Saturday, April 10, 2010

"They" Are Still Spinning

Asset inflation continued apace last week in the financial markets, most notably on Friday, when prices of stocks, government bonds and precious metals all went up. Huh?

One of the theoretical underpinnings of the rise in stocks is that prices to earnings are reasonable to cheap, and hey all other yields stink anyway, so who needs dividends?

The problem that is summarized in, an almost infinite number of P/E ratios exist.

In a more specific mode, Oracle "earned" 38 cents in the February quarter just reported. But wait! Under
generally accepted accounting principles, ORCL earned only 23 cents the same quarter. What's up with that?

From Oracle's press release:

GAAP operating income was down 5% to $1.8 billion, and GAAP operating margin was 29%. Non-GAAP operating income was up 13% to $2.9 billion, and non-GAAP operating margin was 45%. GAAP net income was down 10% to $1.2 billion, while non-GAAP net income was up 9% to $1.9 billion. GAAP earnings per share were $0.23, down 11% compared to last year while non-GAAP earnings per share were up 9% to $0.38.

Double huh. Try to make sense of that! No further explanation was given by the company. Basically, Oracle "earned" a fictitious number but its accountants said it actually earned about 2/3 of what it wanted to tell you it "earned". It returned a nickel a share in dividends, for an annualized yield of less than 1%.

In the old days, such as 1929, investors would have walked away from a mature, large company that disdained sharing the wealth with shareholders. Now, in financial Fantasyland, earnings mean whatever the company wants them to mean, and the SEC cares not a whit.

It is reasons such as the macro example given first and the micro example of ORCL (which also applies to other darlings such as TEVA) that it is important to also consider asset values such as tangible book value or the Tobin "q" value, such as the Smithers version of such referred to many times herein.

On that score, stocks are richly valued, and only the low level of interest rates (due to economic weakness) makes the whole olio acceptable.

Assuming that the economic optimists are correct, much higher interest rates are coming and along with that one day will come much lower stock valuations, if the past is any guide at all.

Meanwhile, while not transactional money, gold continues to boringly just sit there, and unlike the stock averages even with dividends reinvested, gold almost uniquely among major US asset classes has broken out to all-time highs and continues to act well.

When GLD got to $119 in early December, this site "called" a top and suggested a $110 +/- $3 trading range would follow. This happened with one break below that level. The price is now challenging/breaking out from the top of that range. Based on patterns of other financial asset such as TJX and ROST, sooner rather than it makes sense that with debt piled upon debt, those with paper wealth in stocks will continue to transfer it to precious metals, gold shorts will cover, and the same melt-up that has occurred in stocks will occur with no overhead supply in the gold market. Gold has had a strong surge very recently, but given all the chicanery in stocks and, increasingly, the proof that short-term money rates are below any reasonable estimate of consumer inflation, we are back to the 1970s as well as 2007-8 where the Fed is just simply behind the curve.

For now, the DoctoRx approach is: marry gold (with no-fault divorce available), rent the best stocks including asset-backed ETFs, flee cash.

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