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2/26/2026

As I write this, the market is in a tailspin: the Nasdaq is down 322 points (1.4%) and the S&P 500 has shed 0.75%. Even companies with rock-solid fundamentals are seeing 5%+ intraday drops, marking yet another chapter in a long saga of senseless daily volatility.

Who knows where we go from here? Tomorrow, the indexes could swing 4% to the upside based on nothing more than the whims of momentum traders.

While our account is currently up 27 basis points today—and also outperforming for the quarter—we take no comfort in this chaos. Only God knows which side of the bed traders will wake up on tomorrow, let alone next month when the quarter ends and another flash flood of cash emerge.

We have grave concerns regarding the influence of massive day-trading operations. When trillions of dollars are moved by high-frequency algorithms rather than economic analysis, it distorts the cost of capital. For analysts and companies worldwide, this volatility wreaks havoc on the ability to efficiently raise capital.. Furthermore, it baits “weak-kneed” investors into emotional selling, stripping them of their confidence and jeopardizing the stability of 401(k)s and retirement funds.

Stock volatility has a large impact on credit securities, employee morale, and perhaps even vendor financing.

To restore financial market efficiency and their reason for being, we call for a 90% tax on all day-trading profits.

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Full reports forwarded to clients of Credit Trends

We have lowered our credit rating on Tesla as car sales continue to drop, along with Chinese inroads in humanoid robots.

Other factors, such as self-driving vehicles, will also be powered by batteries, while their AI as well as……………………………

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With the year complete, firms need to “true up” actual cash paid to federal, state, and foreign governments from the amount estimated throughout the year.  The. The actual cash taxes paid may also reflect refunds, prior-year adjustments including that related to foreign taxes, legal settlements and changes to codes.

For the past quarter (firms with a December 31 year), the current quarter estimates were due December 15 but covers the quarter ending November with the “true-up” due typically by Mar 15, unless extended. As our firms are global in scope, with tax a large cash usage, foreign taxation and other non-US cash costs, including pensions where rules are different, are important to our analytical adjustments.

In equity markets such as that of 2025, not much of the above takes precedence to investors, but over the course of cycles, it sure does.

Tariffs can affect multiple financial statement accounts, including Inventory and its outflow expense, capital expenditures, the cost basis of purchased assets subject to depreciation, and general operating expenses. Furthermore, the US seller is impacted by increased input costs for imported manufacturing components, which affects the Statement of Cash Flows. While our full analysis accounts for complex areas such as asset impairment, these are beyond the scope of this report.

FOR THE FULL REPORT, YOU MUST BE A CREDIT TRENDS RESEARCH CLIENT

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COMPLETE REPORT SENT TO CONSULTING AND ADVISORY CLIENTS

This quarter, we have attached a significant report detailing the analysis of Cash from Operating Activities.

Our methodology begins with a fundamental shift from the commonly reported Indirect Method presented to shareholders, to the analytically and intuitively superior Direct Method.

Although the Direct Method provides more transparent insight into a company’s true cash velocity, the FASB has thus far been unsuccessful in mandating its use by reporting entities. As outlined in the report, we further refine this baseline by applying our proprietary normalization adjustments to the Direct Method, ensuring the resulting figures reflect the true economic health and sustainable liquidity of the firm.

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We are sure you are—or at least should be aware, our worksheets forming the adjustments to the published financial statements, a composite of comprehensive analysis inclusive of many industry-specific pricing gauges, use the same tools in selecting stocks for the portfolio we use in a M&A analysis. In so doing, we normalize and evaluate real-world risks and possibilities to the cash flows. In this manner, we normalize and assess real-world risks and potentialities concerning cash flows.

We also identify potential areas for expense reductions, provided your organization is already integrated into the sector, and such reductions can be implemented quite easily, although certain factors, such as union engagement or cash outlays, must be considered.

True, every so often, a new hot area comes around, only to later evaporate to competition or some better mou………………………

For the entire report, containing a full discussion of valuation, sectors to enter and avoid, a discussion of various tax codes and why specific stocks will be impacted, you MUST be a CT Capital LLC investment client

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Our analysts have deep experience in every phase of finance, including arcane areas and complex accounting codes

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Waymo’s LIDAR-centric system offers several distinct advantages over Tesla’s camera-only approach (Tesla removed radar from its production vehicles in 2021), especially in the context of Level 4/5 autonomous driving where safety and reliability must meet stringent standards:

 Key Advantages of Waymo’s LIDAR-Based System

 Direct Depth Perception

• LIDAR measures distance by firing laser pulses and timing their reflections, creating a precise 3D map of the environment.
• Tesla’s cameras must infer depth from 2D images, which is computationally intensive and prone to error in low light or unfamiliar scenarios A.

