Posts filed under “Corporate Management”
For the past 5 years, I’ve cringed each time I heard a bullish argument for rising Corporate Capital Expenditures (CapEx for short) stepping in for Consumer spending as it slows down. Its been little more than wishful thinking on the part of strategists, economists and traders.
We’ve addressed this issue many times in the past. Skittish CEOs/CFOs are simply too afraid to risk quarterly numbers to engage in aggressive CapEx spending. That’s why they have chosen more often than not to buy back stock or issue dividends versus investing heavily in infrastructure.
Even when Accelerated Depreciation of Capital Spending (ADCS) created a huge tax break, most companies went for the high ROI purchases — Business intelligence and productivity software that paid for itself in improved efficiency or reduced headcount over a relatively short period of time. Hence, the success of companies ranging from Business Objects (BOBJY) to Cognos (COGN) to Oracle (ORCL) over this period.
Except for the high ROI investments, or taxpayer subsidized purchases, CapEx has been punk. Now,
we see that the rest of the dismal scientists have finally recognized
that CapEx is "officially" softening. A new WSJ survey of economists finds that Economic Worries Move Beyond Housing:
As Housing worries have become widely recognized (however belatedly that was) they are now being surpassed by concerns about weak business spending. This, even as economists again cut forecasts for home prices. (Query: If you are "forecasting" what
happened last quarter, does that still count as forecasting?)
From this morn’s WSJ:
"Weakness in business capital spending is edging out housing as the dark cloud on the U.S. economic horizon.
A new WSJ.com survey found that 20 of 54 economic
forecasters responding to a query cited soft capital spending as the
chief risk to their forecast that the U.S. economy will grow slowly but
avoid recession this year.
Only 11 of the economists cited housing; the rest cited other threats, including inflation and oil prices.
Capital spending "scares me more than anything else
because I can’t explain the weakness," said Stephen Stanley of RBS
Can’t explain the weakness? Steph, pull up a chair, and ole Barringo will lay it out for you:
This economy has been stimulus driven — ultra low rates, deficit spending, tax cuts, ADCS, (2) War spending, printing cash — all contributed to the cyclical recovery since the 2001 recession. However, this has been anything but organic. Its been largely dependent upon government largesse. As that stimulus fades — the pig is now mostly through the python — so too does the economic growth.
When your growth is dependent upon cheap money and easy credit, guess what happens when credit tightens and money becomes less easy?
Economy Enemy No.1: Soft Capital Spending (free WSJ)
Forecasters Say Extent Of Business Cuts Will Tell
Where Slowdown Ends
PHIL IZZO and DEAN TREFTZ
WSJ, April 13, 2007; Page A2
Blame the professors: Just as the option backdating scandal started with academic researchers noting mathematical anomalies, so too might the next brewing scandal: the I/B/E/S Analyst ratings back dating scandal.
According to a Barron’s article by Bill Alpert (buried on page 39), several professors have discovered what they describe as 54,729 non-random, ex-post changes out of 280,463 observations — a little over 19.5% of analyst recs (abstract below):
"The professors found
almost 55,000 changes that had been made in the I/B/E/S database of
stock-analyst recommendations maintained by Thomson, the Stamford,
Conn., firm that is a leading vendor of financial data. The alterations
made Wall Street’s record of recommendations look more conservative –
hiding Strong Buy recommendations and adding Sell recommendations from
1993 to 2002. That is a period for which Wall Street has drawn heat and
government sanctions for touting Internet bubble stocks.
As a result of the changes, the stock picks shown in
the database would have created annual gains that were 15% to 42%
better than the originally recorded recommendations, using a trading
strategy based on analysts’ recommendations."
The firms were the most significant participants in the data backdating were also the firms who had the closest relationship between banking and research and were the hardest hit by the Spitzer enforced settlement.
From page four of the academic working paper notes exactly how significant this was:
"Why do the historical data now look different than they once did? The contents of the database changed at some point between September 2002 and May 2004, a period that not only coincided with close scrutiny of Wall Street research by regulators, Congress, and the courts, but also saw a substantial downsizing of research departments at most major brokerage firms in the U.S.
The paper outlines four types of data changes: 1) non-random removal of analyst names from historic recommendations (anonymizations); 2) the addition of new records not previously part of the database; 3) the removal of records that had been in the data; and 4) alterations to historical recommendation levels.
The net result of this was to make many specific trading strategies appear better in retrospect than they actually were. Buying top rated stocks and shorting lowest rated stocks, based on the changed data, now perform 15.9% to 42.4% better on the 2004 revised data than on the 2002 tape, the professors state.