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From Financial Sense:
Tuesday's Stock Market WrapUp
Glowing Earnings and Economic Reports
Beauty is in the eye of the beholder, and perception in the financial
markets is everything. It certainly can apply to today’s investment
markets. Upon waking this morning over a cup of coffee, I turned on
the financial news to find out what was happening in the financial
markets. To my surprise the markets had levitated right from the
opening bell. I wondered what was behind such a move, and soon
found out. Endless parades of analysts were displayed before me,
making strong recommendations on a number of companies that had
reported earnings that beat Street estimates. The analysts and anchors
were literally fawning over each other in their enthusiasm over the
day’s earnings reports. The long awaited earnings turn around had
arrived. GM, Coca Cola, and Fleet First Boston had beaten Street
estimates.
Reporters and anchors heralded the favorable economic reports of the
day, which further alluded to recovery. The combination of strong
economic reports, better earnings and a favorable assessment about
the future gave way to a strong rally in the markets. The Dow gained
207.65 points, a gain of 2.1%. The S&P 500 jumped 25.82 points,
gaining 2.3%, and finally, the Nasdaq was the big winner advancing
63.01 points, closing out the session with a profit of 3.6% for the day.
GM’s Numbers
On the surface it sounds like a winning combination, until you look
below the surface. GM’s better than expected numbers were pro
forma numbers. The company’s first quarter net income slipped 3.8%
on a wider loss in Europe and the expense of cost cutting to close
plants and eliminate jobs. Net income declined by $228 million, or
$0.57 a share from $238 million, or $0.53 a share a year ago. The
losses came from Europe, where production fell and the company
spent $407 million to shutter plants and cut back its dealer network.
The good news was the auto maker built 11% more vehicles in North
America. The combination of discounts and no-interest loans are
helping to boost sales at the expense of profits. If the company
excluded expenses for Europe, first quarter profits would have been
$635 million, or a pro forma profit of $1.14 a share. The company
increased its production estimates for the remainder of the year and
its pro forma profit estimates. Meanwhile, the company’s first-quarter
loss in Europe widened to $125 million from $86 million, excluding
additional restructuring charges. The company lost $40 million from
devaluation in Argentina. Profits at GM Acceptance Corporation, its
financial unit, rose 2% because of an increase in mortgage operations.
The unit is starting to experience higher automotive financing losses
because of declines in used car prices. When GM takes its returned
lease cars to auction they are getting a lower price which creates a
loss for the financing unit.
The exclusion of operating costs, such as plant closings, layoffs, and
environmental clean up, have been excluded from analysts estimates.
Everyone is selectively concentrating on numbers that don’t reflect
these costs of doing business. This raises the question as to what
constitutes the real costs of doing business. GM has been through
many restructurings in the past. The widespread use of excluding
these ordinary costs of doing business is deceptive. They reduce real
earnings and book value of the business. Last quarter the company
found it necessary to raise over $2 billion in the debt markets to cover
costs of under funded pension plans at the company. Those were real
costs requiring a cash outlay that had to be financed by taking on
additional debt. So much for the earnings miracle.
More Earnings Reports from Coke and FleetBoston
The earnings report coming from Coca Cola helped to rally the blue
chip Dow. Coke beat Street estimates on earnings. What drove
investors to euphoria was the company reported an increase in sales
of 5%. Looking at the bottom line, however, the company
experienced the biggest loss in at least 20 years. Coke lost $125
million, or $0.05 a share compared to $863 million, or $0.35 a share
profit a year ago. The company said expenses climbed $0.37 a share
due to new accounting rules that require a company to write off
impaired goodwill of companies that were acquired. By writing off
these assets the company is admitting that it overpaid for them.
FleetBoston Financial plans to sell its unprofitable securities unit, cut
venture capital investments, and scale back an 80-year old
commitment to Latin America. The company is retreating from a
commitment to emerging markets. The firm’s profits fell sharply with
the biggest drop in 2001 of the 10 largest investment banks.
FleetBoston said it would reduce equity by $175 million because of
having to write off $1.1 billion in the country.
Housing starts, an indicator of future housing activity, fell by 7.8% in
March after rising a month earlier. Expectations were for an annual
rate of production of 1.7 million new units this year. Instead, it looks
like it will be 1.646 million based on current production levels.
