Rarebird:Barron's:Market&GE Bubbles; WagePressures Part II
Barron's,OCTOBER 11, 1999
Next Time Around
By Alan Abelson
Jesse Ventura is a man of vision. A quality, gosh knows, that every other
contemporary politician conspicuously lacks.
Mr. Ventura's vision, moreover, is of a very rare kind. For it extends beyond
this vale of tears to that shadowy realm to which we all repair when we shuffle
off this mortal coil.
Thus, in an extraordinarily thoughtful interview with the learned journal of
anatomy, Playboy, the Minnesota governor indicated his belief in
reincarnation. More specifically, he confided that he would like to come back
in his next life as a 38-double-D bra.
We found that confession both revelatory and intriguing. To begin with, it
adds new dimension to the concept of reincarnation. For after perusing the
voluminous work of the leading scientific expert on the subject, Dr. Ian
Stevenson, director of the Department of Personality Studies at the University
of Virginia, we could find no reference to authenticated cases of anyone ever
having come back as an inanimate object.
It opens up an awful lot of new possibilities as to just what form we want to
take in our next incarnation in this earthly paradise. It also means we'll never
be able to put on a shoe again without wondering whether in a previous
existence it was a heel or a soul.
More to the point, Mr. Ventura has enlarged political discourse beyond such
familiar and emphemeral stuff as health care, taxes and the budget.
Henceforth, no candidate will be able to run for any office, from dog-catcher
on down to President, without declaring what he most wants to come back
as.
A quick survey of the current batch of hopefuls discloses some unusual
preferences.
Al Gore, for example, in his next incarnation wants to be a living person.
Bill Bradley wants to return in his next life as Michael Jordan, which he
calculates would allow him to run for President without accepting matching
government funds.
George Bush would like to come back as a person without the burden of a
famous name. In other words, he'd desperately like to be George Roosevelt
or George Kennedy or George Reagan (but, for some reason, absolutely
refuses to consider the idea of being George Dukakis).
Patrick Buchanan wants to be reincarnated as Attila the Hun, but only if it can
be arranged that Attila talks American and hates free trade. Otherwise, he'll
settle for George Washington (no wig, please).
Warren Beatty wants to come back as a woman to further the equality of the
sexes, and randomly chose for his new incarnation someone named Shirley
MacLaine.
Bill Clinton, incidentally, wants to come back as Warren Beatty.
Donald Trump, after weighing all the multitudes of possibilities, decided that in
his next life he would most like to be Donald Trump.
Elizabeth Dole would like to be reincarnated as Robert Dole so she can run
against whoever comes back as Bill Clinton.
Steve Forbes wants to be reincarnated as Clarence Barron in order to
remedy his most salient lack as a candidate -- substance.
Rudy Giuliani in his next life wants to be Norman Rockwell.
Alan Greenspan is eager to be reincarnated as a bubble on the grounds it
takes one to know one.
George Soros wants to come back as Henry Kissinger.
Henry Kissinger wants to come back as George Soros.
As for our ourselves, next time around we'd kind of like to try life as a bull.
(Only kidding.)
All that jabber about wannabe Presidents reminded us we've been terribly
neglectful in not inquiring of our friendly British bookies what their latest line
was on next year's election. So Barron's research chief, Pauline Yuelys, made
a long-distance query to the Ladbroke chaps in London, and here's how they
rate the candidates (reflecting, of course, where the early bettors have been
putting their money):
Bush, 8 to 11; Gore, 2 to 1; Dole and Bradley, 9 to 2; Buchanan, 40 to 1;
Trump, 100 to 1; and Beatty 1,000 to 1.
Stay tuned.
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By universal agreement, General Electric is a great company, and its
peerless leader, Jack Welch, ranks as the paradigmatic corporate chieftain.
Both judgments were ringingly affirmed in a deft piece on GE in this magazine
early this year by Jon Laing.
And certainly, it's no sweat supplying the stirring lyrics for this vast chorus of
acclaim. Revenues in 1998 topped $100 billion for the first time. Year in, year
out, earnings post double-digit growth -- 13% seems to be the recent norm --
and this year, as the company's recent sparkling third-quarter profits report
underscored, that brilliant winning streak is being extended with gusto.
As all the world also knows, GE's stock has been a stellar performer. Over
the past year, it has shot up from 69 to an all-time high north of 125 on
Friday. Its market cap of $409 billion is second only to Microsoft's $485
billion. And its stock commands a price/earnings multiple of over 40 times last
year's earnings and 38 times this year's anticipated net.
All hail GE!
But, to be accurate, that exclamatory statement needs modification. For
there's at least one sentient being out there who stubbornly refuses to hail GE.
And, wouldn't you just know it, the non-hailer is an old friend with more
investment moxie than a bushel of analysts or a peck of portfolio managers.
