Tuesday, March 06, 2007

The Perfect Storm continues despite today's pop...

There are some persistent myths that resurface across the networks when the markets get choppy. On a side note, this is one of my pet peeves - it is clear that most of the major financial outlets (CNBC, Bloomberg) are rooting for stocks to rise. When investors are making $$$ they are happier and they watch more CNBC, which equals higher ad rates and more $$$ for salaries of the hosts, but the blatant cheerleading is at least annoying and possibly dangerous for your financial health.

Here is one of my favorite myths that I've heard recently:

Earnings are STRONG
The bulk of the earnings strength that everyone is referring to comes from Oil, Commodities and Financial Companies (lots and lots of mergers). Oil prices have eased (hard to tell at the pump) but the bigger risk are the big financials - Lehman, Goldman, Merrill, etc. Their balance sheets are loaded with risky credits that could lead to some huge charges in the coming years.

Also, companies continue to buy back their stock at record rates. This is how the math works - company A earns $100 in year 1 or $1.00/share if they have 100 shares outstanding. If the company buys 50 shares back and earns $100 in year 2, earnings are unchanged, but b/c they now only have 50 shares outstanding they earned $2.00/share. The headline will read EARNINGS DOUBLE IN YEAR 2 FOR COMPANY A!!!! Clearly this is a simplified example but this has been a major driver in the STRONG EARNINGS story.

Again, job creation has been horrible in this recovery, earnings are not that strong, the housing debacle is about to cripple us, inflation is real and growing, and the fed has no room to cut interest rates.

The perfect storm continues to gather steam.

No comments: