User 221132

Salesforce.com: Absurdly Overvalued

I'd wait to short this stock until its fundamentals show evidence of actual deterioation. I'd want to see contracting margins, rising accruals, falling current ratio, etc.

If fundamentals later start to decline, this high priced story stock will be a great short. But I think there are better short possibilities, for now.

Salesforce.com: Absurdly Overvalued

I think this short idea is intriguing, although it's important to wait for evidence of weakness. I don't know anything about this company, including what it does (yet). But I see its return on equity is about 9.5%, and return on capital is 4.5%. With a pe ratio in the stratosphere, and abysmal returns on capital, CRM fits the magic formula model for short sale possibility.

Moreover, projections of furture earnings always factor in unconscious and crucial assumptions about macro growth. Most investors believe that, sooner or later, a full fledged earnings recovery will happen. But it is far more likely that future earnings will disappoint for nearly all companies--including CRM--for the forseeable future. Disappointing earnings will be the inescapable consequence of on-going capital consumption in the US, due to decades of destructive and worsening government policy.

So CRM looks highly interesting. Thanks for the report.

Why This Rally Is Unsustainable

You raise some interesting points.

I don't think we've seen the trough of the bear market yet. No one can know what drives a bear rally higher, except in the most general way; it's too complex.

I'd like to point out what I think is is small logical error in your thinking. You state, "Clearly the powers that be are reflating a reflated bubble. From dot-coms to houses and now to Treasuries. What is all of this? Passing off asset depreciation to the taxpayer in the form of currency depreciation. Wait for the black swan in Treasuries to implode the bubble (which is currently inflating), rates to rise, and rampant inflation."

If rampant inflation is coming, then the financials have to post higher earnings for a while. They're the conduit through which the inflation is facilitated. In other words, the only route to future rising inflation is through unsustainably higher earnings for financials. (Of course, the rampant inflation we worry about--based on the 150% inflation of the monetary base--will eventually destroy the banking system. Rising interest rates mean falling financial asset values.)

For now, financials are improving, because the yield curve mints them money. But this improvement may prove transitory, given looming commercial debt problems.

More basically, the problem for V recovery hopes is that times have changed. Why? Americans (and Europeans) have been forced by decades of rising government intervention to eat their seed corn. If this is true, then we have been consuming capital--a developement that portends slumping stock and bond prices in the years ahead.

If our capital base is crumbling, relative prices change. Industries that make producer goods (stuff for other businesses) become less profitable, because a greater portion of total output has to be devoted to present consumption. So demand and pricing for capital goods slumps.

This slump makes it difficult for borrowers to repay loans, and for banks to make money lending to them. The slump in profits can't be wished away by government spending and inflating--not for very long, at least--because the inflating-spending deplete scarce capital on investment White Elephants and endless variations of "the Bridge to Nowhere".

So if inflation gets delayed for a while by poor lending prospects, financials could suffer. Moreover, government bonds--long-term certificates of financial destruction--could rally.

Of course, as you point out, the markets are rigged. Increasingly so. But we knew this; it goes with the territory.

How Does $9000 Gold Sound?

Fiat currencies are launched on a great trajectory to destruction over the next decade. That sounds like hyperbole, but it is realism.

The reality is that social democracies, including the US, are informally bankrupt. Governments promised vastly more in welfare money than their populations could possibly support from earnings. As the entitlement crisis looms over us, governments hurl trillions at bailout and stimulus fantasies that destroy more of our dwindling capital base.

Quantitative easing won't make the world's economies more productive or prosperous. It will merely lead to further capital consumption, reduced production--and at some not distant point--virulent inflation. Already, we see broad based evidence that lending is resurrecting amidst the rubble of the recession.

Gold may not emerge as a formal currency anytime soon. But it is launched on a super bull market that will carry it to towering heights. The fundamental force behind the bull is not the fervor of Ayn Rand devotees or gold bugs. It is simply the destruction of the store-of-value role of fiat money that is taking place with ominous and disturbing speed.