Alan Brochstein

Large Caps Could Lead the Market Much Higher

No, perhaps you are getting confused with the Index of Leading Indicators. GDP is the sum of production and has nothing to do with asset values.


On Oct 19 06:06 PM Bjarne Jensen wrote:

> Do I recall correctly that increases/decreases in the stock market
> is a component of GDP? Does the market run up explain positive GDP?
> Does anyone know the answer?

Large Caps Could Lead the Market Much Higher

I don't totally agree with your point. Yes, PE's have run up from extremely low levels, but it this surprising? Usually PE's do rise when earnings are depressed. Plus, they are linked to interest rates, and corporate bonds have come down in yield this year. I believe, though, that an honest assessment of earnings is that they have been much better than we would have expected. Kudos to companies for taking so much cost out so quickly. Surely, some of this is just slashing headcount, an action that may be expedient in the short-run but likely to poise longer term challenges to economic recover. But part is related to operating smarter. I spend most of my professional time studying smaller companies, and improvements in business processes are certainly helping the cost structure.

To argue your point more specifically, though, Captain JJack, let's look at just the top 10 companies:

XOM = score a big one for you -- 6.41 at year-end to 3.87
MSFT = ditto -- 2.23 to 1.67
WMT = nada - 3.71 to 3.58, but UP from 3.53 at the end of March
JPM = 2.55 to 2.14, but up from 1.63 at the end of March (and from 1.41 bottom)
GOOG = UP 21.74 to 21.93
GE = 1.45 to 0.98
AAPL = UP BIG 5.16 to 5.89
PG = 4.20 to 3.72
JNJ = 4.66 to 4.57, but up since March's 4.49
IBM = UP 9.07 to 9.79

So, while some estimates for this year are clearly a lot worse, several are up and some are unchanged. Perhaps more importantly, the direction of the estimates is now up. So, I believe that there was too much pessimism in March regarding future earnings and that PE ratios were absurdly low.

This tells nothing of the future, but it does help explain the rally. It's not just PE expansion, and PE ratios haven't moved to "absurdly high" levels as many claim.


On Oct 18 09:11 AM CaptainJJack wrote:

> We have had a HUGE run-up of P/E multiples since March. In fact,
> I could argue that the ONLY thing that has really changed since March
> are the P/E multiples.
>
> Anybody who has been in this market over the last year knows how
> notoriously bad the forward earnings numbers are -- just take a look
> at forward estimates at the start of this year for THIS year.
>
> While there is a lot of manufacturing leverage now that companies
> have cut so much payroll, the current fixed infrastructure is currently
> being supported by large government (both US and Abroad) stimulus.
>
>
> The key question is: What happens when the stimulus is withdrawn?
>
>
> The key metric is the top line, not the bottom line: Those forward
> earnings are only as good as the sales projections.
>
> As an aside, there has been a significant tax cut which, if I remember
> the numbers right, amounted to 2/3 of the tax stimulus proposed by
> some Republicans ( there never was a unified Republican stimulus
> alternative, but the number $400 billion was often used as the tax
> cut required --- and the only stimulus needed).
>
> We should have seen the top line numbers rising by now if the tax
> cuts were as powerful as they were being promoted, and I for one,
> do not see it.
>
> As far as I can see, the $250 Billion tax cuts have had almost zero
> effect, and this is similar to the tax rebates of last year--coming
> into effect in at the end of the 2nd quarter, after the recession
> was 2 quarters old, and just before the economy tanked.

Large Caps Could Lead the Market Much Higher

Hey, it's blatant manipulation, but here's a fact. If the economy goes south again, many of the companies that we thought might disappear due to poor liquidity (too much debt due too soon) won't struggle as much. Many have reset their capital structure. Now this doesn't mean that their prices won't drift slowly towards zero as the economy remains Japan-like for years to come, if that is the case, but there won't likely be the panic such as we experienced in the earlier part of this year.


On Oct 18 09:39 AM j-dub wrote:

> Appreciate the timely reply.
> See, this is the effect that the gunning of the stock market is trying
> to produce. Money managers wondering if they are mising an economic
> expansion (perpetually, always a quarter or two away)about to occur
> (even if the math says it can not). Thus producing the snowball effect
> of moving the markets even higher .
>
> I wish you luck and, yes, large caps with world-wide exposure certtainly
> might producce the highest returns in the next five years.

