Tuesday, January 20, 2009

Hope? No Hope for Some: Requiem for a Russo

This is continuing to act more and more eerily like the Great Depression.

First, there is the historic nature of the headlines.

The current two headlines on Bloomberg.com - "Economy subsection" -are:

1. Singapore economy may shrink a record 5%;
2. King says Bank of England may buy assets soon as effect of rate cuts wanes

Left unsaid is that the Bk of England is going to buy assets with funny money. (Of course rate cuts had no real effect, as the banks are now revealed to be insolvent.)(And buying "assets" doesn't impress the markets, but it does allow sellers to dump their assets.)

More and more we are reading things like the following:

"Irish property tycoon Patrick Rocca was found dead Monday morning at his home near Dublin, in a suspected suicide.
Mr. Rocca, 42 years old, was involved in property through his company Accorp Properties Ltd. in Dun Laoghaire, Dublin, according to company filings. He was a member of a prominent Irish family of Italian descent. Mr. Rocca was married with children. His sister Michelle is musician Van Morrison's partner."

Not long ago a German tycoon (or, ex-tycoon?) did himself in. I don't remember many dot-bomb flame-outs taking some computer wires and strangling themselves in the NASDAQ crash.
This is more serious.

In various posts since I began this blog, I suggested that social policy aside, the Obama Administration was one of general continuity with the Bush Administration. I pointed out that the same inert, dysfunctional Congress that did nothing for homeowners but did everything for finanical companies would be essentially unchanged. The stock market ignored the Obama speech and the spectacle of his inauguration. It will respond to change that is real change, not just a name change.

How low can stocks and the economy go?

The scariest thing about stocks is that so many are trading at elevated levels relative to their actual assets. See "Procter & Gambling" from yesterday, where it is revealed that this old, venerable company can by some criteria be considered insolvent (though it reports robust profits). The problem with stocks that are selling far above actual asset value is that there then is no effective floor if even a temporary but severe business setback occurs. Please take the time to go to a free service such as Finance.Yahoo.com, type in a stock symbol, and go to "Balance Sheet". Look at the most recent tangible book value. If one is dealing with a large company such as IBM, yes of course patents have no tangible book value, but neither does the potential for a large fine, environmental penalty, or anti-trust charge. The best thing a company can have is cash and hard assets, so that even if business stinks for a period of time, there are real things that can allow a lot of money to be made quickly. One will find, for example, that IBM is selling way above the accounting value of its net cash and physical assets. Try to tell me what IBM will be worth/trading for if in 2009 and 2010, it makes no money but loses none either. I have no idea. But if it now had $50 a share in net cash and financial assets, and another $50 a share in the depreciated net value of its other assets such as plant and equipment, I would say that the current share price of $81.98 already discounts such a disaster.

As it happens, IBM has a stock market value of $110 B. After the September 2007 quarter, it told the SEC that excluding goodwill and intangibles, the value of its assets over liabilities was $12.1 B. What happened after a year of strong reported profits? How much did the $12.1 B grow to? $5.6 B, that's what it "grew" to. See link to the IBM page.

What happened? The company had so much faith in its own stock that it bought 85 million shares of IBM stock over the past year. (Good going, guys! Great market judgment) Why didn't it pay dividends or at least follow the lead of some companies and give non-selling shareholders the choice of taking a proportional dividend or additional shares? Because officers and directors own less than 1% of the stock, that's why.

IBM stock has gone nowhere for over 10 years. In that time, I estimate it has spent over $60 B on share buybacks and perhaps only $8 B on dividends (a very rough guess).

IBM has, perhaps, been as much a gambler as Citigroup and BofA. They, P&G, and many other companies have been stock jockeys. A couple of years ago, IBM predicted about 4-5 years of rapid earnings growth. How could it know that if it were not manipulating its earnings?

In an economy dominated not by company founders whose net worth is tied up in the stock but instead with managers who take risk after risk to get the stock moving up, the stock market and the economy have the potential to tank together.

If a well-run economy such as Singapore can see GDP drop 5%, the U.S. economy can do worse than that and the U.K. can do even worse than us.

This really could be Great D 2 rather than just a Great Recession.

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