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Sunday, February 3, 2013

Tony Paradiso: Stock power lacks balance

Tony Paradiso

It’s well known that I’m suspect of the government’s ability to effectively perform any of its obligations, but last week, I was proven wrong.

In a move that only can be described as protecting the sanctity of the American way of life, the Justice Department filed suit against Anheuser-Busch InBev to block its proposed takeover of Grupo Modelo. ...

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It’s well known that I’m suspect of the government’s ability to effectively perform any of its obligations, but last week, I was proven wrong.

In a move that only can be described as protecting the sanctity of the American way of life, the Justice Department filed suit against Anheuser-Busch InBev to block its proposed takeover of Grupo Modelo.

The issue at hand: ensuring no company controls the price of the liquid gold known as beer.

Yes, beer. If Anheuser-Busch – the brewer of Budweiser – acquired Grupo Modelo – the concocter of Corona – the combined company would control 53 percent of the U.S. beer market.

Although InBev already controls 47 percent of the market, according to the government, the merger could lead to higher prices. Heaven forbid.

I hope the Justice Department spares no expense in saving the beer-drinking public from paying exorbitant prices for the sudsy delight. Tax us to death.

Bicker like children while the economy flounders. Tinkle away our money on needless international conflicts, but don’t dare make us pay more for beer.

This, from a government that for decades idly watched Microsoft leverage its operating system monopoly to destroy every competitive maker of spreadsheet and word processing software.

After the damage was done – and the government finally found Microsoft guilty of antitrust – it punished the company by fining it the relative equivalent of a parking ticket.

So as you watch the Super Bowl and imbibe your favorite brew, rest easy in knowing that your government will use all it’s resources to prevent any brewer from concentrating enough power to fix prices.

Except that if the government didn’t have its head stuck up it’s butt, it would realize that the existing concentration of power in the beer industry has already led to virtual “price fixing.”

Every September, like clockwork, InBev raises its prices.

In an incredible coincidence SAB Miller – the maker of Miller and Coors – invariably matches those increases. FYI: these beer behemoths already control almost 80 percent of the U.S. beer market.

It is also well known that I am suspect of Wall Street. Not of its abilities. The inhabitants of the Street are adept at accumulating wealth.

What they aren’t terribly good at is maintaining even a minimal level of ethics or having an iota of concern over how their actions systematically fray the fabric of society. To put it simply: Wall Street is inhabited by a bunch of greedy narcissists.

Investing has become a game in which the rules heavily favor the professionals.

That’s not to say that average citizens can’t make money in the stock market. They can and do. But it’s the pros that amass the real wealth while leaving enough crumbs for the common man to make it appear legit.

Case in point: Apple and Amazon.com.

Apple’s stock peaked last year at $705, but after a recent disappointing earnings report, the stock now trades for about $455. At that price, Apple’s price per earnings ratio is about 10. Last quarter Apple’s revenues increased 18 percent to a record $54.5 billion. The company also had record-breaking profits of more than $13 billion. And it sold a record 47.8 million iPhones.

That’s a lot of records. But evidently, not enough to satisfy Wall Street whose expectations were for even better results. Consequently the stock tanked.

Contrast that with last week’s earnings release by Amazon.com. Despite increasing sales by 22 percent, Amazon’s net income fell 45 percent to $97 million (not billion). Both metrics were below Wall Street’s expectations. For the year, Amazon lost $39 million. To top it off, the company guided earnings estimates lower. Yet, the stock traded up as much as 11 percent.

Any idea what Amazon’s price per earnings ratio is? If you had 3,000 and the over, you’d lose. According to Yahoo Finance, the 12 month trailing P/E for Amazon is 3,160.

Apple: P/E of 10. Amazon: P/E of 3,160.

Yet Amazon is the stock more favored by Wall Street. Granted, determining the value of any stock is more complicated than looking at price per earnings. And there are factors that support a brighter future for Amazon versus Apple. For example: the perception is that Apple’s profit margins are declining while Amazon’s are on the rise.

Nonetheless, it’s hard to imagine any argument that could fully justify the radical difference between these stocks. And that is one reason why I believe Wall Street is a contrived environment that no longer correlates in any way to economic or financial fundamentals.

Last week, I closed by saying that I liked what I was seeing going into 2013. Shortly thereafter, we were informed that fourth-quarter GDP was in the red. Fortunately, I don’t peer into the rearview mirror when making predictions. Though the economy contracted in the quarter the news wasn’t all bad.

The economic contraction was largely a byproduct of a drastic decline in government spending. Better yet, the estimated 2.2 percent GDP for 2012 put another of my predictions in the correct column. If one more TBD prediction converts to correct, I’ll meet my own expectations of being right 80 percent of the time. I wonder if that will cause my “stock” to go up or down.

Author, professor, entrepreneur, radio and TV commentator Tony Paradiso can be reached at tparadiso@tds.net.