Don't be misled by headlines

By DAVID MOON, Moon Capital Management, LLC
April 26, 2009

When you watch a magician, don’t look where he wants you to look. If he’s holding a black wand in his right hand, watch his left hand down by his side. If he throws a tablecloth in the air, keep your eye on the bare table on the stage.

And never look at the scantily-clad assistant. She is always a diversion.

It’s a shame we have to read business news the same way.

On April 20, early morning headlines around the country reported that Bank of America earnings rose in the first quarter of 2009.

By the time trading began at 9:30, Bank of America shares were on their way to a 24-percent decline for the day. It seems that the real news was in the details.

Most of the income resulted from one-time gains and recaptures of earlier-stated losses at the bank’s recent acquiree, Merrill Lynch. Bank of America’s credit card business lost $1.7 billion, its non-performing assets tripled and its mortgage/insurance lost almost a half billion dollars.

CEO Ken Lewis better have a few rabbits in his hat.

Sometimes misleading headlines aren’t intentionally deceitful, but they are just as illusory.

On April 16 the Wall Street Journal reported that the Consumer Price Index posted an annual decline for the 12 months ending in March. This was the first annual drop in 54 years.

If you dug a bit deeper into the data, you would have discovered that the decline was all related to a drop in energy costs. When a gallon of gas drops from $4.00 to $1.80 it has an impact on inflation.

OK. That makes sense.

When gas prices were rising in mid-2008 however, news stories and commentators focused on changes in the CPI excluding the impact of rapidly rising fuel costs. It was common to read something like, “The CPI increased 4.7 percent in May. Excluding the volatile food and energy components, however, the core increase was a modest 2.1 percent.”

So we are supposed to ignore energy prices when they increase, but not when they decline? Can I try that at Pilot?

On Wednesday, a News Sentinel headline took a cue from a First Horizon press release and announced a first quarter dividend. You had to read the article to learn that the dividend was being paid in shares of stock, which produces no value to shareholders. It's a mirage, akin to cutting a pizza into 8.1 slices instead of 8.

Some sleight-of-hand tricks have become ingrained in our system. Every business student studies EBITDA – Earnings before Interest Taxes Depreciation and Amortization. I understand why an analyst would want to know the effect of amortization and depreciation on a company’s earnings; those are non-cash expenses.

But taxes and interest? For the most part, these are actual cash expenditures. A company may not be able to easily manage those items on a yearly basis, but it will have to pay them.

Perhaps, however, the company can draw investors’ attention away from them.

“Yes, our net income was negative $2.8 billion last year, but don’t look at that. If you ignore the $1.3 billion we paid in interest on our debt and a bunch of other silly little things, we actually made $1.8 billion.”

Don’t laugh. That was the February 19, 2009 press release from my cell phone carrier, Sprint. Hocus pocus.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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