources & Income Trust (article of 18 June.) We continue to seek quality longs if we can find them.

Fortunately, we limited our short positions to the 10% our discipline dictated, so we aren’t really “hurting.” But neither are we doing as well as we would have had we waited to lay on these positions! Since our Full Disclosure should address what a new reader see as our current viewpoint, we don't list all these positions from previous articles, but do list the bond funds and inverse ETFs we think are most appropriate for someone making an allocation decision today.

Jul 22 02:45 PM

[rrtzmd:]

...don't worry about "Joesph"...I'm sure he's got some explanation up his sleeve about how he's making money hand over fist despite all these short positions...no doubt that's why he spends so much time writing long winded articles about how the market is overpriced and explaining how he's "waiting until things are more reasonably priced"...of course, we have only his word about this...I've suggested several times that he open an account at "simulator.investopedi... so everyone could see how well he manages a portfolio...but, for some reason or another, he just doesn't seem interested...I can't imagine why...


On Jul 22 12:33 PM Appleton wrote:

> Joseph, it must be hard to keep disclosing your positions in the
> Ultrashort ETFs. Since you stated that you were starting to invest
> in these positions, they are almost all way down. Have you been holding
> them all along? Unless you get in and out very quickly in the ultrashorts,
> they are a bit of a scam. You must be getting killed, and not only
> that, but take SRS for example, in the past 3 months 1st it is down
> 38% (vs. S&P +13%) now just to get back even you need it to rise
> 61%. I know youve consistently said that you would rather get out
> a little early than too late, but with losses like this, wouldnt
> you say that you got out way, way too early?

Jul 23 10:11 AM

[rrtzmd:]

...hmmmm -- I see the market's up about 170 points this morning...hey, Joe!...I bet your "shorts" are getting a little brown, aren't they?...HAW!

Jul 23 11:50 AM

[Joseph L. S...:]

Dear rrtzmd,

I’D LIKE TO EXTEND AN OFER TO YOU.

Even though, via your comments, you bring a can-opener to a gun fight…

And, even though you apparently ditched your last sign-on in which, of 700 comments, the SA community gave you a rating of minus 800…

And, even though your current rating from peers is consistently negative…


I’D LIKE TO INVITE YOU TO PERSONALLY AUDIT OUR PUBLICATION’S TRACK RECORD --

//// I’LL EVEN PAY YOU $500. ////

After all, you claim our performance can’t be tracked. That’s a lie. Our buys and sells are clearly stated and monitored every month in our financial letter.

We began our two portfolios January 1, 1999. We monitor all gains, losses and dividends. We don’t include commissions since everyone pays a different price. If you’d like to add $10 a trade, it could change our numbers – instead of being up 245% in our Growth & Value Portfolio (to the S&P’s -- MINUS 25%) why, we may only be up 240%!

I am willing to send you every single issue since January 1999. You would then << INDEPENDENTLY >> verify our calculations. You would track every printed-for-all-to-see... buy and sell, tally the profit or loss, and add the dividend income.

All I ask is two things:

PROVIDE AN EXCEL SPREADSHEET WITH YOUR CALCULATIONS SO WE CAN VERIFY THAT YOU REPORTED HONESTLY, and

IF OUR RECORD IS AS STATED, YOU EAT CROW. IF IT ISN’T, I’LL EAT CROW.

What do you say, rrtzmd? Are you willing to put up or shut up? I’m willing to put up $500. If you find errors in our previous calculations, I’m willing to fix any error and change our reporting to reflect it. I’m willing to subject our track record to the sunlight of public scrutiny.

How about you, rrtzmd? I know you would be the best person to do this audit because no one else would be as intent on picking a nit. Witness your July 8 diatribe, “...how's that GGN trade holding up?...looks like it's down about 10% since you recommended it June 18...gosh, that translates into an annual return of about, uhhhhhhhhh -- NEGATIVE 100%???...”

Really now -- extrapolating a 100% loss from 3 weeks’ action???!!!?? So now that GGN is above our entry price, by your logic we'd have to call it a winner. It isn’t. Not yet. Only time will tell. But the past is a different story. It’s documented. Please accept my offer. Put up or shut up.

We’ll provide complete access to what would be a delight for you if you could find skullduggery, and $500 to boot. On the other hand, if you are only willing to vilify and rant to every writer of every article, as a cursory review of your comments will show, but are unwilling to put up, I can waste no more electronic ink on you.