Another indicator of future construction, building permits decreased
9.9% to an annual rate to build of 1.599 million. Housing starts fell in
most regions of the country with the exception of the Northeast.
Builders are still filling orders, but their are order backlog is starting
to fall.
Possible Fed Rate Hikes This Summer
Moody’s Investor Services downgraded 159 corporations during the
first quarter, affecting $24 billion of debt. The ratio of downgrades of
4.7 - 1 is the greatest decline in corporate credit since the fourth
quarter of 1990. The company said looking at future earnings should
lead to more downgrades than upgrades for the next few months.
Moody’s also pointed out that tighter lending standards, plus weak
equity markets, will likely keep capital in short supply for problem
companies. Of even greater concern are the prospects for higher
interest rates by summer due to possible Fed rate hikes. According to
a Bloomberg survey of the 10 largest bond dealers, the dealers
believe the Fed will boost overnight bank interest rates in late June to
avert a spike in inflation. This is up from last month where only five
bond dealers thought the Fed would hike rates by summer.
Obviously, the news and facts reported here were not the news events
that dominated today’s headlines. Yet these facts remain. There is a
growing disparity between what is reported and what has really
happened. It is as wide as the Grand Canyon. The facts presented up
above don’t appear to be the beginning of an earnings turn around
that has been so widely forecasted by Wall Street analysts and
economists. It appears more to be a product of selective reporting. A
loss is a loss no matter how you want to spin it. If you were a home
owner and a storm damaged your roof, you would have to repair it.
That repair would cost you real out-of-pocket dollars. You couldn’t
arbitrarily exclude those costs. Repair and maintenance of your home
is an ordinary cost of home ownership, so it begs the question of
what are the legitimate costs of doing business.
Nobody wants a party to end, but the bull market of the 80’s and the
90’s is over. No amount of spin is going to bring it back. Eventually,
the facts are all that remains. By not reporting objectively and by
spinning the news, a disservice is being done to investors. It is
misleading to quote a more favorable number while failing to
disclose the real number. This kind of selective reporting is what
shakes confidence in the system. When investors can’t trust the
companies to report the truth, auditors to authenticate earnings, or
anchors to report accurately, confidence in the financial markets is
lost. Once this confidence disappears it is not regained easily. All
integrity in the system appears to have been lost. Today’s reporting
and hyping of the news is just one more example. The more difficult
question is how to repair integrity.
Today’s Markets
In trading today, most computer screens showed green with just
about every sector showing a profit. In the broader markets financial,
oil service, cyclical and biotechs did especially well. Only the
defensive gold sector was down today. Despite the day’s hoopla over
earnings and economic reports, a survey released today of fund
managers shows most believe the outlook for global equities has
deteriorated in the past month. Institutional investors see profit
expectations as too rosy, and that equity valuations are at extreme
levels given the outlook for profits, especially with interest rates
expected to rise beginning this summer. More worrisome for the
markets are despite the fact that institutional investors are fully
invested, it has failed to raise the markets. Like monetary policy, the
markets are failing to respond to the stimulus of buying. Most equity
managers admit they are feeling uncomfortable with their positions.
The only good news is that earnings are better than expected.
However, expectations have been lowered repeatedly to the point that
beating estimates is no major feat.
Volume came in at 1.34 billion on the NYSE and by 1.76 billion on
the Nasdaq. Market breadth was positive by 22 to 9 on the big board
and by 26 to 10 on the Nasdaq.
Treasury Market
Government bond issues lost considerable ground as speculators
dumped bonds and bought stocks. The 10-year Treasury note lost
14/32 to yield 5.19% while the 30-year government bond tumbled
21/32 to yield 5.665%.
Overseas Market
European stocks rose after Royal Philips Electronics, Europe's largest
consumer-electronics company, and Texas Instruments said orders are
increasing. The Dow Jones Stoxx 50 Index gained for a third day,
adding 67.12 points, or 1.0% to 3648.56, its biggest one-day advance
since March 4. All eight major European markets were up during
today's trading.
Japan's Nikkei 225 stock average had its biggest gain in a month, led
by Advantest Corp. and other chip-related shares on optimism
demand may soon recover after U.S. rival Novellus Systems said
sales will beat forecasts. The Nikkei has fallen to within 100 points of
11,000 and recovered to finish above that level five out of six times
this month. It gained 1.9% to 11,346.66 today.
© Copyright, Jim Puplava, April 16, 2002
financialsense.com
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