FYP
OK, so that makes more sense to me then. I guess my question then is did they take that debt on because they needed to for some reason? Or did they decide that it was too good of a long term deal on rates to pass up? Like, what is that debt going to be used for? I agree now that it is not as risky as I thought, but I don’t know that it makes it feel amazing to me. If they’re paying around 1.75% on all of it, which is about what I get doing a very rough estimate of the weighted average in my head, what can they do differently as a company with that cash to boost their earnings that they could not do without paying the interest on the debt?
Well, I’m less concerned about the fair value of KO and more just trying to make a point. I wasn’t sure of when the debt was coming due, and I don’t know exactly what a fed rate hike will mean for corporate debt interest rates, so I just tried to illustrate a point that it seems like an increase in rates combined with having to roll over debt is going to cut into a lot of companies’ profits.
My point is that we know historically P/E ratios are much lower than they currently are, broadly speaking. So, unless there is a good justification for why that is, it’s a problem going forward, right?
Like what are some reasons investors would be correctly inclined to pay a higher P/E? I can come up with four.
- Lower perceived downside risk
- Expected growth in future earnings to outpace historical growth
- The value is increased by cash on hand or assets
- No alternative investments are available and this is still +EV in their eyes
I think that since the bailouts the last time around, Wall Street has been functioning with the belief that basically all the S&P 500 companies are too big to fail and would be bailed out. Thus they think long-term downside risk is negligible. That may have been true for a while, but it is not true in perpetuity and I don’t think it’s true now.
I think a lot of the talk of growth is bullshit, I don’t think it’s reasonable to expect most of these mature companies to grow their earnings much beyond inflation, population growth, and maybe a bit from automation depending on the industry. If inflation averages 3% in the long run and population growth increases demand by about 0.5% per year, that’s 3.5% per year growth in earnings. That’s 27% over 7 years. Coke’s earnings per share went up 27.5% in the previous 7 years. Why should anyone expect more than that the next seven years? What is Coke going to do with this money they borrowed that is going to make them more profitable?
I’m not trying to pick on Coke, either. I just picked a good company to look at, because if they’re overvalued or overleveraged, almost everything else probably is too.
Obviously their value hasn’t gone up due to cash on hand or assets, those have gone down. I think it’s obvious that #4 is in play in the broad markets, and to me that’s just not a good reason for a stock price to go higher. In part because it means that as soon as conditions change, like say a rate increase, you’re going to move to an alternative investment. Well, if everyone thinks the same way, you’re going to be unloading in a selloff.
I was just looking at total and making a broad point. Like if they rolled current liabilities at higher interest rates into longer-term debt at lower interest rates, that seems good obviously. But their total liabilities have still gone up, roughly in line with inflation, and their total assets have gone down, which seems like it should net into having a negative impact on the valuation. Am I wrong about that somehow? Am I missing something?
Perhaps that’s a clumsy way of expressing the impact of a negative tangible book price, but I was just trying to make a general point.
Like, when evaluating a stock we should look at their earnings, their assets/debt, their competitive risk going forward, and their growth potential, right?
So if a Company A is $80 a share with earnings of $3 a share, and a tangible book value of $-7 a share, and Company B is $80 a share with earnings of $3 a share, and tangible book value of $7 a share, I would pick Company B over Company A, unless I thought Company A had better growth potential and/or less risk going forward, right? That seems pretty obvious to me. I’ve been toying with the idea of using a different multiple, basically (Price - Tangible Book) / Earnings. So Company A would have a ratio of 29 vs company B at 24. I’m not sure if that’s something that’s already used elsewhere or has a name, but off the top of my head I don’t recall seeing that. It seems like most people look at Price/Book or Price/Tangible Book and Price/Earnings separately.
But overall it seems to me that ~nobody talks about tangible book value anymore. It’s just a number on a spreadsheet to skim past. Is there a good reason why it should be irrelevant to a stock price?
