Fun With Numbers
By Bill Fleckenstein
02/14/2003 18:23
Overnight, Asia was up slightly, and this morning Europe was pretty firm. After a modestly higher opening here, we flopped and chopped for about a half-hour. When a worse-than-expected confidence number from the University of Michigan was brushed aside, the market started to grind higher. It then took off like a shot as Hans Blix gave his testimony, such that a couple hours into the day, the Dow and S&P were up 1%, and the Nasdaq was up nearly 2%.
Tech Puckers Up : Tech was paced by the SOX, up 4% on the back of what was deemed to be good news from Analog Devices ADI and Nvidia NVDA . Of course, the party preparations were already under way last night, when Dell DELL made its estimate and didn't lower guidance, both of which surprised me (more about that in a moment). In the early going, financials and housing stocks were trying to celebrate, as well.
After the early blast, the market sold off following Blix's report, turning negative on the day. But during that selloff, techs were hanging in there. Then, about midday Eastern time, the market began a steady grind higher and closed on the highs. Tech was where it was at, with the SOX up better than 5%. Bank stocks were firm, as was housing. Basically, it was a good-sized party all around, and a noisy one at that, with bulls breathing an audible sigh of relief.
Away from stocks, fixed income was being hit, while the dollar was a bit firmer. Gold was clubbed for 1.5%, to close at $352.20, while silver remained unchanged.
Artificially Flavored Balance-Sheet Cake : To return to Dell, the company basically did the impossible, in my opinion, but nevertheless pulled it off. I covered my stock last night when I saw it make the estimate and hold its previous guidance, as I assumed that Dell's "charmed" existence in PC land would get people all lathered up. For the life of me, I can't understand how Dell was not affected by the PC price wars.
I have harbored suspicions about the "other assets" category on its balance sheet, and wondered about the possibility of other levers accounting for its performance. But we will never know the answers to these questions. For the moment, I have chosen to stand down from my short position, though in the words of Arnold Schwarzenegger, "I'll be back." For all intents and purposes, I have no shorts at the moment, other than a small position in CDW Computer Centers CDWC , in the interests of full disclosure.
Shifting to the what-they-didn't-disclose department, in today's New York Times there are three stories worth commenting on. Floyd Norris wrote a piece called "Unreal 'Real' Figures, and Other Good News," which also could be subtitled "Fun with Numbers." He raises an important question that I have been discussing, namely, the Fed's phony-baloney rationalizing, and also ties it into our current problems with the budget deficit:
Pining for Mania-Manna : "When stocks were soaring," he writes, "Mr. Greenspan cited estimates by Wall Street analysts to justify high-technology stock prices, and promised that the Fed would be able to handle any economic problems if a bubble were to burst. But after the bubble did burst, neither Mr. Greenspan nor the Bush administration appears to have understood the extent to which the bubble had inflated tax revenue -- largely through taxes on capital gains and stock options -- and did not realize how rapidly tax receipts were going to decline." This should not have come as news to anyone paying attention, but it appears many weren't.
Then, Floyd showed how bad data can be used to rationalize bad decision-making, citing the Fed's recent claim that "spending on computer equipment 'rose 25 percent in real terms' in 2002, a gain that 'more than reversed the previous year's decline.' " That was the Fed's let's-pretend number. In actual dollars, computer spending grew only 0.3%, and that is because the Fed insists on its "hedonic adjustments" that try to equate all changes as de facto price improvements.
Most of the reason for this change stems from the fact that computers have been made much faster. While the speed is interesting, and theoretically useful, most people don't need it. The Fed has mistaken more speed for actual improvements, as experienced by computer users. It just goes to show that extrapolating with numbers can lead to a lot of gobbledygook. This is a problem with much of the data that are hedonically adjusted.
War and Peace and Epiphany : In any case, longtime readers -- unlike the man who would be king -- will have no problem with this question posed by Floyd: "In other words, is the burst bubble still causing damage that an easy monetary policy cannot solve?" I believe we know the answer, but I also believe it will elude most folks until many of the war complications are behind us. Afterward, however, I do think people will realize that our economic and financial problems stem not from the war, or September 11, but from the bubble. And that is one of my reasons for being bearish on the economy and the stock market later this year.
The Red-White-and-Blue Screw : Turning to another fun-with-numbers exercise, a Times story titled "Wall St. Firms Are Faulted in Report on Enron's Taxes" points up the craziness of the tax code and the uselessness of financial statements. To quote Joanie on what Enron got away with: "Jot down these years: Enron avoided paying any federal income taxes between 1996 and 1999, and claimed only $63 million in tax liabilities in 00 and 01." She then opined, "Remember on whose watch this stuff festered, so that when the liberals whine about the Bush i.e., plenty of blame around for both political parties connection to Enron, you can jar their memories by reminding them who was at the wheel when they were vigorously avoiding paying taxes."
Enron further tortured the numbers by reporting profits to shareholders of $3.264 billion between 1996 and 2000, but reported only $76 million in profits to the IRS. Its tax liability, based on a 35% tax rate, would have been $1.142 billion, and the company paid only the aforementioned $63 million.
So, that's an exercise in how far afield financial statements have grown from reality. Everyone realizes that Enron was a house of cards, but you just have to shake your head at the magnitude of the swindle. This nonsense is still in the tax code. As I have stated many times, I am not for overtaxation or giving the government more than it "needs," but everyone should pay his fair share. Finally, on the subject of financial statements, I would just note a change of heart by Ernst & Young, which now believes that options should be expensed. It will be interesting to see if this gains any traction.
One from Column A, None from Column B : Now, before turning to a Times op-ed called "On the Second Day, Atlas Waffled," let me just add the following: Normally, I like to stay out of political mud-slinging, but the juxtaposition of this article by Paul Krugman with Floyd's demands a couple of comments. Krugman has taken to beating up on Greenspan lately, though I consider Krugman bad company because mostly, all he wants to do is get at George Bush. This is his prerogative, but he shouldn't make up facts to suit his prejudice. Had he read and understood Floyd's column, he would not have accused the president of causing the deficit. (His comment, via a Greenspan attack, was: "Two years ago, you acted as George W. Bush's enabler; you share part of the blame for our plunge into deficit.")
Well, Krugman is mad at Greenspan for endorsing Bush's tax cut, but as Floyd's column points out, it wasn't the tax cut that produced the deficit. Our government's revenues were already artificially inflated by all the taxes paid on capital gains during the go-go years. The prior administration was not thinking ahead to future deficits by reducing its spending during those years. So, while people can blame the Bush administration for other sins, it did not single-handedly create the deficit. The mania papered over a pre-existing condition. |
