Jason Merriam

A Worm in the Apple?

Mr. Headley, I'm not a technical investor, but your article was a good read and points out something very clear- AAPL is overvalued. The whole idea of Seeking Alpha is to share point-counter point, but it appears the ever-loyal AAPL "fanboy" contingent is a tough sell.

Tradingdayz also makes an interesting point re the anecdotal correlation between "expectation bubble" and "irate comments".

I don't doubt that Apple has been at the forefront of innovation. They have executed well, marketed geniously and everybody I know loves their products. But, that does not exclude the possibility that (at current valuations) the apple pie might be getting over-baked.

Huron Consulting Group's Crash: Red Flags Abound

elipsemaster,
Every company's earnings have both a cash and non-cash component. Suppose I report earnings of $500,000. However, cash-flow, the increase in my bank balance, shows $700,000.

The difference comes from "adjustments" - depreciation, changes in inventories and receiveables ( two-steps and one-step away from cash respectively), bad debt allowances, etc. Together, these are known as accruals.

Although most of our accrual data comes from balance-sheet items, you can look to the statement of cash flows for clues also.

Example: Start with reported net income, strip out changes in depreciation, goodwill impairment, and changes in capital spending. (Keep in mind that depreciation is a tax benefit, not an expense).

Negative accruals suggest a company is not fluffing up earnings with lots of non-cash charges. However, accruals have to be put in context to a company's size and assets.

And, accrual analysis doesn't work so well with banks and insurance companies. They are capitalized much differently, and as we have discovered, making sense of their financial statements is at best, a crap-shoot.

If you would like more information, we have links to articles on related topics in our website at merriamreport.com (click the product information tab). Hope this information helps to answer your questions. JM

Wells Fargo Is Broke: Poor Forecasting Slays Another Giant

James: I don't know that Wells is "broke", but their earnings quality is certainly questionable. However, I agree with you that rising unemployment could really muck up the works, especially when you consider that California's jobless rate in in double-digits and likely rising.

Curious Accounting Tactics at Wells Fargo

Albert- "These days a lot of cash is falling through the cracks under the guise of a non-cash charge".

I couldn't agree with you more. That said, accounting changes such as FASB 142 & 141 disrupt data time series making it difficult to estimate trends and forecast future performance. More importantly, the tax-related cash flows associated with these changes make it necessary to pay more attention to operating cash-flow when assessing a company's financials.

Another thing; SFAS 142 does not require companies to disclose the methodology used when applying the impairment test. In Wells' case it is difficult at best to determine quality of their goodwill assets to the associated earnings and cash-flow they are intended to support.

Curious Accounting Tactics at Wells Fargo

Author replies: I am well aware to FASB SFAS 142 and 141 changes regarding goodwill amortization and regret the error. My reference to expensing or amortizing intangibles should have been limited to “Other Assets”.

My point essentially is that as Wells goes through its massive merger and restructuring, earnings will be suspect at best, and possibly lousy, depending on merger costs, further credit reserves and its need (or desire) to amortize intangibles, depreciate assets, and de-lever its balance sheet.

During Jack Welch’s watch at GE, the company would often restate intangible adjustments to segment profit information (GE Capital for example) as a corporate cost rather than a unit operating cost. However, it does not alter the fact that even with the elimination of the previous amortization rules this has a substantial effect on financial statements.

In the case of Wells Fargo, management is basically telling investors that most of Wachovia’s goop is behind them. I would also note that although both amortization and/or impairment is a non-cash expense/charge with no likely tax benefit, companies have gotten pretty crafty in mitigating the effects via pro forma figures in recent years.

As for the surge in the assets (nominal or other wise) discussed in the article, I believed it was or should be obvious to any reader that Wachovia is included in the consolidated statements. While I fully support constructive criticism, it does not require an abacus to realize an acquisition like Wachovia is going to balloon somebody’s balance sheet big-time.

The real issue here is the stock has had a great run and judging by the sentiment in many of your comments, most folks are long and expect more upside. This could very well be the case and the best of luck.

I never implied WFC should be shorted, but do believe the share price is extended at these levels. My only suggestion is to be careful.

The bottom line for me is what I’m seeing on the balance sheet doesn’t have the feel of quality or sustainability in its future earnings potential (at least in the short-term). The bigger question you should be asking is how is Wells funding all this blossoming loan growth?

According to management’s clipped tone it isn’t TARP funds and the recent secondary only gives them a bit of wiggle room in meeting their capital requirements. Maybe ‘ol Dick Bove is right this time. Perhaps Wells is funding loans with long-term debt. JM

Politically Powerful Unions: A New Class of Senior Debt?

Unions are more of an endangered species than any of the industries they have helped ruin economically over the years. All one has to do is look at steel, airlines and shipping for proof.

Risk is as risk does and I would only hope that my GM bonds will fetch more than ten cents on the dollar. I don't mind taking a haircut for my risk participation, but getting scalped feels pretty crummy too. Meanwhile, I continue to pay my health insurance premiums each and every month just like always.

However, I'll be damned when my taxpayer dollars are used to subsidize the healthcare of a union retiree. The middle-class la-la land created by the UAW years ago bears no resemblance to the middle-class of today's real-world.

Cash Is King: Accrual Earnings Stock Screen

Aalan & Mark,
The Merriam Report includes an accrual ratio model in their cash-flow analysis research. Samples of our research are available at merriamreport.com . We offer individual reports, packages and a quarterly newsletter, all at very reasonable prices. JM

On Aug 20 11:08 AM Aalan wrote:

> This is a terrific idea. My only problem is... where do I find a
> screener that has the accrual ratio listed as a criterion??
>
> Failing that, it's a good method for evaluating financial statements--doing
> the calculation by hand for a stock while researching it. But I'd
> love to have the luxury of just running a screen. Got one?

Bank Insiders Made Out Like Bandits

We had no idea this would prompt such vibrant replies.

In response to those who feel the article is misleading or late to the party, your points are well taken. Our intent was only to get some humor from the irony of situation (exploding bank earnings and bailing insiders).

We could care less about tax consequences, speculating on motive or whether they were net-share transactions. Only thing we can say with any certainty is that bank insiders were less than sanguine in putting their money where their mouths were. These charts illustrate that point.