Standard and Poors 500 Index going to 100?

My correspondent Ted Kavadas writes great stuff at Prosperity by Pen, which is on the blogroll. He has an article entitled "A S&P500 Target of 100? Impossible, Improbable, or Impending?" It relies on the fact that there is little technical support between recent S&P 500 Index lows and 100, and little in the way of current earnings to prevent the index from crashing to such a level.

It's interesting as his work always is. And from the point of view of gaining publicity for an idea it never hurts to be extreme . . . wasn't Harry Dent calling for Dow 45,000 before he decided that the Dow has strong support down around zero? (I did this myself once, calling for an Indonesian Rupiah at 10,000 to the dollar at a time when it was around 1,700 -- but I was not extreme enough as it ultimately went north of 15,000)

The first material critique I make to the argument is that markets do not look only at current year (year 1) earnings, but look beyond the earnings trough, whether that is this year or next year or whenever. Market participants can be wrong about that and need to reset expectations, but there is no way they drive the S&P to 100 based on current year earnings estimates, without other things happening (e.g. the financial system collapses despite all efforts, terrorism hits us at home in a spectacular way, Obama embraces Chavez-ism.)

Second, market participants have already largely discounted the work product of the analysts, who have proven again that as a group they are no use under deeply cyclical conditions. The shock value of their downgrades is more limited now. Certain analysts who have made particularly good calls are exempted from the criticism that they don't know how to analyze in this economy, but even they are finding it hard to shock the market at this point.

Third, given the cyclical conditions, participants will prefer to consider earnings over a longer segment of a full cycle than just one year. I have heard of people calibrating valuation to an average over ten years. No one can forecast year 10 earnings for any company, but if investors are finding this approach works for them that's great.

Fourth, and maybe the big one. Let's not forget that current earnings are heavily penalized by non-cash charges. This is the central problem of our markets today, the fact that charges required by mark-to-market accounting have demolished the capital of the financial system, requiring markdowns and charges on assets even if they are performing. It's madness, but it's the system we have now. If you are of the opinion, as I am, that much of this capital destruction is unreal and unnecessary, then true earnings, though depressed, are still higher than reported. It is not only financial companies that are taking these charges because they are forced to. Other companies are "kitchen-sinking" their earnings in order to get out whatever bad news they could conceivably ever have at a time when markets are inured to bad news. Hence Nike recently wrote down Umbro, which they bought mere months ago and now declare impaired, taking a heavy hit to earnings in the current period. This charge is wholly discretionary. They did not have to take it now or probably ever. This is why some participants prefer cash flow to manipulable reported earnings. Earnings lie, cash flows tell the truth.

The Mouse That Roared: Adrenalina Stalks PacSun

It's too good. PSUN is not much, but Adrenalina is even less of not much, a bulletin board stock trading at $0.15, the low for the year.

Here's Transworld.

Here's the presser.

I don't know, it just strikes me funny. "Dear Sally: . . . We hereby demand your immediate resignation from Pacific Sunwear . . . It was incredibly cavalier of you to reject our offer of $5 a share . . ."

One more time: Yi'shion of China should buy Pac Sun.

Government Bailout for Snowboarding!

I had been going to write that slogan on my truck in grease pencil as a joke. Tonight, government aid to the snow and boardsports industry is apparently a reality, all joking aside. See $70M DOLLARS ALLOCATED BY U.S. DEPARTMENT OF EDUCATION FOR PRODUCT PURCHASES THAT GET YOUTH ACTIVE; SNOW SPORTS PRODUCTS QUALIFY at leading boardsports industry website Transworld Business.

Dude, where's my Senator, man?

Following a thread about Quiksilver at "Transworld Business"

I'm following this thread about Quiksilver at "Transworld Business".

Quiksilver (ZQK) is the market leader in action sports gear, practically the originator of the category, owner of the Quiksilver, Roxy, and DC Shoe brands. It was formerly in ski through Rossignol and golf through Cleveland Golf. Those were bad outings of which the less said the better; however, they are part of the reason Quiksilver finds itself in some financial distress, with a stock price bouncing between $1 and $2 and a debt load that is a multiple of the common equity value.

I'm involved in the action sports gear industry peripherally, in apparel more generally, and I really believe Quik is in the right market space. Action sports gear has wiped out urban hip-hop as the uniform of choice for kids who don't want to wear only Aero, Eagle, and Abercrombie. As an analyst, I have worked on all the players in the category, the bigs (Nike and VF Corp) the less bigs such as Volcom, and the former big ZQK.

I observe on that message board that posters who say they work at Quik HQ in Huntington Beach say they are (rightly) proud of the company's heritage but fearful of the current direction and the future. And they are getting heavy pushback from people who are hoping that things are better than they say.

In the course of my analytical work there have been many examples of the objective facts showing that a company is in trouble, maybe a goner, and people bitterly fighting me on it. A lot of them do not ever want to give weight to negative information. Many investors live in hope, and if you tell them anything that is not hopeful, they accuse you of a sinister plot to panic them out of their position so you you can scoop it up on the cheap and make the fortune that is rightly theirs.

Moreover, many American individual investors don't get the whole concept of equity dilution at all. That is to say, they can't get their heads around the idea that, for example, Citigroup could survive but the common shareholders get wiped out. (On the other hand, Asian investors understand dilution very well. Abusive rights issues and insider self-dealing have been problems in Asian markets.)

I do not know whether DC Shoe is going to be sold at a valuation that alleviates Quiksilver's debt problem or not. I do not know whether there will be a bid for the whole company that gives common shareholders any take-over premium above the current share price.

No one knows these things.

That's why ZQK shares are valued where they are.

But there are a few things I think I know.

One is that when people who work for a company tell you it's not going well, it's probably not a sinister plot to scoop up your shares on the cheap, and you would have rocks in your head to dismiss what they say right out of hand.

Another is that time and gravity are on the side of Nike, VF, or others who might want to acquire these brands or the whole company. Unless Quik sells DC for a high price, or otherwise find a way to get its debt down, or gets saved by a miracle recovery in credit markets, or persuades Congress that the Surf & Skate industry is a vital national asset that requires a rescue, it has an intractable problem, valuable brands or no.

Another is that the Quiksilver, Roxy, and DC brands are indeed valuable, but periods of financial distress are not the best for capitalizing on these values. I'm concerned that the distress and the pressure will tend to wear the company down and put it in a harder negotiating position.