By Gareth Soloway on March 27th, 2010 9:10pm Eastern Time
There is something the markets are paying little attention to at this point. It has been mentioned in the media but kept relatively quiet. It has been reported by a few companies thus far but the market, being in its super bull mode, had ignored it for the most part.
Ultimately, what is going on right now, because of healthcare reform will raise the overall P/E for the S&P 500 by lowering the profits of almost all the companies listed. For instance, instead of a company making $1.00 in profits for 2010, a company may only report $0.85. Overall, this creates a higher P/E for the S&P500, creating a valuation issue. With stocks priced near perfection, it is possible this could be a driver for correction in the markets.
The issue with healthcare reform is the loss of the ability, to subtract from their taxes, the subsidies paid by the U.S Government for those who have retired. This may not sound big but many companies have thousands of retirees. These dollar amounts are well into the tens of millions and even some over one-billion. These charges will be taken in 2010.
Companies that have already reported that they will have these charges are mounting. Deere & Company (NYSE:DE) reported that they will take a $150 million charge. AT&T Inc. (NYSE:T) will take a huge $1 billion charge. Caterpillar Inc. (NYSE:CAT) will take a $100 million charge. 3M Company (NYSE:MMM) will take a $90 million charge or $0.12 per share.
Other companies that have announced charges for 2010 are Honeywell International Inc. (NYSE:HON), AK Steel Holding Corporation (NYSE:AKS) and Valero Energy Corporation (NYSE:VLO). More companies will be alerting investors to this in the coming weeks. There are very few companies that will escape taking a sizable charge.
The markets have had a beautiful almost two month run on light volume. They can remain irrational for long periods. Even with these significant charges, so far the market has had little reaction. Next week it is possible they will continue to have little reaction. While the markets seem to be near correction levels, holiday volume may be enough to keep them up. It is possible reality may wait to set in until earnings begin in April.
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Gareth Soloway
Chief Market Strategist
InTheMoneyStocks.com
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