Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Berney who wrote (125)	4/2/1998 6:40:00 PM
From: porcupine --''''>	Read Replies (2) \| Respond to of 1722

<< porcupine put forward some free cash flow numbers recently that were dramatic. If I read them right, the S&P companies have more free cash flow in the the last 4 years than they had in the previous 15 years. It seems that this has to factored into the equation. >> Here are those S&P free cash flow numbers, to which Wayne alerted me in the first place. I must agree with the inference drawn by Berney, if I understand it correctly, that prices are high, to a significant degree, because these companies are generating a lot more cash than at the Market's peak in the 1980's. Note, for example, that in the 1982 to 1990 cycle, FCF was overwhelmingly negative for the total cycle. This deficit was "balanced", largely, by companies going deeper into debt. In this cycle, the free cash flow has been positive throughout. Debt as a percentage of earnings and revenues has been greatly reduced. Non-core assets were spun-off and shares bought back. Yet inflation has fallen to close to zero. In other words, this Market is worth a lot more than the Market of 1987. (Source: Barron's -- 2/2/98, p. 19) Note: This is for the S&P Industrials YR $FCF/shr. 80 -7.86 81 -9.48 82 -9.93 83 -2.12 84 -3.17 85 -3.51 86 -2.75 87 5.19 88 5.99 89 -0.44 90 -3.63 91 -2.45 92 2.43 93 6.41 94 11.71 95 13.48 96 10.35 97 12.29

To: Berney who wrote (125)	4/2/1998 8:04:00 PM
From: Freedom Fighter	Respond to of 1722

>Wayne, The presentation on your site is indeed worthy of significant >thought; however, porcupine put forward some free cash flow numbers >recently that were dramatic. If I read them right, the S&P companies >have more free cash flow in the the last 4 years than they had in the >previous 15 years. It seems that this has to factored into the >equation. I have addressed this before. The free cash in large part does not exist in the real world because: 1. It excludes one time charges that in many cases are just operating costs that companies are shifting. 2. It excludes the cost of stock options which is significant. 3. This is important! The increased margins that exist at present are not sustainable. That was my point about the models that are used on Wall St. at present. You can get some really wild valuations if you believe that impossible combinations are sustainable in a free market. Some analysts may be using these numbers but they are fooling themselves (#1, and #2) and don't understand where the free cash flow is coming from and that it cannot continue indefinitely. In fact that was the major point. I will and have admitted I don't know how long it can last. One key factor is that the rest of the world is providing us massive savings via our current account deficit. Clearly you must understand that compound interest on a rapidly growing debt will eventually bust us. The income stream and interest is leaving our shores. We are transferring wealth overseas at a much faster rate than we are creating it. The critical mass is unknown and may yet be a decade or more away, but it is carved in stone on our present path. If the savings stops coming here: rates rise, dollar falls, inflation rises, consumption falls etc... This is a part of the bubble. We will die by heart attack or we will die by slow growing cancer if we don't address it eventually. If we address it, that portion of it that is contributing to our illusionary well being will vanish. This is partially what happen in Asia. Many of those countries showed great health on the surface as long as foreigners were providing the capital. In this case they died of cancer that lead to stroke. There are other unsustainable factors contributing also.