(October 2 – 18:00 ET) – Investors ignore the uncomfortable data to chase the bull market says James Grant, chairman of grantsinvestor.com and publisher of Grant’s Interest Rate Observer.
Grant warns that investors are willfully ignorant of plain facts at their peril. In a column in today’s Financial Times, Grant argues that investors are focusing on a big paydown of the U.S. Treasury’s marketable debt and ignoring a much larger build-up in non-marketable debt. He also says U.S. investors are focusing on rosier “core” inflation numbers, rather than scarier headline numbers, and are accepting wonky corporate accounting to justify outrageous valuations.
Grant warns that investors should heed the danger of disappearing marketable debt and face up to the fact of insidious inflation. For his corporate target he takes on tech bellwether Cisco Systems
Grant notes that with a market cap of almost US$400 billion and a P/E of 160, Cisco is a market giant, yet few have noticed its weakening financials. Grant says that over the past few years Cisco’s operating margins have been halved to 17% from 34%, and over the past four quarters its income attributed to non-operating sources has more than doubled, to 40% from about 15%.
Investors continue to buy the stock though. Grant blames Pollyannaish accounting and investor sloth, noting that a study by his colleague Robert Tracy shows that Cisco’s earnings growth is reported 23% higher in press releases, than in GAAP compliant results, over 1999 and 2000. “Cisco’s results are universally and freely disseminated. However, as this is also a credulous age, the data go unread. Investors prefer to absorb their Cisco news from Cisco’s press releases,” says Grant, “In the wake of the 1929 crash, the federal government mandated full disclosure across the length and breadth of the US securities markets. But it passed no law requiring investors to pay attention.”
-IE Staff