A Hodgepodge of Thoughts -- 5 Blogposts in 1
May 14, 2009
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1) Don't ignore capex - When you analyze a stock, it is critical that you look at more than the income statement. You need to understand the balance sheet and the cash flow statement as well. In particular, don't ever ignore capital expenditures. Imagine that you are a CFO and anything that you are able to classify as capex will be "hidden" from the income statement. Isn't it just possible that this incentive leads to some liberal classification of expenses as capex? Those expenses only hit your income statement over the next many years, amortized as depreciation. Let's take one of my favorite redthumbs as an example -- MCRI, a rinky-dink casino operator. The company is projected to earn 30 cents this year and the stock trades at $9.90, which gives it a forward p/e of 33x. Pretty rich for a company with shrinking revenue, don't ya think? But wait... there's more! The company had $23 million in cash flow from ops in 2008 but spent $64 million below the line (sort of hidden in the slush fund) in capital expenditures. Now, if that capex was helping the company achieve big revenue growth, then it might be "good" capex. But revenues are SHRINKING, not growing. This is simple, folks. THE COMPANY IS DESTROYING CASH. In a big, big way. I would say this company has at least a 90% chance of being bankrupt within 3 years.
A sidenote on casino stocks. I've redthumbed a bunch of them and they've been killing my Caps score. I feel pretty confident that most of these guys with high debt will go bankrupt eventually. The revenue just ain't coming back. And the House has introduced a bill to re-legalize credit card payments for online gambling. Online gambling is a lot more convenient than getting on a plane for Vegas. If the bill passes, look for further pressure on revenue of the brick-and-more gaming companies.
2) The government continually fools most of the people most of the time - I keep thinking that the masses, the "sheeple," will finally come to their senses and realize that you should NEVER, EVER trust a number that comes out of the government. Fool me once, shame on you... Fool me 1,000 times, I'm just your average American investor. The market still moves up, sometimes strongly, on the numbers the government puts out. Give me a flippin' break! Remember how the market went up on the "unexpectedly good" uptick in March retail sales? Oh, shocker of all shockers -- the number just got revised downward to a drop. All these numbers are subject to revisions and many have a big margin of error. And yet the market reacts as if the numbers actually have some relevance when they first come out. WTF is wrong with you people?
On a related topic, it is my belief that the government just orchestrated the most successful PR blitz on the markets in history. And the sheeple ate it all up. Bombard the media with all sorts of "data" and "news" and "green shoots", causing the market to go up enough for the banks to be able to sell equity to improve their capital ratios. My hat is off to the government -- it worked beautifully. But I'm disgusted with the people for getting suckered by it, hook, line and sinker.
3) Let your profits run - It is commonly said by trading pundits that it is important to cut short your losses but let your profits run. It is my experience that this is both correct and incorrect. Let me explain. If you have a portfolio of positions that are making you money somewhat steadily, over a period of weeks or months, then I think this maxim is correct. The market is telling you that are well-positioned in the current market environment, so I suggest taking a little off the table at a time, increments, but generally letting it ride.
Here's the caveat. Over the past couple years, I've had several extremely profitable trading days, when it seemed as though all my positions were hitting the jackpot on the same day. To my recollection, EVERY SINGLE TIME this happened, I lost half my profits the next day, sometimes more, if I didn't lock in the gains. In fact, if I had put on the opposite trade at the end of the day, I would have really made a killing. This happened to me yesterday and today again, in fact. I'm the sucker here. Next time I have an awesome trading day, I'm locking at least 2/3 of profits in at the end of the day.
4) The next crisis will be different - The vast majority of investors think the bottom is in. I don't, of course. In my opinion, people are too narrowly focused on the rear-mirror. They don't look forward and they completely lack peripheral vision. The crises that people were worried about, C and BAC failure or nationalization for instance, seem to have been averted. So people think the coast is all clear for the moment. But I think there will be other shoes to drop. Will they be loafers, sandals or clogs? Brown, blue or black? I have no idea, and neither does anyone else. What I do know is that the government owes $50 trillion+ if you include unfunded obligations such as medicare and social security. I know international trade is drying up. I know that geopolitical conflict always looms on the horizon. I know that something like 70% of Americans don't have enough financial resources to last them more than a few months. I know that more than 20 million homeowners have or will soon have negative home equity. I know that there is still inflation in the cost of essential needs and you can't even earn 1% in a savings account. I know that local and state governments are screwed. This list goes on an on. Our old way of life based on spending money we don't really have is dead forever. Forever. Go ahead and be bullish. It doesn't pass the sniff test for me.
5) When will I turn bullish? - Will I be bearish forever? No. I will turn bullish when the thought of owning stocks makes most people laugh, sneer, or vomit. When Jim Cramer is a distant, despised memory. And when stock valuations are actually low. I think they are very high right now. I would point out 2 things about the supposed p/e of 14x on the S&P 500: First, previous big bear markets ended with p/e's below 10x vs. today's 14x or so. Second, the earnings used to come up with the 14 multiple ignore all the "one-time" items, like writedowns of assets. This is a new thing in the last 15 years -- ignore GAAP earnings and use "normalized" or "core" earnings as determined by management. Do you think the previous p/e troughs in bear markets of 7x used these discretionary earnings numbers or GAAP earnings? GAAP earnings for the S&P500 are probably close to zero or negative, I'm guessing. Apply a p/e multiple to that!
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