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Showing posts from October, 2007

Tech Wreck

We've had ongoing weakness in profits for much of the technology sector so far this reporting season. But the sound of all the earnings misses has been drowned out by a handful of rapidly-growing companies with high multiples and even higher expectations. Jim Cramer of CNBC infamy has dubbed them the Four Horsemen. GOOG, RIMM and AAPL produced big numbers to feed the Nasdaq frenzy but the 4th horseman stumbled badly after the close today.

AMZN delivered strong revenue growth and beat profit expectations slightly - which was fine. Then they dropped a bombshell with their guidance.


Operating income is expected to be between $221 million and $291 million, or grow between 12% and 48% compared with fourth quarter 2006.First problem is the range is wide enough to drive a truck through. That tells you they have no real idea what is going to happen - rarely a good sign. Second problem is that expected EPS growth for 4Q is 100% year over year. At the top of their guidance, they only fall …

Reserves, Profits and Multiples

One of the key problems with valuation in the stock market today is the difficulty of determining actual profits are trying to compare the numbers that are reported to previous years where different standards were used. Many bulls have tried to tell me that I should buy because the S&P 500 is selling at a P/E of only 16x 2008 earnings. Well, there are a ton of problems with that statement so let's just cover the fatal flaws.

First, I don't know what 2008 earnings are going to be and neither do they. They are using a guess as the denominator to get that multiple. The number we do have is the historical reported numbers and based on that the multiple is 18x, significantly higher.

Second, 18x is very expensive and even 16x is far from cheap. 16x would be a normal peak multiple over the business cycle. 18x would be extreme territory normally. During the 20th century, the P/E for the S&P 500 has exceeded 18x on a sustained basis 3 times: the late 1920s, the mid 1960s and the …

Global Reversal

It's been a few weeks and there's been a bit of excitement surrounding the Fed. But from an economic and credit standpoint, it's largely "sound and fury, signifying nothing." Risk spreads are still wide, lots of high-grade and few low-grade bonds are being issued, market rates (all but the shortest maturities) are higher not lower. Sure, stock markets are rallying on the promise of inflation but the Fed may not be able to deliver, especially since only the Bank of Japan is using the same playbook.

If you look closely, the recent past is very similar to the 1970s. We have rising inflation everywhere, though masked this time using statistical manipulation in the First World. Inflationary credit excess driving unsustainable demand for all kinds of stuff. This benefits rising industrial exporters (Japan then, China now) and commodities producers (OPEC, Chile, Brazil, Canada, Australia, Texas, Alberta and various African nations). We experienced a co-ordinated global b…