Large Caps Could Lead the Market Much Higher

As I said, I am not convinced that the possibility to which I allude is a probability, but I will say that after 31 years of following the economy and stocks, I have learned that having a handle on the economy (or thinking one does) doesn't make predicting the direction of stocks as easy as one might hope. It's always a question of "what's priced in".

I became bearish on the economy in the summer of 2007, so I wasn't late to the game. I had an "aha" moment rather late last year (around Thanksgiving) that "this time is different". I still cling to that notion - that the economic recovery is doomed because "we went over a cliff".

Here we are almost a year later, and things are much better than most of us, including me, might have imagined at the time. Of course, the intervention and support of the government has had a massive role and has tainted the recovery, but, nonetheless, even crappy companies are refinancing their debt. Heck, we even have IPOs and M&A again.

Mr. Wendling, who started his bearish website in 2007 rather than 2009, could be correct generally (a big rally followed by a worse bear market move). I guess that is what I fear not expect. It is certainly not consensus, even among the bulls. As long as rates remain low, liquidity high and the animal spirits alive, there is a risk that the scenario I described plays out.

It is not clear to me that this is sustainable, or I would act accordingly. So, this article is truly an exercise in "what if". Dave Wrixon, nice try, but I don't earn "commissions", so that's clearly not my motivation either. I hope that my additional comments reinforce the point I was trying to make - this is not my expectation yet but rather a scenario that could play out and for which I will look for signs (does IBM break to an all-time high, for instance).


On Oct 18 03:13 AM j-dub wrote:

> "I continue to think that the economy will be challenged for quite
> some time and that the earnings estimates out there are too optimistic.
> But what if I am wrong?"
>
> In actuality, you are not really doubting yourself, are you Mr. Brochstein?
>
> You don't think, you know that this is the case. Reality , logic
> and reason force that economic case upon us as a country.
> So what you are really thinking in your heart of hearts is:
> "Can the market can continue to disconnect itself from reality or
> will reality catch up to it?"
> You assume that reality must take hold, as it always eventually does.
> But maybe, JUST MAYBE, you think, "this time is different."
>
> I have bet very heavilly this past week that it's not. No responsible
> money manager should seek out new models proving that it is.

S&P 500 Watch: March 'Winners' Are Actually the Biggest Losers

I think we are in a range of 730-880 roughly over the next several months. We will possibly make new lows but most likely test the recent bottom later this year. In any event, I agree with you that stocks won't be making anyone rich for quite some time (except those who can trade opportunistically).

I find it interesting that some of the demolished stocks have come back, but others haven't (as I demonstrated on the first chart as well as what I saw with the same analysis applied to the R2000). Could it be that GM really isn't worthless? I doubt it. The reality appears to be that BAC, GM, GE etc. aren't going to see their stocks zeroed out - for now.

On Mar 29 08:54 AM prudentinvestor wrote:

> Thanks for an informative analysis. When the market was near its
> lows I had argued that sound stocks were by no means "cheap"; and
> that the low SP500 was more due to some of its constituents being
> demolished, rather than due to its good companies becoming "cheap".
> This was just an observation, now bolstered by your excellent analysis,
> which says that the demolished ones have stirred back to life in
> the ER, boosting the SP500.
>
> I still maintain that at current levels stocks are not "cheap" except
> relative to the bubble era. Dividends are being slashed at astonsihing
> rates, and historically, companies which drastically cut dividends
> have restored them slowly, if at all. Thus, I expect SP500 dividends
> will not climb back to 2007 levels for many years, and this suggests
> to me that stocks will be worth less than they were in 2007 for many
> years as well.

S&P 500 Watch: March 'Winners' Are Actually the Biggest Losers

I agree with your idea, but I don't really have good data on short interest integrated into my analytical tool (StockVal). The good news for me is that I will soon have it when I migrate to BaseLine in the coming months.


On Mar 29 08:43 AM Chezfrederick wrote:

> Excellent article. I especially like the approach you have taken
> to analyse the outcome of the recent rally. Good perspective and
> good advice.
>
> One of your conclusions is that pook performing stocks in the past
> year performed better in March because of short covering. It would
> have been interresting to see the volume of shorts before and after
> the rally for some of the leaders in the rally. Have these actually
> dropped or increased.
>
> Thanks and keep the articles coming.

The S&P 500's Strongest Balance Sheets

S&P classifies it as an "Industrial"... On your point about their balance sheet, it is quite strong compared to peers and to other business services providers, though I appreciate your comment upon their fundamental outlook.

