As the woman in that infamous Wendy’s commercial asked, “Where’s the Beef?”, we should also be asking the same when it comes to company earnings, “the Beef” being top-line growth. There was virtually none of it in the second quarter of 2009. Instead we saw companies meet analyst estimates by cost cutting, inventory stuffing, and accounting manipulations. And Wall Street, still reeling from its performance over the last two years, has run up the stock prices of the most debt burdened companies, leaving behind much stronger companies and blindly hoping that it’s different this time.
On August 14, 2009 Abercrombie and Fitch, reported their second quarter earnings. In the report, they where upbeat about same store sales only being down 30% from last year. On that awful news, the stock was bid up. However, in that same report, the company revealed how it was able to achieve massive cost savings by cutting payroll, direct to consumer expenses and other variable costs. This scenario was common in the second quarter. So, again I ask, “Where’s the Beef?”
Do you wonder why, like I do, financial company stock prices have done so well for the last few months? How did they manage to report such wonderful earnings? This was partly accomplished by the changing of the mark to market accounting rule by FASB in early April (retroactive to the 2nd quarter). That change alone allowed JPMorgan to take a huge write up in their valuation of Washington Mutual’s assets. However, I came up short in my search through their financial statements for signs of real economic growth. So, after two years, there still remains question marks as to the real value of big bank assets. Furthermore, I am concerned over the financial system’s capacity to even refinance existing debt, much less finance any new growth! Clearly, no “Beef” here.
Where is the money going to come from for top line growth? The market would have you think that the consumer is going to come back to life from his zombie like state. The government and helicopter Ben would like you to believe that we can spend and tax our way out of this conundrum. Others believe that China is the great red savior. In the end, I believe that this equity market just does not have the fundamentals to sustain its current levels.
Joshua Barone
August 31, 2009
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