Komrade Obama doesn't know or care how real prosperity comes about. He thinks you can steal it from your neighbor. Komrade Castro has no such luxury... because in Cuba, no one's left to steal from anymore! When you need actual prosperity and not just empty talk, you have only one place to turn: the free market. Cuban President Raul Castro needs to increase food production pronto, so he's giving idle land to small, private farmers... some of whom have worked family plots for over a hundred years.
If you believe the financial press, the whole corporate world is performing above expectations...
But if the dirty, grimy details of real transactions are what you care about, then perhaps we'd all better lower our expectations dramatically. For example, take regional bank BB&T's deal to buy Colonial Bank...
BB&T took a cumulative 37% writedown on the $14 billion in assets it agreed to take on from the failed Colonial. The markdowns range from 18% (82 cents on the dollar) on residential mortgages to 67% (33 cents) on Colonial's construction portfolio.
I don't know anyone who's been predicting recoveries of just 33 cents for every $1 of principal. That's well below expectations. BB&T's own assets are in many of the same locations as Colonial's... and I seriously doubt BB&T was so much better at underwriting than Colonial. They both made huge amounts of loans in Florida and Georgia – practically ground zero for the real estate bubble. More banks have failed in the state of Georgia this year than any other.
It makes you wonder about BB&T's own credit quality. Do we really believe Colonial's assets are so much worse off than BB&T's? I don't. I bet BB&T has a long way to go before it writes down its entire loan book to reality.
If I ran the Wall Street Journal, I'd shut it down for a week and fumigate the place... At the very least, I'd ban the phrase "above analysts' expectations." This phrase is such an obvious and well-known scam, I'm shocked it's still allowed in print. I would call Wall Street analysts a bunch of whores, just like our senators and congressmen... but that does real whores a disservice. Then again, a whore's expectations are about as low as a Wall Street analyst's these days, so maybe it's a good fit after all.
Take Home Depot, for example...
Home Depot, the world's largest home improvement retailer – and a bellwether for both the retail and housing sectors – announced "better than expected" earnings of $1.1 billion for the second quarter. Of course, the most prominent feature of its earnings is that they were below last year's second-quarter earnings of $1.2 billion... just like almost every other company that has beat analysts' expectations. (Wall Street analysts' perennially low expectations must make them wonderful marriage partners.)
But as we pointed out last week, headlines – in this case, Home Depot 2Q Profit Beats Expectations – can be misleading. The headline doesn't tell you a huge chunk of Home Depot's earnings came from one-time cuts. About $410 million of total earnings (37.3%) came from cutting costs and tax settlements.
And of course, like so many other companies, Home Depot's sales fell 9.1% to $19.1 billion. Sales from stores open more than one year (comp sales, a key retail measure) dropped 8.5%.
So in reality, Home Depot's sales are down a lot, profits are down a little (buoyed by cost cutting and tax settlements), and comp sales are down a lot...
If Home Depot keeps turning in "above expectations" performances like this one, it should be completely out of business in about 10 years. Mr. Market reads the daily news and swears by every word, bidding Home Depot shares up more than 3%.
Target's second-quarter earnings report was – you guessed it – "above analysts' expectations," even though revenue declined 2.06% (ouch) and earnings fell 6.4% (ouch, ouch).
At Target, the wonderful "above expected" earnings were the result of the same cutting everyone else is doing... In this case, staff reductions, salary freezes, tighter underwriting standards at the credit-card division, and fewer store openings all helped Target increase its gross margin to 31.9% from 31.2%.
Target's credit-card operation is still deteriorating. Profits fell 15%. Expenses for bad debt jumped 19%, and delinquent accounts are soaring. Accounts at least 60 days late increased to 5.8% from 4.5% a year earlier. The 90-day delinquency rate rose to 4.1% from 3.1%.
Mr. Market, of course, reads the Wall Street Journal like a good little apparatchik and swears by every word. He sent Target's stock up almost 7%.
Just so we're clear on what really happened at Home Depot and Target: Less money came in the door. Period. They sold less. They earned less. And this ain't poetry or painting: Less isn't more in finance. In finance, less is less. Why does the Wall Street Journal do such a miserable job of telling you this? It's not even trying to hide its attempts to slip more happy pills into Mr. Market's morning coffee.
You may also recall Goldman Sachs' record earnings report this quarter – the result of government subsidies and fancy accounting... These numbers will come back to reality soon enough. In the meantime, Mr. Market's taste for ailing businesses seems insatiable...
"Above expected" earnings have sent Mr. Market's expectations through the roof. He's pushed the S&P 500's price to earnings (P/E) ratio from 10 at the beginning of the year to over 18 currently, according to Bespoke Investment Group. This is the highest S&P 500 P/E since the end of 2004. Declining earnings, a weakening consumer, soaring stock prices, the highest P/E ratio in five years...
How ironic. High stock prices have pushed our expectations down... and now they're as low as Wall Street's army of analytical strumpets. In order to beat our expectations, though, sales and earnings will have to grow 25%-30% in the next few quarters... and we don't expect that.
See the chart below for historical P/E ratios since the start of the 2002 bull market...
Chart from Bespoke Investment Group
New highs: none.
More Obama rants in the mailbag. Don't just block or delete us, write us: feedback@stansberryresearch.com.
"Porter and Steve Sjuggerud were invited to New York today for the ringing of the opening bell at the New York Stock Exchange?
"No wonder stocks tanked today, lol well that and.... OBAMA HATES THE UNITED STATES OF AMERICA. Because he believes America has been an enemy to the black race and to the Muslim world... GAWD, a land of idiots." – Anonymous
"I can't believe these people who write in to complain about comments made regarding politics, politicians and government. IF YOU DON'T LIKE WHAT IS IN THE DIGEST JUST BLOCK IT OR DELETE. You are only paying for financial advice, the rest is FREE and if you don't like it DON'T READ IT... Keep up the great investment advice and say what you will in The Digest." – Paid-up subscriber Dave Christie
"Do you really need to print the kind of brainless, hateful drivel that this Michael C espouses. I am no fan of Obama (or any other politician except for Ron Paul for that matter), but this kind of idiocy makes you look like Fox News or something. I know it's not neccessarily your opinion, just his. and we are all entitled to our own opinion. But 'Obama hates the United States' and wants to hurt it because the U.S. has been an enemy of blacks and Muslims? This guy is a moron. I don't need to read the opinions of morons on The S&A Digest. There are more than enough of them everywhere else." – Paid-up subscriber Richard Klein
"I feel vidicated after reading the blog from Michael C. He states correctly Obama! has so far been seemingly succesful in his bid to destroy the US economy. I read that the reverend Jeremy Wright even married he and his wife, and babtised his kids (this I can't confirm). I didn't capiltalize the work 'reverend' since Wright stood on the alter of GOD, and use the term GOD-D__N. Political Correctness is gonna get alot of people killed.
"Every bit of his socialist/communist's actions are always in the 'cram down' mode, i.e., do it as quick as possible. Obviously, the longer people are given to consider, and react to his 'Mass Destruction' policies on our economy, the more they see what HAS to be his plan (at least according to his actions, not his rhetoric). Annihilation of the US economy. I would feel much more secure living beside Osama." – Paid-up subscriber D. Cartier
Regards,
Dan Ferris
Medford, Oregon
August 18, 2009