May 06, 2009
Greedy glut feeding frenzy
Cash for trash, writes Paul Krugman and is what many sceptics labelled Henry Paulson`s 700 billion rescue plan. To be honest the same could be said for some of the securities that are part of this invincible recovery and not just restricted to US markets but across the entire wagon of global equities.
Without any doubt the lows of March 09 are gone and some firms were priced very much on the cheap end.
Back only a month ago or so there were actually firms with negative enterprise value, amazing as that may be and how could that be?
Enterprise Value or Transaction Value is the sum of claims of all security holders and can be derived by taking the (equity value + debt + preferred equity) minus (cash + marketable securities). That is tradable securities fell so much, some firms were perceived to have more cash than ongoing claims and one would deem such a place as an arbitrage opportunity of all occasions, where you could buy all of the debt of the firm and use its cash balance to cover the investment cost. As the number of firms with negative EV grew, the steepness of the slope of decline diminished and eventually the market reached capitulation (bottomed out) and then just as it couldn`t be any darker, the world sprung to life and it keeps leaping back, so much so that we are now reaching another bad place; the correction.
As Bloomberg writes ``Aprils, record rally in European stocks pushed market valuations to the highest level in more than four years`` and ``The 13 percent advance in the Dow Jones has sent the measure to 16 times its average companies earnings`` This is all good surely where some firms` stock price has climbed so rapidly that you wouldn`t even know you had been in a recession, in some cases the price of the stock is about where it was last October. What recession do I hear you say, it`s endless but if you scratch below the surface you will find that some of the real big movers are the small caps. Now it isn`t uncommon for the small caps to lead the market as a whole out of a recession and in past recessions this happens about seven or eight months before the recovery. If however you pull the covers aside on some of these companies and look at their reported balance sheets, it`s a very oh dear me, perhaps this little lot aren`t such a great buy.
One firm I looked at in particular has a negative current ratio (liabilities are greater than assets), sales down 70% from the year before, operating costs about the same and well umm profits negative. The share price, WOW up 80 percent plus and if I have ever seen a badly dressed date for a ball, that has to be one.
When UBS announced its 1.98 billion Swiss franc loss yesterday and the share blew to another 4.7 percent up, I knew for sure the world had gone crazy. Well I suppose if everyone was that pessimistic in the past to think that a loss of 1.98 percent today is a good thing because last year the bank did over six times that, we all need a reality check.
This is all fine, speculate on; it`s all been a negative place for a few months but where are the fundamental economics under all this buying? EU Business reports that retailers in the 16 nations using the Euro saw a slump in their sales accelerate in March. According to official EU data released on Wednesday 6th May, brings the decline over one year to 4.2 percent, twice as much as many analysts had estimated. February of course was worse, so again with our pessimistic glasses on we take a little less bad news as brilliant news but nota bene ladies and gents that while the acceleration or slope of decline has diminished, it`s still going down. What about US unemployment, well last month that soared to 8.5%, its highest level since 1983 and Germany`s unemployment rate has risen to its highest level in over a year with consumption declining by 1 percent instead of the forecasted 0.2 percent gain analysts saw as reasonable.
I know it all sounds doom gloom and hey who wants to be a party pooper but with climbs in some security prices of 10% every second day, one starts to believe that it is a tad premature after the last greedy glut feeding frenzy denial that everything has to go up all the time.
Posted by CausalEvents at 10:16 PM
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