Respectfully submitted,
JS

Jul 23 03:17 PM

[bricki:]

Ahh sigh. Gotta love these articles about how if you take a short position and the market goes up the reason is manipulation, irrational investor behavior, PPT conspiracy, the volume is too low for it to be a real rally and dammit this thing had better retest the lows according to my technical analysis. Not to mention that the Dow and Gold are going to be equal real soon now.

Well here is the clue. The market doesn't care about these theories. The market is going to go up or down despite the best intentions and well laid plans of investors.

What the real story is that you have to be nimble and brave. Get in when the corpses are rotting in the street. And get out when the touts are saying "all in" the market can't ever go down again.

Jul 23 04:17 PM

[rrtzmd:]

...well, mercy me!!...don't blame me cause the market went up!...audit your records?...awww, hell, son, I trust ya'...truly I do!...on the other hand, were you to open an account at "simulator.investopedi... then we all could track your trades and then find both solace and confidence in your bountiful words of wisdom...no doubt, you would quickly become a veritable halide spotlight in the dark caverns of Wall Street....


On Jul 23 03:17 PM Joseph L. Shaefer wrote:

> Dear rrtzmd,
>
> I’D LIKE TO EXTEND AN OFER TO YOU.
>
> Even though, via your comments, you bring a can-opener to a gun fight…
>
>
> And, even though you apparently ditched your last sign-on in which,
> of 700 comments, the SA community gave you a rating of minus 800…
>
>
> And, even though your current rating from peers is consistently negative…
>
>
>
> I’D LIKE TO INVITE YOU TO PERSONALLY AUDIT OUR PUBLICATION’S TRACK
> RECORD --
>
> //// I’LL EVEN PAY YOU $500. ////
>
> After all, you claim our performance can’t be tracked. That’s a lie.
> Our buys and sells are clearly stated and monitored every month in
> our financial letter.
>
> We began our two portfolios January 1, 1999. We monitor all gains,
> losses and dividends. We don’t include commissions since everyone
> pays a different price. If you’d like to add $10 a trade, it could
> change our numbers – instead of being up 245% in our Growth &amp;
> Value Portfolio (to the S&amp;P’s -- MINUS 25%) why, we may only
> be up 240%!
>
> I am willing to send you every single issue since January 1999. You
> would then << INDEPENDENTLY >> verify our calculations. You would
> track every printed-for-all-to-see... buy and sell, tally the profit
> or loss, and add the dividend income.
>
> All I ask is two things:
>
> PROVIDE AN EXCEL SPREADSHEET WITH YOUR CALCULATIONS SO WE CAN VERIFY
> THAT YOU REPORTED HONESTLY, and
>
> IF OUR RECORD IS AS STATED, YOU EAT CROW. IF IT ISN’T, I’LL EAT CROW.
>
>
> What do you say, rrtzmd? Are you willing to put up or shut up? I’m
> willing to put up $500. If you find errors in our previous calculations,
> I’m willing to fix any error and change our reporting to reflect
> it. I’m willing to subject our track record to the sunlight of public
> scrutiny.
>
> How about you, rrtzmd? I know you would be the best person to do
> this audit because no one else would be as intent on picking a nit.
> Witness your July 8 diatribe, “...how's that GGN trade holding up?...looks
> like it's down about 10% since you recommended it June 18...gosh,
> that translates into an annual return of about, uhhhhhhhhh -- NEGATIVE
> 100%???...”
>
> Really now -- extrapolating a 100% loss from 3 weeks’ action???!!!??
> So now that GGN is above our entry price, by your logic we'd have
> to call it a winner. It isn’t. Not yet. Only time will tell. But
> the past is a different story. It’s documented. Please accept my
> offer. Put up or shut up.
>
> We’ll provide complete access to what would be a delight for you
> if you could find skullduggery, and $500 to boot. On the other hand,
> if you are only willing to vilify and rant to every writer of every
> article, as a cursory review of your comments will show, but are
> unwilling to put up, I can waste no more electronic ink on you.<br/>
>
> Respectfully submitted,
> JS

Jul 23 05:34 PM

[sheeple123jump:]

hear,hear.....well said


On Jul 23 03:17 PM Joseph L. Shaefer wrote:

> Dear rrtzmd,
>
> I’D LIKE TO EXTEND AN OFER TO YOU.
>
> Even though, via your comments, you bring a can-opener to a gun fight…
>
>
> And, even though you apparently ditched your last sign-on in which,
> of 700 comments, the SA community gave you a rating of minus 800…
>
>
> And, even though your current rating from peers is consistently negative…
>
>
>
> I’D LIKE TO INVITE YOU TO PERSONALLY AUDIT OUR PUBLICATION’S TRACK
> RECORD --
>
> //// I’LL EVEN PAY YOU $500. ////
>
> After all, you claim our performance can’t be tracked. That’s a lie.
> Our buys and sells are clearly stated and monitored every month in
> our financial letter.
>
> We began our two portfolios January 1, 1999. We monitor all gains,
> losses and dividends. We don’t include commissions since everyone
> pays a different price. If you’d like to add $10 a trade, it could
> change our numbers – instead of being up 245% in our Growth &amp;
> Value Portfolio (to the S&amp;P’s -- MINUS 25%) why, we may only
> be up 240%!
>
> I am willing to send you every single issue since January 1999. You
> would then << INDEPENDENTLY >> verify our calculations. You would
> track every printed-for-all-to-see... buy and sell, tally the profit
> or loss, and add the dividend income.
>
> All I ask is two things:
>
> PROVIDE AN EXCEL SPREADSHEET WITH YOUR CALCULATIONS SO WE CAN VERIFY
> THAT YOU REPORTED HONESTLY, and
>
> IF OUR RECORD IS AS STATED, YOU EAT CROW. IF IT ISN’T, I’LL EAT CROW.
>
>
> What do you say, rrtzmd? Are you willing to put up or shut up? I’m
> willing to put up $500. If you find errors in our previous calculations,
> I’m willing to fix any error and change our reporting to reflect
> it. I’m willing to subject our track record to the sunlight of public
> scrutiny.
>
> How about you, rrtzmd? I know you would be the best person to do
> this audit because no one else would be as intent on picking a nit.
> Witness your July 8 diatribe, “...how's that GGN trade holding up?...looks
> like it's down about 10% since you recommended it June 18...gosh,
> that translates into an annual return of about, uhhhhhhhhh -- NEGATIVE
> 100%???...”
>
> Really now -- extrapolating a 100% loss from 3 weeks’ action???!!!??
> So now that GGN is above our entry price, by your logic we'd have
> to call it a winner. It isn’t. Not yet. Only time will tell. But
> the past is a different story. It’s documented. Please accept my
> offer. Put up or shut up.
>
> We’ll provide complete access to what would be a delight for you
> if you could find skullduggery, and $500 to boot. On the other hand,
> if you are only willing to vilify and rant to every writer of every
> article, as a cursory review of your comments will show, but are
> unwilling to put up, I can waste no more electronic ink on you.<br/>
>
> Respectfully submitted,
> JS

Jul 23 10:49 PM

[sheeple123jump:]

Joe,Ive only glanced at your web site,as it seems to indicate you only handle high asset portfolios ,I should have inquired further...but I just presumed that our asset level wouldnt qualify.
We are in the 500-600 K range ,and recently fired our neglectful and shortsighted financial manager...I'm learning to 'do it myself' and alongside being greatly appreciative of the education I get from people like yourself here in SA, I also think about just finding a good investment manager/firm (like yours) to do it for me.
should I take another look at your web site? thanks for your good work here in SA.
Thomas.



On Jul 23 10:49 PM sheeple123jump wrote:

> hear,hear.....well said

Jul 23 11:03 PM

[Joseph L. S...:]

Thomas, you're welcome to peruse our website or call us at the number on our Profile page. We'll do our best to answer any questions you might have and, if you then believe it would be a good fit, to assist as you direct.
With best regards,
Joe


On Jul 23 11:03 PM sheeple123jump wrote:

> Joe,Ive only glanced at your web site,as it seems to indicate you
> only handle high asset portfolios ,I should have inquired further...but
> I just presumed that our asset level wouldnt qualify.
> We are in the 500-600 K range ,and recently fired our neglectful
> and shortsighted financial manager...I'm learning to 'do it myself'
> and alongside being greatly appreciative of the education I get from
> people like yourself here in SA, I also think about just finding
> a good investment manager/firm (like yours) to do it for me. <br/>should
> I take another look at your web site? thanks for your good work here
> in SA.
> Thomas.
>

Jul 25 08:27 PM