Posted on 08/20/2002 8:30:11 PM PDT by Medium Rare
MEDIUM RARE
By Jim Rarey
August 1, 2002
MEETING EXPECTIONS AND OTHER MARKET CONS
Last week during “reporting season” (when companies report their results for the previous quarter) an analyst on CNBC was enthusing that 58% of companies reporting had met or exceeded expectations. What, if anything, does this tell the average investor about which companies are good investments?
The only thing “meeting expectations” really means is that the companies told the stock analysts ahead of time what to expect, and that’s what they reported. The quarter could have been a total disaster but as long as there are no surprises for the analysts they are happy. The advance information allows those handling the stocks to adjust the prices to reflect the expected news when the report actually comes in. It also allows the “specialist” to adjust stock prices when good or bad news is reported as if he had no advance information.
The most common criterion used is “earnings per share” which is simply earnings (profit) divided by the number of shares outstanding. A corollary is the “Price/Earnings ratio” (earnings on an annual basis divided by the price of the stock). As an example, if the P/E were 10 to 1, that means it would take ten years of earnings to recover the price of the stock. That would be a 10% return on investment. That might be good for the company, but what of the “long term” investor? Unless the investor intends to make his money by trading the stock when he can make a profit, he depends on dividends paid.
The earnings per share have no necessary relationship to the dividends paid. The “earnings” are available for a number of purposes including capital expenditure, pay and/or benefit increases for the work force along with bonuses, stock gifts and stock options to management and directors and acquisitions. It almost seems as though dividends come last in that hierarchy.
In the run up of the bubble during the late 90’s, some P/E’s were as high as 100 to 1 and the average for all stocks was in the 50-60 to range. Yet analysts were touting those stocks to “long term” investors, who they say all of us should be (except themselves) which would take fifty or more years to recover the price of the stock even if all the earnings were paid out in dividends. The average P/E ratio of all stocks is still in the 30-35 to 1 range.
Once the small investor gets into the market, he (or she) runs into a stacked deck. By far the largest numbers of average investors in stocks are in mutual funds. There they are at the mercy of the fund manager who, in most cases is not a long-term investor. The tremendous volume of daily stock transactions shows that the “institutional “ investors are gambling on day-to-day (or hour-to-hour) changes in prices. The New York Stock Exchange (NYSE) website, (http://www.nyse.com/) has a wealth of statistics, most of them current as of 12/31/2001. For that year, the value of the average trade was well over a quarter million dollars, well beyond the reach of the small investor.
The public perception is that all stock transactions are made on the floor of the exchange by specialists (persons appointed by the NYSE to trade in specific stocks). Not true. Broker members make about 70% of stock transactions on the NYSE either buying or selling from or for their own accounts or finding another exchange member to handle the transaction. Of the remaining 30% performed by the specialist, about one third of those transactions are run through the specialist’s private account. The public has no way of knowing (immediately) if they are getting the best price available.
Specialists’ transactions are reported six months later (including those from their private accounts) but only the specialist knows what range of choices he had to close the transaction. There have been lawsuits (some successful) alleging that a specialist did not get the best price available for an individual investor.
Many people believe that a stock’s opening price on a given day is the same as the closing price the previous day. Not so. At the start of each day’s trading, the specialist assigns a “fair market price” (usually called “fair value”) to each stock he handles. Supposedly based on an analysis of buy and sell orders placed before the opening (and awaiting execution) the price is completely arbitrary.
“Normal” trading is done during the exchange’s open hours (9:30 am to 4 p.m. Eastern time). However, for exchange members, there are two “after hours” trading sessions. Remember the Robert Redford/Paul Newman film “The Sting” where the con was betting on a horse race when the result was already known? That’s how these special sessions work for exchange members.
The first session called “Crossing Session I” (CSI) allows members to place orders from 4:15 to 5 p.m. Trades are executed at 5 p.m. based on the closing prices of the regular session.
The second session, “Crossing Session II (CSII) is for the high rollers. It is limited to transactions involving a “basket of at least fifteen different stocks with a total value of one million dollars or more. This runs from 4 p.m. to 5:15 p.m. with trades being executed at that time at the regular closing prices.
There are other “perks” for exchange members that space considerations do not allow us to explore.
In the recently passed “reform” legislation, one aspect was not covered. That is stock options awarded to management and “independent” directors. One of the suggestions being considered is to have stockholders approve all stock option plans. This raises the question of who owns corporate America and votes the stocks.
On the NYSE website, a chart is presented (furnished by the Federal Reserve Bank) that purports to show how much stock is held by “institutional” investors (e.g. pension funds, insurance companies, mutual funds, and banks). By that definition, “institutions” own 46.7% of U.S. corporations. However, that doesn’t even tell half the story.
By far the largest single category of stock ownership of U.S. corporations is “Households & nonprofit organizations, which is excluded from the definition of institutions. The Fed has intentionally lumped these two classifications together to obfuscate the vast influence “nonprofit” organizations wield in corporate America. Nonprofit organizations, of course, include the mega-foundations authorized in 1913 at the same time the federal income tax went into effect e.g. The Rockefeller Bros. Fund, The Carnegie Endowment, The Ford Foundation and many others.
At the end of 2001, this category held (and voted) $5.5 trillion in corporate stocks. The contribution of “households” would be a very small part of that. However, if the nonprofits hold only half of that amount, they are still the single largest holders of corporate stocks.
Furthermore, the investments of the “institutions” and nonprofits are concentrated in the 1,000 or so largest corporations. Their true ownership is probably in the 70% to 90% range. Who votes the stock? Nominally it is the fund managers who are only hired hands. The boards of directors of the organizations make the real decisions.
Is it any wonder then that questions put to stockholders at annual meetings (including election of directors) usually pass by a 9 to 1 or greater margin?
When one studies the relationships of corporate directors and the organizations to which they belong, e.g. The Council on Foreign Relations, the Business Roundtable and others, one is led to the inescapable conclusion that most of the large corporations in America are controlled by a close-knit group of wealthy globalists who have no allegiance to the United States as a sovereign nation.
Permission is granted to reproduce this article in its entirety.
The author is a free lance writer based in Romulus, Michigan. He is a former newspaper editor and investigative reporter, a retired customs administrator and accountant, and a student of history and the U.S. Constitution.
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