Having a negative tangible book has to mean having a lot of debt and servicing a lot of debt has to have some drag on future earnings potential, right? Plus, having a positive tangible book value puts some floor on a company’s value.
In the example above, if Company A and Company B are rival food companies, and it comes out that Company B has been somehow letting rat poison get in their food, and they have to go out of business, they can still liquidate assets, cover debts, and get that $7 a share back. Company A goes all the way to $0.
It seems like that should matter somewhat in valuations. So looping back around, when I see that Coke has gone from a positive to negative tangible book, and their P/E has gone up anyway, I’m left thinking it’s that much worse of a deal, unless something to do with the way they’ve structured that is increasing growth/earnings.
I’ve also heard people say the more negative the tangible book is the better, because the stock can only go to $0 they can’t go negative… But, at some point that’s not true because the debt gets too big to service and increases the risk of experiencing negative outcomes even if they’re capped at losing 100% of the investment.
So maybe there’s some sweet spot where it’s actually better to be leveraged and have a negative tangible book value, but it still seems to me that unless that’s increasing growth/earnings somehow, it’s bad. I can see that case on growth companies that are expanding and have tons of upside potential, but how many more beverages can Coke really sell?
I guess the only thing I can think of that makes sense is that Coca Cola wanted more cash on hand in order to be able to buy up other brands and expand the business that way… But if that’s the case, where’s all this cash on the balance sheet? Because the cash/short term investments number is pretty much unchanged.
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So you are predicting that a wave of inflation will cause pain for debt-ridden young people by causing deflation and increasing their relative debt load?
Essentially, you’re arguing that inflation causes deflation.
If we have a recession caused by inflation, which then leads to rate hikes, which then leads to deflation, the net would still be inflation relative to the original value of currency, unless you’re predicting the deflation to last a long time. Even if that’s the case, it seems like you’re better off not paying down the debt until the rates get hiked and the deflation begins. Even if you just stick the money you would have used to pay it down in an I-Bond at 7.56% and wait, in a year you’ll have 1.0756x as many nominal dollars, so unless your interest rate is higher than that you’re better off paying down the minimum and stashing it there. But since the inflation would likely lead to some wage hikes, the debt load would be lower relative to your income even as the deflation began.
You could also pre-purchase things you know you’d need in the future if that’s what you expected, then use the future inflation-impacted dollars to pay down the debt. Obviously there aren’t a lot of things you can pre-buy that far out, though, so that’s kind of nibbling around the edges.
I don’t see how it happens if Republicans are in control. They may try to find a clever way to bail out Kentucky and not IL/NJ/PA, though. I also don’t see it happening without 60 Dem votes in the Senate. Especially if Kentucky isn’t the first to go belly up. If it’s the others, they’ll just blame Dems and say they’re collateral damage.
There’s a joke to be made about connecting the teacher pension problem to how lunatic right wingers are threatening to shoot teachers, but I think the likelihood of teacher’s getting shot by right wingers (not en masse, in a few isolated incidents) in the next few years is too high to find a way to enjoy the humor.
In a purely academic sense, all the Boomers biting it would solve some of the problems, but cause a lot of others and trigger a huge recession.
If deplorables succeed in making teaching even less desirable as a profession that really hurts the pension plans. They depend on active workers making contributions to the plan deducted from payroll, a big downsizing in the working population of teachers is a pension catastrophe.
All math says they made out like bandits compared to otherwise and it sure as hell wasn’t a 40% difference back then. (now yeah, because nobody can afford to pay them because they’re still paying the retired ones)
and worse, cities will shut down first before they don’t get paid and they all fucked over their own communities. Fuck them all and fuck you too for defending it.
Nah, fuck you buddy. Those pensions could have been funded if we as a country didn’t decide that Greed is Good and let our corporations pay literally 0 taxes after they “moved” to Ireland on paper, let our richest people pay effective tax rates in the single digits, etc.
