Marc Faber - More pain to come for equities (E)

verfasst von Cosa, 10.10.2002, 21:56

-->Hi,

hier die neue Faber-Kolumne....


<font size="5">More pain to come for equities</font>


I have mentioned before that if stocks perform poorly when an industry is doing well it is a warning flag. Take the US auto companies.

We have now record auto sales as a result of zero interest auto loans, yet the stocks of General Motors and Ford are making 52 weeks new lows and are now lower than they were in 1990! So, clearly the market has serious reservations about the prospect of both companies - and with good reasons.

According to the GM 2001 annual report, the company's retiree benefit plans, including pensions and health care, have unfounded liabilities of $61 billion, which is up from $34 billion in 1999. Unless the stock market rebounds convincingly in the next few years these liabilities are likely to increase and the company will have to make massive contributions to its benefit plans, which will reduce earnings. But this is probably only a minor problem about which the market is concerned.

The poor stock performance of both Ford and GM amidst strong car sales rather reflects the fact that the stock market simply does not believe that the present auto boom is sustainable and that it will shortly give way to an auto slump! The auto industry is on track to sell more than 17 million vehicles this year, thanks to interest free financing. This would mark the fourth year in a row that total vehicle sales exceed 17 million units.

By comparison, before the 1990s, the US auto market averaged annually 14.6 million sold units. Based on an analysis by an automotive consultant, who took vehicle sales and driving age population into consideration, auto ownership has risen from about 90% of the population at the beginning of the last decade to 99.8% of the population.

Moreover, about two-thirds of the cars and trucks on the road in the US were purchased since the mid 1990s buying binge began - indicating that the car population age has declined significantly in the late 1990s (which reduces the need for replacement). According to this consultant, there is now an auto bubble and 'Americans could buy somewhere between 30% and as much as 50% fewer vehicles per year for four or five years and still very adequately meet their transportation needs.'

But there is another observation I wish to make about the fact that both GM and Ford are below their 1990 highs. If this were an isolated case, it would be of no great concern. But, the fact is that so many other stocks are either lower than they were in 1990 or barely above the 1990 level that the market is suggesting that something is really rotten in the US economy.

Otherwise, how could it be that after the longest economic expansion on record, which was followed by an extremely mild and brief recession in 2001, so many stocks are back to where they were when the 1990s economic 'miracle' got underway?

According to Adam Barth, who writes occasionally for the www.PrudentBear.com website, 'share repurchases went from 3% of total earnings in 1972 to 5% in 1980, before skyrocketing to over 50% of earnings in 1998. In the pre-1980 period, more than 50% of earnings were retained to build corporations' equity base. By 1998, less than 2% of earnings were retained to increase equity. Instead, these earnings were used to repurchase stock to counter the dilution caused by stock option grants to top management. In effect, common shareholders were left with a progressively smaller amount of equity and a rapidly increasing amount of debt'.

It should also be noted that the distribution of options is very much in favor of executives. According to the National Center for Employee Ownership, the top five executives of a company hold 75% of all US companies' options outstanding. The next fifty executives own 15% of the outstanding options, while all the other employees only hold 10%.

Barth then explains that the 30 Dow Jones Industrial components have, on the basis of each company's most recent quarterly reports, a combined $ 3.3 trillion in liabilities compared to just $ 728 billion in book value. Barth writes that,?there is a combined $ 218 billion in goodwill within this book value figure, leaving just $ 510 billion in net tangible assets (which does not even subtract intangible assets other than goodwill from book value).

In effect, the Dow's net tangible assets are presently leveraged at a 6/1 ratio - a capital structure bearing far greater resemblance to a hedge fund than a prudently financed corporation. Of even greater concern, this figure is not just a function of the massive leverage employed by the Dow's financial components: just 10 of the Dow 30 have liabilities/NTA of less than 3/1.

Additionally, it should be noted that this figure does not account for the off-balance sheet liabilities. Risk assumed off the balance sheet dwarfs the aforementioned $3.3 trillion in liabilities in an unknowable, but certainly immense, fashion.' Or take the diversified conglomerate, General Electric, which holds only $24 billion in NTA compared to $ 446 billion in liabilities.

Barth goes on by saying that, 'for every dollar invested in GE stock at the present time, the shareholder has a paltry $0.8 in NTA and a whopping $1.47 in liabilities - I guess efficient market theory is necessary to explain such an investment arrangement. The stalwart of stability in the new economy, IBM, has $22 billion in NTA versus $ 60billion in liabilities - a stunning figure for a technology service company with no aim for significant revenue expansion. Massive stock repurchases at 8-10 times book value have their costs.'

The increased leverage of the American corporate sector and consumer will undoubtedly mean that in the coming years the corporate sector will begin a process of de-leveraging and that the consumer will at some point have to reduce his spending habit, which, in the last two years, has been driven almost solely by rising mortgage and consumer credit.

This de-leveraging of the American corporate sector will, in my opinion, increase the supply of equities and also lead to lower share repurchases. So any market advance will be contained by a rising supply of equities and less demand for equities from the corporate sector - not to mention by individuals, many of whom are vowing never again to touch stocks!

In addition, the increased leverage of the American economy is taking its toll on financial stocks such as JP MorganChase, Citicorp, Bank of America, Fannie Mae, Capital One Financial, Household International and all the brokers. In fact, the poor market action of financial issues not only in the US, but also particularly so in Continental Europe where many insurance companies are technically bankrupt must be viewed as very negative for the economy.

Financial companies have now rising financing costs and, therefore, their ability to lend is being curtailed. This will certainly have a negative impact on the debt driven housing market and on overall household consumption. Therefore, my advise is to not only sell the financial sector, which has massively outperformed the market since 2000, but to also sell homebuilding shares such as KB Homes, Beazer Homes, Ryland Group, Lennar, Toll Brothers, and Winnebago as well as retailers!

One final point! It is true that the stock market usually bottoms out in October/November and then rallies into March/April of the following year. Also, since western stock markets are already as oversold as they were last July, the possibility of such a rally is very high.

However, looking at the deteriorating fundamentals in the financial system and the economy, such a rally may only take place after a final washout or even a crash of close to 1000 points for the Dow Jones! The fact that everybody is expecting such a rally concerns me, also.

Therefore, I would be careful in jumping right now into the stock markets and would wait for some even more extreme oversold positions. Moreover, I very much doubt that if the US market rallied right away that this we would be the ultimate low of this bear market. More work on the downside is likely to take place once the consumer and homebuyer finally capitulates.

Dr. Marc Faber

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gesamter Thread:

• Marc Faber - More pain to come for equities (E) - Cosa, 10.10.2002, 21:56
  • Re: Marc Faber - More pain to come for equities (E) - Ecki1, 10.10.2002, 22:23
    • Vielleicht hast Du recht NUR ohne washout auch keine nachhaltige Rallye - nasdaq, 11.10.2002, 00:14