 Superior Performance in Adverse Conditions

• LIDAR and radar are largely unaffected by fog, rain, snow, or glare, whereas cameras can be blinded or confused.
• This makes Waymo’s system more robust in real-world weather variability.

 Sensor Redundancy

• Waymo uses a multi-modal sensor fusion approach: LIDAR, radar, and cameras work together to cross-validate data.
• If one sensor fails or is obstructed, others can compensate—critical for safe driverless operation A.

 Reduced Susceptibility to Visual Ambiguity

• Cameras can be tricked by shadows, reflections, or adversarial inputs.
• LIDAR relies on physical measurements, making it less vulnerable to visual deception A.

 Mapping Precision

• Waymo’s vehicles operate in geofenced areas with centimeter-level HD maps built using LIDAR, enabling accurate localization even without GPS B.
• Tesla’s vision system avoids prebuilt maps, which can be advantageous for scalability but sacrifices precision in complex urban environments.

—

Waymo’s system is currently deployed in fully driverless robotaxi services in cities like Phoenix and San Francisco, while Tesla’s Full Self-Driving (FSD) remains a Level 2 driver-assist system, requiring human supervision A B.

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Drops in populations of our major trading partners are bringing a firm’s ability to improve productivity, while maintaining market share and other factors, into the deep spotlight.

We measure labor and total firm productivity using various measures and means for firms to improve that cash-enhancing yardstick, including collections, capital spend, self-insurance, tax, captives, manufacturing, technology, costs, business partnerships, acquisitions, other financing decisions, and logistics. Labor productivity refers to the overall amount of output, measured in terms of revenues produced per unit of dollar cost of labor, number of employees, and other such metrics.

FOR THIS COMPLETE REPORT, YOU MUST BE A CT CAPITAL LLC RESEARCH CLIENT

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For our complete study, your firm must be a CT Capital Research or advisory client.

A half-century in all phases of security analysis, global M&A for largest firms, academia, taxation (including foreign codes), and credit.

For instance, if a firm repurchases shares at the end of a reporting period for settlement in the upcoming period, the cash impact will appear in “Other accrued liabilities.” This would likely cause a cash flow error for most analysts should they not adjust the period.

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CT Capital today introduced a new portfolio strategy—the only one in existence–using our proprietary and most comprehensive cash flow and credit worksheets based on 50 years in all phases of finance—to an exclusive portfolio in which all firms are fully capable of taking advantage of the declining trend and aging of the world’s population.

Currently, lower inflation-adjusted interest rates have provided a large boost to valuation multiples, as firms can earn a lower cash yield to maintain a constant spread with the cost of equity.

Unfortunately, interest rates eventually rise, and therefore, secular trends are a more powerful long-term contributor to the investment performance of firms and their investors.

It is a diversified portfolio in which the firms are able to overcome not only the population trend, which is further impacting consumer spending, such as housing but also VP Harris’s higher proposed tax rate.

Please get in touch with CT Capital for complete details of this institutional portfolio ($10M minimum)

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Proposal for investors

PRODUCTIVITY ETF

Labor productivity refers to the overall amount of output, measured in terms of revenues that are produced per unit of dollar cost of labor, number of employees and other such metrics.

The framework presented here is a consequence of the global decline or virtual stagnation in population in industrialized nations. Estimates by various think tanks, such as the World Bank, UN, INED, and others, all confirm the current and continuing population declines.[1][2]

This secular falloff in the consumer base, the first in centuries, would value an investment strategy capable of taking advantage of firms whose primary business is directed at improving the productivity of clients or have a strong history of such for themselves.

The reach of such firms runs across a spectrum of economic sectors.

We are therefore proposing an ETF (exchange traded fund) in which the portfolio is comprised of firms engaged in such businesses or implementing such a strategy.

FACT: The populations of developed nations worldwide are either declining or on a declining trend, which is an indisputable fact.
FACT #2: Insufficient labor forces require higher levels of productivity to sustain or expand production.

FACT #3: The challenge of fewer consumers can be addressed by reducing costs and increasing efficiencies to increase profit margins. Cost cutting can only go so far and has proven to backfire.

