Friday, January 20, 2012

Stocks ? Why I'm Not Buying:

Warning: I have not personally researched the majority of S&P 500 stocks, my arguments are based on the few companies that I actually had the time to analyze in more detail.

I read it all the time: stocks are incredibly cheap and especially with interest rates as low as they are, you cannot go wrong buying.
I'm not buying, and here is why:
1. When the price/earnings ratio for the S&P is calculated, only earnings are considered. When companies make losses, their "earnings" are not subtracted from the total.
2. Companies report "earnings from continuing operations" and tell analysts that losses from discontinued operations should be disregarded. It's equivalent to me trading IBM with a nice profit but trading US Steel incurring large losses and then taking an oath not to trade US Steel again. The loss on my US Steel trades is disregarded and only my profit on IBM counts. I still made a loss overall, but to the casual observer, it appears I made a profit.
3. Industries invent their own accounting yardsticks, like FFO (Funds From  Operations) for Real Estate Investment Trusts (REITs) and present those as "earnings". Again, the casual observer/investor who is getting his info from the likes of "Yahoo" is tricked into believing that his REIT is profitable when it is actually losing money according to GAAP ( Generally Accepted Accounting Principles). The difference between the two measures is that FFO does not account for depreciation. The REIT industry likes to make you believe that real estate improvements do not lose value and do not become obsolescent. Yet commercial real estate is not much different from other ventures, like manufacturing facilities.
4. Government contracts, subsidies and incentives can make an industry look very inexpensive based on reported earnings, yet those subsidies are at risk to be cut and can turn a seemingly profitable industry into a basket case almost overnight. Recent Examples? Ethanol producers and solar companies.
5. Interest rates can only go up from here. When they do, stocks will lose their comparative income advantage.

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