The dissenter, an unfailingly charitable and courtly type, doesn't denigrate the
company's stature nor dispute Mr. Welch's considerable skills. But he does
take issue with the stuff of which the company's earnings gains have been
fashioned.
Part II
We should warn you, right here, that he suffers from an incurable malady
known as compulsive footnote fetish. He's an inveterate reader of the arcana
in financial documents. Let's indulge him, then, and study footnote 5 in GE's
last two annuals.
These come under the plain but pregnant heading of "Pension Benefits." (In
common with a number of corporations, GE's pension plan is awash with
funds, so much so that the company hasn't had to make a contribution to it
since 1987.)
Now, if you will, fix your gaze on a table in the footnote that bears the
legend "Pension plan income" in the 1997 annual and "Effect on operations"
in the 1998 version. The bottom line of this table shows "total pension plan
income" -- which is the amount, after all obligations and contingencies have
been provided for, the company took into the year's reported income.
In 1997, pension income chipped in $331 million of GE's total earnings of
$8.2 billion. In 1998, pension income accounted for $1.01 billion of the
company's total earnings of $9.3 billion.
Okay, let's suppose that there was no contribution to earnings in either year
(these are not, in any case, actual cash additions). Minus the noncash
contributions from the pension plans, GE's '97 net was $7.9 billion; its '98
net amounted to $8.3 billion.
On that basis, the rise in earnings last year was roughly $400 million, or
about 5.1%. And 5.1%, while respectable, is a good cut below the 13% the
company triumphantly reported.
GE's shares, as we observed, are selling at some 40 times last year's
earnings. Which is undeniably rich, but not unduly outrageous in this
euphoric market, given the company's many admirable qualities, not least of
which has been its ability to deliver 13% growth in earnings.
But that's the point: What kind of a multiple, our friend muses, would GE get
for earnings growth of 5%, as it would have had to report last year, except
for the help from pension income?
If you're generous and use the going multiple on the Dow of 25, the stock
would be selling at around $70 a share, and its total market value would
weigh in at $230 billion.
In other words, by this reckoning, the $685 million more in pension-plan
income GE took into earnings last year than it did in 1997 added a tidy
$179 billion to its market capitalization. Man, that's leveraging to a
fare-thee-well!
We think it's a shame so few people seem to have noticed this remarkable
addition to shareholder value. GE's bulking up earnings via its pension plan,
incidentally, is strictly according to the accounting rules.
But the investment implications are not especially favorable, holds our
critical friend. However legitimate or even mandated the contribution of
pension income to profits, investors can be finicky on occasion about the
value they place on earnings that aren't quite the right stuff -- that can't, for
instance, be used to buy favors for the Christmas party or pay dividends.
The substantial enhancement to earnings of pension-plan income, especially
when it turns a modest improvement into a brisk one as it did last year, in his
view makes GE's stock at least 50% overpriced. We should mention that he
most often errs on the conservative side.
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The memory lingers on. And so does the mischief.
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Both memory and mischief, in this case, are courtesy of Floyd. The havoc
the hurricane visited is still very much evident up and down the East Coast.
Last Friday, moreover, its after-effects were quite visible on the financial
front.
Confounding the consensus of Wall Street economists (which, it must be
said, is not among life's more difficult challenges), the number of new jobs
created in September was less than nothing -- it shrank, in fact, by 8,000.
To be fair, that meant the consensus estimate was off by only 230,000 or
so.
According to the Bureau of Labor Statistics, Floyd washed away 50,000
jobs. Which suggests that even without a hurricane, employment last month
was more than a tad disappointing. As our eminent colleague Gene Epstein
observes in his Economic Beat column this week, something doesn't
compute ("Counter Intuitive"). Message 11495239
The plain fact is that the Labor Department's statistics fly in the face of a
variety of other data and, equally important in our book, of anecdotal
evidence as well. None of the recent measures of manufacturing activity
square with the continuing decline in manufacturing employment reported by
Washington.
Similarly, the weekly tally on new claims for unemployment insurance also
runs counter to the weak showing in the monthly numbers prepared by the
BLS. On that score, the gathering strength in the purchasing managers'
surveys, most notably in the latest one, also encourages a skeptical view of
the official data.
For that matter, so does the outsized jump in hourly wages in September, to
$13.37, from $13.30 the previous month, hardly suggestive of a slowing job
market or, by implication, of a slowing economy. If there indeed is a drag on
hiring, it's more likely the result of how tough it is to find suitable workers
than it is reflective of a contracting need for them. The available pool of what
might be called peripheral candidates for employment contracted last month
by 200,000 from the year-earlier total.
We also have to wonder about the supposed drop of 9,000 service jobs,
including a decline in retailing employment. With consumers spending like
there's no tomorrow and retailers anxious about being caught short of goods
and help as they were same time last year, it's a little much to believe the
figures.
And, in fact, we simply don't. |
