endoftheworld

'Too Big to Exist' Bill Would Impose Market Discipline

Its even simpler for the government to enforce market discipline. It should do nothing to save any bank. Re-impose Glass-Stegall (separate the risky investment banking/trading from the traditional loan based banking), and declare as a policy, that after a specific date, no further assistance to any bank will be rendered.

That declaration itself would put creditors and equity holders on notice and force them to rethink about risk. After a brief period, if there was going to be any run, the government would be there to handle it, but going forward the market would enforce its own discipline. This talk of a systemic market breakdown, financial armageddon, is a laughable load of tripe if there was any. Utter manipulation by a few ultra rich bankers hell bent on using the government resources and people's ignorance to further their own ends.

Baidu vs. Google: A Free Cash Flow Analysis

Sorry, but I just find that logic a bit facile and the conclusion specious.

If you ARE going to use Free Cash Flow to value stocks, you should use FCF. The Enterprise Value (EV) of the company is independent of the capital structure (other than the tax impact assuming its not distressed). It DOES depend on the FCF value you use though. You should use the (correct) lower FCF to calculate EV AND use the appropriate adjustments to calculate the dilution impact based on the fair value of the options. Most of these Items are included in the GAAP statements. You can use OCF-Stock Based Comp - Capex=FCF, and use GAAP diluted shares as a better estimate. The company's already done the math for you in most cases.

Most of the dilution adjustments depend on the current stockprice, exercisability and cash flows from the diluting instruments, so its not a simple linear relationship of doubling the shares for example in your example. What you DO end up doing is getting an inflated present value of EV when you use an inflated FCF for longterm projections, especially when you project them out and assume a growth rate. Its not as simple as dividing by "diluted" shares to get to the true value.

On Oct 29 09:33 AM Peter Mycroft Psaras wrote:

> www.investopedia.com/t...
>
> I do not include them in the cash flow side (numerator) but do included
> them in the (denominator) as everything is included in there. <br/>
>
> "
> Investopedia Says
> Investopedia explains Fully Diluted Shares
> An investor should consider carefully the fully diluted share amount
> because it can cause a company's share price to plummet significantly
> if a large number of option holders or convertible bond holders decide
> to claim their stock.
>
> For example, let's say that XYZ Corp. currently has 1 million shares
> outstanding, 1 million options outstanding (assuming each option
> gives the right to buy one share) and its share price is $5. If everyone
> decides to exercised their options, there would be 2 million shares
> outstanding and the share price would likely drop to $2.50. "
>
> The method I use has been very successful for me and my FCF, FROIC
> methods have done wonders for my results. I hope that explains my
> method and allows the non-professionals who are reading this to understand
> what we are doing. Diluted shares solves the problem of compensation
> and that is the only number I use in my calculations.

Baidu vs. Google: A Free Cash Flow Analysis

The reason I'm asking is that most companies add back "stock based compensation" in their calculation of Operating Cash Flow (OCF). The typical analyst simply calculates reported OCF-Capex=FCF to calculate Free Cash Flow.

If you recognize that FCF should be the residual cash flow companies throw off after taking into account all spending required to run the company, thus FCF should be the cash available to the stock and bond holders, in your analysis, if you are using reported numbers, you are neglecting to account for the substantial amount of compensation employees would require, though in the form of stock.

This is a quirk that most analysts ignore for some reason. If a company pays a $10million to employees in stock, its ignored in the FCF, but if it pays $10m in salaries, its counted. Net impact is that employees walk away with $10m cash regardless. Where does the cash come from in the case of options/stock? Financed by existing shareholders. This can be extremely significant, especially in growth/tech companies. You should account for the fact that some of the operating cash flow should be reduced for this factor, which is the reason why stock comp amortization was principle behind their inclusion in GAAP figures.

by the way the Question was:

Did you include or exclude Stock Based compensation in your calculation of "Free Cash Flow"?

On Oct 28 09:49 AM Peter Mycroft Psaras wrote:

> I use diluted shares outstanding in my calculations so therefore
> everything gets included in that.

Baidu vs. Google: A Free Cash Flow Analysis

Did you include or exclude Stock Based compensation in your calculation of "Free Cash Flow"?

If the FDIC Is Broke, Why Are They Still Issuing Guarantees?

What difference does it make whether a government institution is insolvent or not? When the government has basically declared that banks will be saved at all costs, no higher priority, and the government has a printing press, of COURSE they're going to back CITI's debt or any other debt, even yours, if you have mortgage. Why shouldn't this be expected?

