Bearish News

Note: I wrote this on Feb 2nd 2009 but never got around to publishing it. Still seems relevant, though. I stated my long position in MW on Motley Fool back in Feb, and have stated my short positions in SPG here and there.

After evaluating two stocks recently, and comparing their S&P ratings, I’m more convinced than ever that S&P ratings mean crap and are biased towards clients. Let’s take a look.

S&P has a sell on Men’s Warehouse (MW), who is not an S&P client, because of the “rough retail environment”. Yet they have a strong buy, 5 Star, rating on the highly-leveraged mall REIT Simon Properties (S&P client). Yes, I pick on SPG a lot, and yes, I’m short their stock. But I’ve already done the research, so might as well use it as an example. Here are some fundamental stats on the two:

Men’s Wearhouse: 8 P/E, 0.07 debt/assets (very little debt), strong cashflow, should perform pretty well in a downturn because people are looking for a deal. Current price: $11.75, S&P target: $11

SPG = 25 P/E, .75 debt/assets (it’s actually higher if you look at the sec filings instead the “balance sheet”. Joint ventures have a flattering effect on balance sheets). Faces a horrific next few years because of retailers, especially pricey ones. And they just switched their dividend to 90% stock (aka, they cut the div 90%).

No, this isn’t an apple-apple comparison. I had already done the research on SPG, so I just threw it in there. They’re both exposed to overall retail spending in a big way, so I figured it was close enough to make some comparisons. Plus, SPG has been a 5-Star S&P Strong-Buy pick since $105 or so. It’s currently around $32, and ramping down.

This whole thing just reinforces what Bill Fleckenstein has taught me – Analysts on the whole are biased and reactionary. They react to how a stock behaves, and adjust their price targets and recommendations based on these movements. They don’t really do much forecasting or meaningful research. There are exceptions, of course.

According to this Bloomberg article, Ben Graham would still find US stocks to be expensive:

Benjamin Graham, the father of value investing and mentor of Warren Buffett, would find most U.S. stocks expensive even after the Standard & Poor’s 500 Index dropped 56 percent in 17 months.

Mr. Graham’s valuation method measured stocks against a decade of earnings to “smooth out distortions. Interesting, but I’m not sure if I understand the impact of it:

Graham measured equities against a decade of profits to smooth out distortions, a method that shows the S&P 500 trading at 13.2 times earnings, according to data compiled by Yale University Professor Robert Shiller. At the bottom of the three worst recessions since 1929, the average ratio fell below 10. To reach that level, the S&P 500 would sink another 27 percent.

Take it with a grain of salt, but it is interesting to see how valuation methods have changed over time.

Another interesting snippet from the Bloomberg piece:

“A lot of earnings estimates on which the market valuations are based are quite suspect,” said John Carey, who oversees $8 billion at Pioneer Investment Management in Boston. “You have to adjust what you see out there for reality. I remember thinking that a stock selling at 10 times earnings was expensive” in the 1970s and 1980s, he said.

This 2006 puff-piece by Fox News is a real gem. It praises Goldman Sachs executives for their public service:

Wall Street powerhouse Goldman Sachs has a long list of alumni who have gone onto government service, and it looks like it’s about to give up one more of its protégés with the nomination of Chairman and CEO Henry M. Paulson Jr. to head the Treasury Department.

The move won’t be uncommon for Goldman Sachs employees. At least among its financial competitors, Goldman Sachs appears to be head and shoulders above the rest when it comes to putting former employees into the halls of government. For years, résumés around Washington have sported the company name, and those with the job experience have gone on to positions as Cabinet officials, agency analysts, advisory board members and even U.S. lawmakers.

That’s some impressive spin. No mention of the fact that Hank Paulson got to sell $500 million worth of GS stock with ZERO capital gains/taxes because of his position (it was a conflict of interest, so he has to sell it, right?).

Then Paulson decides to rescue AIG, arguably because they owed Goldman Sachs $20 billion. There’s no solid proof of this that I’ve seen, but it’s rumored that Goldman was short Lehman and contributed to their demise by spreading rumors of their insolvency.

We need to fire most investment bankers from the treasury department, especially the boys from Goldman Sachs, and replace them with REAL ECONOMISTS. Roubini for treasury secretary, anyone? It wouldn’t hurt. These Goldman elitists are incredibly biased. They quite obviously don’t have a handle on the situation.

Investment Bankers are not economists. The most important criteria for being a stockbroker at a place like Goldman Sachs is having rich friends. If you can steer business to the firm, you’re probably getting hired. These are NOT the best and brightest, they’re the richest and salesiest. There are a few exceptions, of course. But we shouldn’t hold these guys up on a pedestal, as we still do today.

Disclosure: short JPM, long GS puts
None of the information posted here should be considered investment advice. Always consult a financial professional before making any investment decisions.

Goldman Sachs’ tax rate dropped to 1% in 2008. That’s down from 34% in 2007, according to Bloomberg News. Goldman attributed this drop to “geographical changes” and tax credits. I’m not a CPA, but that screams “tax haven!” to me.

If they are using offshore corporations to dodge taxes, the testicular fortitude on these guys is impressive. They’re taking taxpayer dollars via the bailouts, shifting profits overseas to avoid paying any taxes, then awarding themselves generous bonuses. This type of creative tax-accounting is common among big banks. See the CBS story which I link to below for more. Just to be clear, I do not have any evidence or proof of legal wrongdoing by Goldman Sachs, or any other investment bank traditional bank. But it just doesn’t smell right.

There is some hope. Today Timothy Geithner announced the Obama administration’s support for legislation which aims to eliminate offshore tax havens:

Let me just start by saying that we fully support the legislation you referred to championed by your colleagues on offshore tax centers, and we look forward to working with you as part of the broader effort to address international tax evasion and close the tax gap. source

Most large banks who received taxpayer-bailouts have significant oversea tax havens. But the sheer number of tax-haven subsidiaries owned by the banks in the Cayman Islands alone is staggering:

Goldman Sachs has 15 subsidiaries there. Bank of America: 59. Citigroup: 90. But Morgan Stanley beats them all with at least 158 subsidiaries in the Cayman Islands – seven times the number of hotels. source

Goldman Sachs stock was down 4.5% today. Given their miraculous 4q tax-rate, I’d say there’s a good chance that these events are related.

Post was updated for clarity and legal-compliance 5/24/09.

Minor edits made again 8/11/09 (sloppy writing, slowly getting better I hope). It is interesting to note that absolutely nothing has been done to shut down these tax-havens, despite Geithner and Obama’s promises. Working on an update piece on this now.

Disclosure: short JPM, long GS puts. Disclaimer: None of the information here should be considered investment advice. Always consult a professional before making investment decisions.

If any information here is not correct, please contact me through the form at the top of the page and I will remove/fix it ASAP.