Our objective is to manage the only globally diversified Exchange-Traded Fund (ETF) that focuses entirely on investing in firms that improve productivity measures, either for their own benefit or for others.
.

This fund has a broad emphasis and does not exclusively target technology. However, it is expected that a substantial portion of the portfolio, ranging from 30% to 60%, would be invested in technology companies. The exact allocation will depend on factors such as portfolio risk, allocation strategy, and values.

The portfolio will be composed of firms possessing stronger than benchmark financial structures, access to credit, and an adjusted free cash yield in excess of their cost of equity using our proprietary financial adjustments of both a quantitative and qualitative nature.

I anticipate that the financial media, both in written and televised form, will be inclined to offer a platform for a fund of this nature, as there is now no similar option available.

Write to us with interest.

info@ctcapllc.com

[1] See https://data.worldbank.org/indicator/SP.POP.GROW?most_recent_value_desc=false

[2] See https://www.ined.fr/en/everything_about_population/data/world-projections/projections-by-countries/

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COMMENT ON AI AND THE JOBS ACT

Potential changes brought about by the Jobs Act’s sunsetting provisions are considerably more significant financially than recent trends in microprocessors designed towards artificial intelligence and so have a considerably greater impact on the US economy and stock values. Jobs Act cash-impacting changes could pose a risk to technology shares, as tax credits, the actual tax rate, research, and depreciation allowances could be altered. Individual rates will also rise, necessitating a cautious approach to our investment strategies.

After reading through scores of financial filings, our position on AI is that it will take a long time, if ever, for promised benefits to be felt via impacting shareholder value in the 99%+ of firms outside the microprocessor, software, and consulting firms that sell those services. Eventually, those firms will succumb to customer reality.

Many firms, from Boeing to UPS, had no comment on the matter of AI, while others, like Honeywell, mentioned it just in passing, without any specific application to how it would lift cash flows or other financial metrics.

Firms commenting on AI include benefits to compliance risks, the timing of reports, including legal and accounting, repairing design flaws (such software has existed for years), and some labor savings. Consulting firms like Accenture claimed costs would rise, at least in the short term.

We do not see general economy-wide advantages capable of lifting valuation multiples due to AI revenue enhancement. Stability metrics could improve. Increasing competitive risks, cyberattacks, or penetrating competitive advantages may harm metrics.

GE’s comments on cybersecurity should extend to AI: “As a result, we may be unable to promptly or effectively detect, investigate, remediate or recover from cybersecurity attacks, which may result in material harm to our systems, information or business.”

If benefits occur, they will be equally available sector-wide, making firms equally competitive. Some firms warned that competitive threats from AI might infringe on their business, a particular risk of the advancement.

Should a higher unemployment rate be seen as technology replacing labor, that could well have a negative impact. Years ago, we heard how large-scale supercomputer competition capable of trillions of calculations a second would also change the world, including weather forecasts. I’m still waiting

.

Until we see a tangible impact capable of improving shareholder valuations across the board, we will be content to watch others invest in and comment on this world-altering technology, as we did with EVs. This was the correct decision, as time has proven, and it will likely be again. If not, we will watch the losers fold and place capital into those most benefiting.

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How to Properly Measure Stability Metrics of a Public Entity

Our meticulous approach to conducting a separate analysis of historical stability for each key metric is not just essential; it’s the bedrock of our analysis. This approach ensures the reliability of our analysis and provides a solid foundation for our conclusions, even when new factors such as a new accounting standard, tax law, or other events alter historical stability.

We are now engaged in a presidential election cycle, sure to play a pivotal role in corporate stability running through all decisions-operating, financing, and investment.

Stability is a crucial component of valuation. It plays a significant role in estimating the cost of capital, which is the discount rate of future cash flows from all sources.

FULL 11 PAGE REPORT- A MUST FOR ALL SECURITY ANALYSTS-SENT TO CT CAPITAL CLIENTS

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Investors are lacking in their understanding of defense shares, and the values presented therein.

Our defense sector investments have continued to outperform diversified indexes, such as the Russell 1000, while continuing to replace money-losing fixed-price contracts with cost-plus.[1]. Subsequently, free cash will rise dramatically—a development that most investors are unaware of.

FULL REPORT ON DEFENSE SHARES AND SECTOR SENT TO CT CAPITAL CLIENTS

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LEARN HOW TO MAKE PROPER FINANCIAL ADJUSTMENTS—BECOME A CLIENT TODAY!