Fuck the politicians, fuck the lawyers and lobbyists who did all the bidding of the rich, fuck all us white collar “professionals” as a mother fucking group.
But shut your mouth about the teachers.
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If they really made out like bandits, then the state should have told them to pound sand, and offered fair market value plus 10-20% to lure teachers from other states. But I doubt they actually made out like bandits. They collectively bargained and got what they were worth to the state at the time.
It’s not their fault the state didn’t fund the pension plan.
Let’s just be clear about who did the fucking over. The politicians who cut the deal, the voters who voted for the politicians who cut the deal, and the voters and politicians who kicked the can down the road for 50+ years. Not the teachers and not me.
So direct your “fuck yous” accordingly.
Meanwhile you are defending tearing up a binding agreement with teachers and stealing their justly earned compensation after the fact. How do you think that works out the next time teachers or anyone else are negotiating anything?
Last but not least, there’s no need to be aggressive and rude and I refuse to respond in kind.
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Very confused why the teachers should be the villains in this story.
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It’s hard to imagine bailout legislation passing. Seems a lot easier politically to point fingers at irresponsible local governments instead of signing the taxpayers up for trillions of dollars of liability.
Perhaps some sort of state bankruptcy process to give pension claims priority over other creditors?
In public sector pensions almost everyone is a villain, but the workers are probably the least responsible party involved. Everyone, including the unions, very deliberately avoiding tough but necessary discussions like “what happens if the fund doesn’t return 8% every year forever”. It is a situation where people will map their personal politics to assign villains. If you just hate unions, then you exaggerate their responsibility. If you hate low taxes, then you assign the blame on that. If you hate investment advisors, then there’s that. If you hate kick-the-can-down-the-road boomers, they’re to blame. In reality basically no one comes out great if you carefully examine the situation. Systematic risks were ignored by everyone because everyone involved had major agency problems. The end.
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I am guessing that wheatrich is an Illinois resident who’s facing a significant increase in property taxes through no fault of his own. It’s not fair that he should have to pay it, and the politicians and voters who made the bad deal are retired/dead/not going to be able to be held to account and pay for it. So the only way he can avoid paying it is if the state screws the retired teachers. They already tried and the state supreme court said no.
I don’t blame him for being mad, but it’s wrong to blame the teachers and it’s wrong to screw the teachers.
The best way to handle it would be to try to figure out a way to almost turn it into back taxes against wealth that existed in the state then. Like impose some kind of property tax and wealth tax on anything inherited in the state since the pensions went unfunded.
That would mostly hit the wealthy who benefited via inheritance from the underfunding.
But the reality is the wealthy would never let that happen, so either property taxes are skyrocketing or the state is going bankrupt.
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I am in general agreement but don’t forget that with public sector pensions the unions usually have a seat at the table to negotiate benefits and in many cases even get assigned seats on boards that manage pensions. Your randomly selected 80 year old retired teach is probably blameless, but “teachers” had a hand in designing the unsustainable system. I agree there are bigger villains, but it’s also a bit of a misdirection to pretend the unions were uninvolved bystanders.
We could excise the pension stuff to a separate thread if necessary. This is really not very STONKS.
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Didn’t the unions acknowledge and address the problem by making sure it was an iron-clad guarantee?
Obviously this is conjecture on my part but it sure seems like a guarantee like that happens when it goes something like:
State: This pension fund we’re offering will be worth $X in compensation.
Union: We think it’s worth like 1/3 X, so why don’t you just pay us $X in salary instead.
State: No we can’t do that up front but don’t worry, it’ll be worth $X we promise.
Union: Well we don’t think so and we’re not going to get screwed, so if you insist on paying us that way, put it in the Constitution that you will meet $X of obligations.
Like unless the teachers rejected salary up front and demanded the pensions instead because they thought they could pull one over, I don’t see how it’s their fault. It seems very unlikely to me they did that, but if they did and someone has an article or something about it, I’ll join weatrich on the “fuck the teachers” side.