Make no mistake, this list wasn't a buy recommendation by any stretch, but rather a list of companies that might survive better than others...


On Mar 22 08:54 PM TeresaE wrote:

> Robert Half International is NOT an industrial stock.
>
> Robert Half is an Accounting/Finance/Tech temp firm.
>
> Of course they have a strong balance sheet, you can't show people
> as assets, and their inventory (workers) is bulging while their customers
> are being bankrupted.
>
>
>

The S&P 500's Strongest Balance Sheets

They made the cut. Upon closer examination, they sure have a lot of inventory. Even if one cuts it in half, though, they still have plenty of cash and other short-term assets to cover near-term and most of their longer-term liabilities. Their FCF generation will most likely plunge, but I find it interesting that the company hasn't ever lost money over the past 35 years (which is as far back as my data goes). At 2X tangible book, though, clearly the stock has some downside if their earnings plunge.

On Mar 22 10:46 AM Gunns wrote:

> Not every day you see the argument for Nucor having "financial strength"...
>
>
> Pensions, pensions, pensions...

The S&P 500's Strongest Balance Sheets

I wasn't sure how much to restrict P/TB. It amazes me how many companies now trade at less than tangible book, but most of these have a lot of debt or tend to be very small. My main goal in including that variable was to get rid of the companies with very little (or negative) tangible equity. Clearly AAPL or PCP have a lot less downside protection than ESV or TIE in that regard. You make a very valid point, and hopefully the market will continue to recognize that some companies have intangibles that are worth something.


On Mar 22 06:45 AM Zoltan L. Kovacs wrote:

> Nice to see Apple on your list, they really deserve it. But they
> have only made it because you put hurdle rate for Price/Tangible
> Book <4. It is in fact natural for a company with such innovative
> potential like AAPL to have a price way over the value of the tangibles.

Cash Analysis: Wal-Mart, Lilly, Verizon Not Quite So Rich

Imclone? yes

On Mar 19 12:29 PM User 379270 wrote:

> Is the number associated with LLY AFTER their recent $6 B acquisition?

Cash Analysis: Wal-Mart, Lilly, Verizon Not Quite So Rich

ok, thanks...


On Mar 18 12:08 PM BS Detector wrote:

> Alan Brochstein wrote:

Cash Analysis: Wal-Mart, Lilly, Verizon Not Quite So Rich

While I am aware of your point, I am unsure how to incorporate it into my analysis. If you look at the balance sheet for WMT, you will find a massive AP ($29 billion). This goes into the Current Liabilities metric of course. So, WMT is "borrowing" from its vendors, and the cash that they show is owed to them.


On Mar 18 01:41 PM Joseph Sherman wrote:

> Great article. Would you take into account favorable trade credit
> terms that Wal-Mart uses with suppliers as a substitute for cash.
> For example, much of Wal-Mart's supplies give the firm several months
> to pay for goods, Wal-Mart makes a sale, in cash or credit card,
> and holds onto the cash for a month or two before paying the supplies.

Cash Analysis: Wal-Mart, Lilly, Verizon Not Quite So Rich

Zoltan, your assessment is correct. I am aware of the limitations of this exercise, but I believe that it actually goes a long way towards rooting out companies with the illusion of high cash balances. As transitory as it might be, I believe that you will find by looking over quarters and quarters of the relationship for a given stock, one will find that it isn't transitory though it could theoretically be so.

Cash Analysis: Wal-Mart, Lilly, Verizon Not Quite So Rich

Deferred revenue means that the company collects cash but hasn't booked the sale. In the future, it will have a sale, but no cash associated with it. Hence, a company can have "earnings" but not see its bank balance increase. The presence of a large amount of deferred revenue vs cash tells me that the cash won't go up in the future, al lthings equal (unless they grow deferred revenue). There is also always a remote risk that the customer cancels and wants their cash back. The point is that the cash is on the books but hasn't been run through the P&L yet.

On your second comment, that is precisely what I am saying. If current assets are to fund current liabilities and they aren't converted to cash as is expected, the cash on the balance sheet, all things equal, would have to be used to pay current liabilities.

With a King's Ransom in Cash, Why Still No Buying Spree in the Tech Space?

1) A lot of the "cash" is spoken for in terms of liabilities, such as debt, deferred revenue, etc. Cash is easy to spot, being at the top of the balance sheet, but take a look down or to the right sometime and you will see what I am talking about.

2) These companies tend to repurchase their own stock - probably a safer but not necessarily bright idea in this economy.