Last week, Noah "Cult of the Bear" Blackstein was pounding the table as to how much cash was on corporate balance sheets.
Raymond Jame’s Jeff Saut puts that cash into context, via underfunded Pension Plans and Healthcare
"While it is true that companies have tremendous cash positions currently, if under-funded pension plans and healthcare liabilities are moved from the footnotes of the financial statement to the balance sheet, said cash evaporates. For example, the FASB (Financial Accounting Standards Board) is proposing to move the status of pension and OPEB (post-retirement employee benefit) plans out of the footnotes onto the balance sheet. If done, the notional "hit" to shareholders’ equity for the S&P 500 is more than $250 billion.
Moreover, today’s balance sheets are already overstated due to fallacious pension accounting. To wit, in 2004 the S&P 500 companies reported roughly a $100 billion net pension asset on their balance sheets, when in reality those pension plans were $165 billion under-funded (source: CS First Boston). While that is bad enough, Jack Ciesielski, publisher of the "Analysts’ Accounting Observer, notes, "We’re only seeing roughly half of the [retiree healthcare] obligations on the balance sheet." He believes that retiree healthcare costs are twice as large as pension obligations. "A day of reckoning is coming," he added. Ciesielski expects the requisite accounting changes to affect stock prices in industries where "it’s going to be a surprise," and not just the auto and airline industries (source: Barron’s).
When we combine these aforementioned balance sheet "impacts" with the upcoming expensing of stock options, the waning profitability of the carry-trade that U.S. corporations have employed to boost their earnings, compressing profit margins, and a softening economy, it is difficult for us to embrace the rosy earnings forecasts for 2006. And we are not alone in that thinking, for as the savvy Bank Credit Analyst (BCA) notes:
Analysts are rashly assuming that nothing will harm corporate profitability, and that is bound to lead to disappointment. The bottom-up consensus of analysts’ projections implies that S&P 500 operating earnings will rise by 12.4% in 2006, only slightly down from this year’s expected growth of 14.8%. Our earnings model paints a very different picture, with earnings growth expected to slow to around zero (in 2006)."
While we are not as earnings’ bearish as the BCA, hereto we think the answer lies somewhere in the middle (between zero and 12.4%), implying we are on a glide-path to single-digit earnings growth.
Saut is a moderate bear on US equities, Bullish on commodities, and a believer in selective stock picking . . .
The Ruling Passion
Raymond James Investment Strategy