As when the bombs fell in the Mideast in winter 1991 in the Gulf War, and again in spring 2003 in the Iraq War, and in fall 2001 with the Afghan War, and in the 1960s when LBJ turned Viet Nam into a must-know-how-to-locate-on-a-map place for the cognoscenti, so with the country possessing Africa’s largest known reserves of oil. Go to war, goose the stock market.
And so it is risk on today.
And it is back to the sickness of the recent Bush years, takeover Monday, proof that credit is flowing freely in the wrong places, allowing one corporation to waste resources rebranding the services another company already provides, the main purpose of the exercise being to enrich investment bankers and the managements of both companies. Today’s overpriced takeover shows the degree of monetary inflation that has occurred the past decade. An also-ran telecom company, T-Mobile, is being valued at $39 B from AT&T. $39 B?!
AT&T, by the way, as of 12/31/2010 has (per Yahoo’s Finance section) a net negative tangible net worth of $22 Billion. If one thinks tangible net worth is too stringent a critieria, let’s look at net working capital. It is negative $13 Billion. Plus, I would question whether its $103 Billion of stated value of property/plant/equipment is overvalued, given the prospects for the land line business. Buying an income stream from a company with no underlying tangible asset value is a risky proposition. What supports the stock price if profits drop to zero or turn negative?
In the same vein of the “authorities” keeping the money flowing, banks of unquestioned financial strength such as Ally Financial have been granted the right to pay dividends. (Sarcasm was on there.) But of course, Ally is majority owned by . . . the U. S. Treasury. So the Ponzi can continue. The Treasury can pump money to Ally, which can return it via dividends. Similarly, the Fed buys Treasuries, the Treasury pays the Fed interest, and the Fed remits the interest back to the Treasury.
Anyone who mistakes today’s “green” in the stock market futures for a reflection of economic vigor is in my humble opinion mistaken. There will be growth in the spring. But that’s in part because government spending is as much a part of GDP measurement as is business investment in productivity-enhancing machinery.
Precious metals and oil remain the most vigorous intermediate-term bull market around. That would change if pols grew the proverbial “pair” and emulated the many other countries that actually approximate a balanced budget and don’t do the worst sort of central bank money printing. Thus I continue to like the petrocurrencies of Norway, Canada and Brazil as ways for Americans to obtain USD diversification without going all in on precious metals and oil.
I can’t wait for the Fed to read Mises and Hayek, and absorb their wise teachings. Till then, or till events force the hands of politicians, unrestrained money-printing, and its various and not always predictable consequences, remains the dominant theme of the American financial landscape.
Copyright (C) Long Lake LLC 2011
hi Jeff, i loved most of this article, and i disagree with a small portion of it.
i think AT&T overpaid and i don’t think re-branding subscribers is at all a productive exercise for anyone other than the bankers and lawyers. maybe the Feds let the deal go through, maybe they don’t.
however, i take issue with book value and working capital comments, and i do not think they are relevant. and as you and other awesome posters know, i have massive respect for this blog and read it, well, daily.
yahoo finance is not an acceptable information source, in my opinion, SEC.gov is more appropriate. but in general:
1) negative working capital is only a bad thing upon liquidation, which is clearly not the case with AT&T. if a company can pay its trade creditors more slowly than it gets paid, and this is sustainable, then that is a good thing.
2) the book value of a company like this AT&T is not relevant, it’s been around over 100 years so its assets have been written down as dictated by GAAP. and many large companies have distributed what would be a hard asset (cash) as dividends, which diminishes hard book value — as book assets are converted into cash, and that cash is distributed, book equity is hit. hilton hotels has depreciated the value of the waldorf astoria to near zero — i’m quite certain it’s worth more than its hard book.
3) licenses and spectrum are not intangible. goodwill, when generated via acquiring other assets with similarly written-down assets, is not intangible. if they were, then they’d probably be shut down by regulators for earning such an absurd ROE.
4) the only thing that matters is the net present value of its cash flows. we can disagree on what those future cash flows may be, but we cannot debate that what they are is what determines the value of a company, nothing else.
i have learned so much on this blog about economics and i think i subscribe to the Austrian School. i am new at top down thinking, macroeconomics, and monetary theory. i’m not new at bottoms-up analysis, and i do not deny that monetary inflation is everywhere, including company earnings and valuations. however, if i’m being honest, i am a little disturbed by some of the commentary on how to value businesses.
i am not defending AT&T and am not posting to debate the company specifics. the other debate that comes to mind is share repurchase versus dividends, both of which are great uses of capital so long as they are paid out of internally generated free cash flows.
and finally i do see the merit in precious metals and mining companies, for some juice, as DoctoRx might say.
This is a DoctoRx article. My error in the original posting.
dd: Appreciate your kind comments.
However, you might wish to re(read) Graham and Dodd, Security Analysis/other works. Per basic securities analysis, companies are not worth simply the sum of their future operating cash flows without reference to the current value of their assets. They are better described as worth the current value of their assets plus their future free cash flows. Ben Graham, basically the founder of the hedge fund industry, lamented in the late 1950s that he could only find 30+ “net-nets” available on the NYSE. A net-net, which when Grahan/Dodd wrote their book in the 1930s, was supposed to be the only sort of company that was a safe investment. To wit, a net-net is a company that is selling for less than the value of its net working capital. Long-lived assets such as capital equipment, market position, and brand name were all extras.
Putting matters another way, one would want to buy stock in a company at $100/share that owned $100/share of cash (or gold) and had no debt, and that was earning $5/share yearly from operations, in pref to a company with no net cash at all, earning $7/share annually from operations, all other matters being equal. (Even if the cash/gold never was converted to another form of wealth and just sat there . . .)
So, all things otherwise equal, it’s better to own AAPL with (soon to be) $70/share cash in the bank (even earning zero) and no debt than a similare operating company with -$70/share in working capital (think AT&T, P&G, VZ with negative tangible book values and negative net working capital). It’s the latter co that lacks reserves for good times. Re book value, of course it’s not how one decides to own or not own shares in a company, and of course, if a company own land in Manhattan carried on the books as if all of Manhattan was still worth $24, you should assume book value is understated. In AT&T’s case, my point was that book value may well be overstated. AT&T still has large legacy assets that may well have little future earnings power, just as steel companies in 1981 were on the road to bankruptcy despite trading well below book.
IMHO One of the major probs w growth investing is that the Street/CNBC “teaches” you to look only at earnings growth without looking at the current assets of the company.
Finally (sorry for the long comment), I believe that owning gold bullion or equiv is not “juice”, but owning gold stocks is, especially some of the speculative type. As Jeff Harding points out in his comments on David Rosenberg “leaving”, we are in quasi-uncharted waters. Our charts suggest dangers lurking not far below the surface. Gold might be your lifeboat should an iceberg be encountered.
Doc:
i agree on gold.
i disagree on the rest. i do not think your argument is consistent. i am fully aware of a company’s net asset/liability position, i do this for a living. i take issue with a your assessment of a company’s asset value, as represented by their GAAP balance sheet.
ebitda can be pretax, unleveraged free cash flow, or it can be Earnings Before I Tricked Da Auditor. follow the cash.
i am not a fan of AT&T’s stock, but i do not see AT&T wireless’ 96M wireless customers as legacy assets, i see them as a vibrant business that people use to connect to the world with their AAPL devices. to think that each AT&T customer who pays $500-600 per year, with limited churn, for their phone is not worth $1000 is not sound judgement.
that a company has net cash or net debt / working capital is not an ample assessment. if all one had to do to find a value is to buy a stock below book value or net working capital or has net cash in excess of the stock price, then we’d all be genius investors. not realistic, they rarely exist. and when they do, they usually have other issues.
i’d point out that ABX trades at over 3x tangible book value. AAPL trades at roughly 7x book value. the great warren buffett, graham & dodd’s most famous hypocrite-disciple, bought his railroad company at 1.5x book and it’s been heralded by the MSM as wild success.
one last thing, what i meant to say was that i like gold bullion, but for some juice, i like a small allocation to miners / explorers. i believe that is what you had said in an earlier article.
dd: Thanks for your thoughts. Of course there are many ways to look at what a security is worth. Ultimately the market, after voting, weighs. It is inefficient to exchange views via written comments on a blog page, and this topic is not the main point of Jeff Harding’s blog.
I’d be happy to communicate with you on this topic to understand your thinking better in another venue. One way to do that is to comment on any post at econblogreview.blogspot.com.
yes, i am aware of that and feel a little bad after our exchange, given the focus of Jeff’s fantastic blog … to which i am finding myself addicted. sometimes my urges get the better of me, i’ll move on!
thanks to all contributors.