Why Banking Is Insolvent

It gets better. Total Mortgage debt outstanding has more than doubled, or in dollar terms risen in excess of $5trillion over the last decade. Aggregate asset levels (using the S&P500 as a proxy), are essentially flat (use any other broad market index if you prefer - except housing, as that is the variable in question here)

So with asset prices essentially the same, consumers who have more have twice the number unemployed are servicing more than twice the debt.

Even accounting for population growth, one cannot come up with an equation that allows the servicing of this extra debt without massive defaults. Some of those defaults/losses have been offshored by selling MBS to foreign govt's, the rest, have been taken as hits by the banks, but the majority of that liability is with the Fed which finances it by printing currency.

I'd say over half the additional debt created over the last decade is probably going to be defaulted on, i.e. $2.5-$3trillion.

Baltic Dry Index Tells the Real Economic Story

It could be there is excess shipping capacity in which case shipping prices will not keep a linear pace with the materials/commodities

Apple: Set to Double Again

Net of it is that in most cases, the market does NOT care what is actually happening as long as the reported number looks good.

If it doesn't, its up to the company to promote the "pro-forma" number.

Cash flow - what is that? You mean, companies should be measured on cash, not earnings? Who needs cash when you have great pro-forma "earnings"?

Most investors can't even read or understand an income statement, let alone a cash flow, let alone understand how stock option expenses or deferred assets/liabilities should be interpreted, which is why investors herd into and out of stocks.

The Coming Economic Collapse, Part 2

sounds like you should be shorting the hell out of the market then! we should be getting out our Mad Max suits and get ready to prowl and hunt on the soon to be barren wasteland called the US ;)

The Worst Case Scenario (Someone Has to Say It)

FANTASTIC MOVIE SCRIPT! - "28 YEARS LATER" - Who needs viruses when you have debt?

The Last Five Years in a Single Chart

Yes, so? basically all that's saying is volatility increasing as the bank's capital cushion is eroded.. so?

The Bounce in Financials: Will it Last?

Some stats:
Mortgage debt in 2000 - ~5trillion
Mortgage debt in 2008 - > 10 trillion
Total mk cap of financial stocks in sp500 in March 2007 - $2.7 trillion
Total mkt cap of financial stocks in sp500 in March 08 - $1.9 trillion
in 2009 - 500billion

Stock market is back at mid/late 90s levels. Is unemployment? consumer earning power? confidence? How can the same consumer service more than twice the debt being far worse off on almost all measures?

To date banks banks have written off only a fraction of the bad debt on their books. That's why the market has reduced their stocks down so much. House prices will go back to pre-bubble times - the write-downs will continue. Mind you, we're only considering residential real-estate right now. Take into account commericial assets that have gone down, we're off even worse. Don't believe the hype that everything is hunky dory now in the financial wonderland. The bond holders know better about the mark downs coming. Economic value has been destroyed - whether or not banks "mark-to-market",fair value is less than the debt on the books, and first equity holders will take their lumps, and then the preferred, and then the subordinated etc. One by one they will all regress to fair value.

A Look at Banks' Tangible Book / Asset Ratio

btw- March 7, 2007 SP500 Financials were worth - $2.7trillion

on March 7, 2008, SP500 Financials were worth $1.9trillion

on March 7, 2009, SP500 Financials were worth $511 billion

A Look at Banks' Tangible Book / Asset Ratio

We had $5trillion of mortgage debt in 2000. In 2008, the figure was over $10trillion. With house prices and earnings power of the consumer less than or equal to that in the late 90s, we're going to have over $5trillion of write-offs by debt holders. Guess who owns this debt? What do you think the entire banking sector's market cap was in 2008? and now? And this is only mortgage debt. We're not even considering the commericial real-estate, which along with residential real-estate backs up most of the loans, i.e. assets on the banks books.

Let AIG Go Bankrupt, Not America

Right on. One of the motivations for bailing out AIG is to help prevent the collapse of primarily European and to a smaller degree, other Wall St. investment banks, namely GS & MS, who'd suffer huge losses should AIG's CDS and other insurance related liabilities default. But in the end, everything regresses towards fair value, and no government has enough money to make all the idiot capital suppliers who didn't do due diligence, whole. Rogers is right - the American taxpayer is supporting the debt dead weight of the world on its shoulders, and hell, even Atlas Shrugged