Last week, Noah "Cult of the Bear" Blackstein was pounding the table as to how much cash was on corporate balance sheets.
Raymond Jame’s Jeff Saut puts that cash into context, via underfunded Pension Plans and Healthcare
"While it is true that companies have tremendous cash positions currently, if under-funded pension plans and healthcare liabilities are moved from the footnotes of the financial statement to the balance sheet, said cash evaporates. For example, the FASB (Financial Accounting Standards Board) is proposing to move the status of pension and OPEB (post-retirement employee benefit) plans out of the footnotes onto the balance sheet. If done, the notional "hit" to shareholders’ equity for the S&P 500 is more than $250 billion.
Moreover, today’s balance sheets are already overstated due to fallacious pension accounting. To wit, in 2004 the S&P 500 companies reported roughly a $100 billion net pension asset on their balance sheets, when in reality those pension plans were $165 billion under-funded (source: CS First Boston). While that is bad enough, Jack Ciesielski, publisher of the "Analysts’ Accounting Observer, notes, "We’re only seeing roughly half of the [retiree healthcare] obligations on the balance sheet." He believes that retiree healthcare costs are twice as large as pension obligations. "A day of reckoning is coming," he added. Ciesielski expects the requisite accounting changes to affect stock prices in industries where "it’s going to be a surprise," and not just the auto and airline industries (source: Barron’s).
When we combine these aforementioned balance sheet "impacts" with the upcoming expensing of stock options, the waning profitability of the carry-trade that U.S. corporations have employed to boost their earnings, compressing profit margins, and a softening economy, it is difficult for us to embrace the rosy earnings forecasts for 2006. And we are not alone in that thinking, for as the savvy Bank Credit Analyst (BCA) notes:
Analysts are rashly assuming that nothing will harm corporate profitability, and that is bound to lead to disappointment. The bottom-up consensus of analysts’ projections implies that S&P 500 operating earnings will rise by 12.4% in 2006, only slightly down from this year’s expected growth of 14.8%. Our earnings model paints a very different picture, with earnings growth expected to slow to around zero (in 2006)."
While we are not as earnings’ bearish as the BCA, hereto we think the answer lies somewhere in the middle (between zero and 12.4%), implying we are on a glide-path to single-digit earnings growth.
Saut is a moderate bear on US equities, Bullish on commodities, and a believer in selective stock picking . . .
The Ruling Passion
Raymond James Investment Strategy
The Federal Reserve, as expected raised interest rates for the
13th consecutive time Tuesday, lifting the federal-funds rate by a quarter
percentage point to 4.25%. The central bank suggested it would raise rates
again, but also hinted that it is less certain on its future rate actions than
it has been in over a year. In the accompanying statement, the Fed said growth
remained "solid", inflation excluding food and energy prices had "stayed
relatively low," and inflation expectations were contained. But it also warned
that the possibility of further erosion of spare productive capacity and high
energy prices "have the potential to add to inflation pressures."
economists and other analysts make of the changes? Here’s a sample of their
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The Fed has finally taken the step that we have been
pointing to for a while, in separating the two concepts of reaching neutrality
and finishing the rate cycle. They kept "measured," as we thought they might,
but now it refers to "some further measured policy firming" as opposed to
removing accommodation at a measured rate. So, rather than being on automatic
pilot in raising rates toward neutral, the FOMC now sees itself in the second
stage of the rate hike cycle — further moves will be perceived by Fed officials
as taking policy toward a restrictive stance.
– Stephen Stanley, RBS
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The message from the FOMC appears to be that barring a
major change in the tone of economic data, another 25bp tightening move will be
implemented at Chairman Greenspan’s last meeting on January 31. At that time, it
is quite possible that the "measured phrase" will be jettisoned, leaving
incoming Chairman Ben Bernanke with a clean slate for the next meeting on March
28. Our own view remains that the evidence concerning economic growth should be
sufficiently strong in coming months to spur another three 25bp tightening
moves, lifting the Fed funds target to 5.00% in the second quarter of the year.
We think that growth will then be moderating sufficiently for the FOMC to cease
tightening, even if core inflation drifts up mildly from its current
– Joshua Shapiro, Maria Fiorini Ramirez Inc.
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The Fed announced: "Core inflation has stayed relatively
low in recent months and longer-term inflation expectations remain contained."
Quite frankly, we do not believe them. We know that beyond the rises in food and
energy prices, nearly everything — from healthcare to building materials to
education costs to insurance to commodities — costs more. And gold, the world’s
best inflation indicator, is well over $500 per ounce. Where ever we look, we
see evidence that prices have limited stability and an upward bias.
Barry Ritholtz, Maxim Group
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