Right but they’re negotiating in the context of overall compensation and making tradeoffs. And correct me if I’m wrong but it seems like the problem isn’t so much that the pensions were mismanaged, it’s that the state underfunded it based on some really stupid assumptions about consistency of annual returns.
So how does the union influence on the pension management factor in?
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For like 10 years on the old site Suzzer and I took endless amounts of shit for simply pointing out that there was a pretty big pension problem.
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Yeah there’s some overlap, this all arose from what in hindsight was a great point by I believe @anon12304106 about this being one way a stock market crash can trigger a recession via forcing austerity on states that have pension problems.
But we’ve gotten pretty deep into this and excising it seems reasonable too.
OK so you’ve been following this for a while. The end game is pretty clear at this point right? Property taxes have to go way up or the states go bankrupt?
So I assume that property taxes will increase for a year or two, then the GOP will sweep a trifecta running on, “Fuck those overpaid socialists teachers, and fuck high taxes, let’s go bankrupt, it’ll save you money. Trump did it all the time!”
Then a massive self-inflicted crisis ensues, sooner or later it bleeds out into the national economy, and WAAF?
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Interesting article about how Mario Cuomo fucking around with New York’s pension fund in the 90s led to a state Supreme Court ruling that the pension must be fully funded
IL isn’t like every other state on this one, retired teachers here (not the special ed ones of course they got fucked as always despite being the most valuable ones) are almost all pretty well off (okay I don’t know about inner chicago) and yes it’s absolutely fair to blame them. Like everyone else they know and they don’t care. Gets worse when you hear of all the loopholes some did to get full or even more.
I don’t own any property at all actually. Nice try.
I wish everyone would stop and assume everything is always one sided ie, most states obviously this isn’t the case so obviously that’s true everywhere is something I’ve noticed many people here think or the classic all tenants good, all landlords bad. That is never true everywhere. Very rarely anything actually is.
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Google told me their average pension is $58K. I’m not saying they’re poor on that or anything, but it’s not like it’s some lavish amount. It’s the median household income.
Assuming they made less than the fair market value in salary back in the day, and didn’t save for retirement because they had a guaranteed pension, they should not lose it. I mean they shouldn’t anyway because that was the deal, but like they should be absolved of any judgment if that’s the situation.
Imagine planning your whole life around having a guaranteed pension, how much less you’d save for retirement. Then you get to retirement and the state says, “It was $58K, but fuck you, it’s $30K.”
How are you feeling about that?
Like I’m not saying they should be happy about it, but again, what do you expect of them? They made a deal, they took less up front and more on the back end and lived and planned accordingly. Now because the other side of the deal fucked up and didn’t fund it, they’re supposed to give some back?
I mean, imagine the inverse. Imagine if there was no guarantee on it. You think the state of Illinois and the voters of Illinois right now would be trying to figure out ways to give them more money? Fuuuuuck no, they’d be shrugging and saying, “That’s a tough break, but uhh not much we can do once this thing goes insolvent. You guys should have realized that and planned better.”
This is different, and I certainly blame them for that part. This happens a ton in the public sector, and society does a horrible job of addressing it.
Alright, sorry about that. It came across as pretty likely given how fired up you are and that I thought you lived in IL.
My current landlord is pretty solid, actually. My rent is reasonable, the place is reasonable, I never hear from him except to wish my happy holidays, he’s quick to respond when I need something. My previous one (corporate) was the worst ever, most have been somewhere in between.
I’m not all landlords are bad, all unions are beyond reproach, all capitalism is bad guy. But bottom line, you make a deal, you sign it, you enshrine it in your state constitution, you have to follow it and as long as the negotiations were not at gunpoint, I don’t begrudge anyone seeking to maximize their compensation and benefits package, especially in a woefully underpaid field.
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