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Monday's
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Market Round-Up WARNING: THE FOLLOWING FINANCIAL REPORT COULD BE HAZARDOUS TO YOUR FINANCIAL HEALTH. The SEC should start requiring that Wall Street firms publish a warning label that accompanies any statement made by firms making stock recommendations. Over the last few years, firms have advised investors to stay fully invested in stocks while the market, and especially technology stocks, wiped out over $1 trillion of investor wealth. The fact that the conflicts of interest run throughout the industry should get more attention from regulators, especially when there are banking relationships and long and short positions involved. In the case of Enron, many of the firms that had strong buy recommendations on the stock right up to the point of its bankruptcy had investment banking relationships with the bankrupt firm. Today was a good example of this kind of bias. A major firm came out with a recommendation on Cisco. They said the business was doing great and that they felt there were no accounting problems involved with Cisco’s books. The reporter did ask the customary question about banking relationships. The recommending firm not only held a position in the stock, but also had strong investment banking relationships. There was no mention that Cisco’s sales and profits have slid considerably. No mention that profit margins have shrunk or that the tech giant has a fair amount of goodwill on its balance sheet that may be impaired. Nor did the analyst mention that Cisco had been receiving a greater portion of its income from interest income. Cisco actually lost over a $1 billion last year. In its latest quarterly report, the company said its sales fell 29%, while profits fell 24%. The company’s revenue growth has been anemic and new orders haven’t been coming in as fast. Cisco is starting to receive tough competition from the user equipment market. The company is forecasting that next quarter’s sales could be unchanged or rise only slightly. All of this from a company that is now selling at 97 times earnings. I wonder why none of this kind of information was mentioned in the firm’s strong buy recommendation. Could it be that investment banking relationships, and the fact that the firm held shares of Cisco prevented them from saying or reporting this kind of information? In an equally ridiculous call this morning, another Wall Street firm downgraded shares of soon-to-be gold mining giant Newmont Mining. The target price was cut from $21 a share to $10 a share. The analyst sited concerns over some of Newmont’s reserves declining at some of its mines and concern that higher gold prices may impact jewelry demand. Apparently the analyst was oblivious to Newmont’s successful bid for Normandy and its pending merger with Franco Nevada. This combination not only increases Newmont’s reserves, but also strengthens the firm’s balance sheet with Franco’s $1 billion cash hoard and improves income with the Franco royalty stream. Newmont will now become the world’s largest gold mining company with close to 93 million in proven and probable reserves, and an annual production of close to 8 million ounces of gold. On a market cap to proven reserve basis, Newmont is probably one of the cheaper majors around. Newmont will also become the world’s largest unhedged gold mining company, making it a favorite of institutional investors. The fact that Franco’s Pierre Lassonde and Seymour Schulich will personally control 32% of the world’s largest company is not mentioned. These two, while managing Franco Nevada, produced an annual return of 38% a year to shareholders in one of the worst gold bear markets of the century. Imagine what they could do in a rising gold market, which is what the two believe is ahead for gold. Their belief is so strong on this view that they are willing to stake $235 million of their own money by tendering their 9% interest in Franco for shares of Newmont. If I had to bet on this one, I would bet against Wall Street. It is more likely, but not probable that Newmont’s shares are going to head higher this year rather than lower. The analyst failed to mention monetary demand, and a flight to quality is what is driving the demand for gold shares at the moment -- not jewelry demand. Gold has been running an annual supply deficit for close to a decade. It has only been official central bank gold sales and gold leasing that has kept the price down. Gold Fields Minerals reported that central bank sales were 468 tons last year. Other reports put that number much higher. The fact remains that fabrication demand alone of 3,483 tons far outstrips gold production of only 2,595 tons. If you want to get the real facts on what is happening to the precious metals markets, I recommend finding a good Canadian brokerage firm, or a newsletter that doesn’t get its compensation from stock options, payments for articles/coverage, or retainer fees to get an unbiased opinion on what is happening in the new bull market in precious metals. Wall Street analysts don’t have a clue as to what is happening. You would be better off getting your advice from comic books. Hype and Pitch Qwest Communications
and Global Crossing, Swapping Horror Stories More Coming Out of The
Closet Wall Street seems to be taking an Alfred E. Newman approach to all of these scandals by essentially saying, "What, me worried?" However, there is mounting pressure in Congress and the SEC to look into these matters because they are starting to surface too frequently. What is different now compared to a few years ago is that people are starting to pay attention. When we were in a bull market and the price of most stocks were going up, nobody seemed to care. Now that we are in a bear market, the fact that the books were cooked is now getting attention. When everybody was making money, the slight of hand was overlooked. When investors start losing money, they start caring. Markets Jittery -
Tensions Higher Volume was lower on Monday with only 1.14 billion shares trading on the New York Exchange and 1.56 billion on the Nasdaq. Market breadth turned positive by 21-10 on the big board and by 20-15 on the Nasdaq. Overseas Market The Dow Jones Stoxx 50 Index gained 36.82 points, or 1% to 3522.38, trimming last week's 3.3% drop. A total of 110 billion euros ($96.4 billion) of market value was wiped off the Stoxx 50 last week amid concern falling profits would impair companies' ability to repay debt and jitters about corporate accounting after Enron Corp.'s bankruptcy. Benchmark indexes rose in six of Europe's eight biggest share markets. Markets also rallied in Asia on hopes of a recovery. The Nikkei rose 1.07% and the Hang Seng gained 3%. Both indexes remain down for the year. Treasury Market © Copyright, Jim Puplava, February 11, 2002 |