Example: If a firm repurchases shares at the end of a reporting period for settlement in the upcoming period, the cash impact will appear in “Other accrued liabilities.” This would likely cause a cash flow error for most analysts should they not adjust the period.

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The S&P 500 has lost its utility as a value benchmark for assessing portfolio performance since it cannot match the broad sector composition, volatility of key financial metrics, cost of capital, employment, and its volatility, and other characteristics of measuring value-type equities.

The S&P 500 may be more accurately and currently characterized as a well-known quasi-technological benchmark. The US Bureau of Economic Analysis (Figure 1) shows the technology sector accounts for just 8.8% of GDP, yet the top 6 stocks in the index, all being technology, account for 27% of its portfolio importance.

Comparatively, during year-end 2017, the top 10 S&P 500 stocks were a diversified group accounting for 17% of the entire index value—today, the top ten securities for about one-third and is composed of a single sector–technology firms.

The current faster growth in many technology firms does not warrant its weighting. As we saw with Tesla shares, a top 5 S&P 500 firm only a few years ago, these shares can halve in value even though, as economic growth remains strong,  shares are generally rising.

Example: Nvidia’s stock price increase of only one day this quarter was about equal to the combined performance of two hundred S&P stocks!

Figure 1 Technology Sector in S&P 500 Gives Misleading Impression of US Economic Activity

 (figure sent to CT Capital Clients)

Because of the greater cost of equity (risk to adjusted cash flows) associated with technological companies, anticipated returns should consider a large depreciation of principle. Extreme volatility is inherent in the sector.

However, our diverse large capitalization value portfolios and the Russell 1000 Value Index have longer track performance records over a broader range of economic conditions and shifting industry trends, making them less vulnerable to the notable price volatility linked to a single sector. Conversely, as its complexion changed in very recent years, the S&P 500 became a general index oddity.

We display two large-cap value portfolios below (Tables 1 and 2). Their makeup differs significantly from that of the S&P 500 benchmark. Notably, those top heavy currently ruling the index are absent, except Microsoft, which logically has a more extended history.

Table 1 Wilshire 1000 Large Cap Value Portfolio Characteristics

(Table sent to CT Capital Clients)

Table 2 Russell 1000 TR Characteristics

(Table sent to CT Capital Clients)

Always remember that short-term financial results have a minimal impact on long-term value. In contrast, the consistency of multi-cycle growth in inflation-adjusted metrics found in a value portfolio such as CT Capital has a considerable influence and investor reward. That is the essence of a value-type portfolio and one not present in the current construction of the S&P 500 as has long been perceived.

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Our company has a unique approach to estimating the cost of capital. We believe that we have delved deeper into this matter than any other advisor. To make sure, feel free to ask other advisors about their precise method of calculating the equity cost of capital, including worksheets. While academia has also touched upon this topic, most focus has been on naive GAAP data and relatively simple approaches. It is essential to understand that even a one percentage point difference in the cost of capital can lead to a fair value variation of fifteen to thirty percent, depending on the current price of capital. Therefore, we must consider this aspect when determining a reasonable value estimate.

Become a CT Capital client today and understand our history of outperformance of benchmarks with considerably lower risk

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As security analysts, we conduct year-end assessments and profound financial modifications to reported results. The quantity and quality of the information initially disclosed at the commencement of the reporting period are typically limited in scope.

First, financial releases are frequently scant; thus, our methods for obtaining information become more varied. In addition to the company information that may have been available, we gather and use a variety of sources to broaden our base, including official government data, conferences, managerial approaches and remarks, competitor and supplier information, and other pertinent channels like state requirements.
Our primary objective is to understand the allocation and origins of cash flows comprehensively.
To that end, it is essential to conduct a thorough examination and analysis of all sources of revenue to gain a comprehensive understanding of the inflows related to cash flow. This includes examining all revenue categories, whether through cash receipts on earn-outs, product and service sales, or any other means of obtaining cash, such as insurance proceeds. We will make the necessary adjustments if we uncover any unusual cash production information.

TO VIEW THIS MOST IMPORTANT TEN-PAGE REPORT, YOU MUST BE A CLIENT OF CT CAPITAL LLC

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…….

Investors typically raise risk levels when normal cyclical events stare them in the face when they should have accounted for it all along, including current happenings in China.

The most significant such issue is in fact the expected dramatic population drop in China.

Japan was viewed as the world’s economic engine (Figure 1) and now China could well be on a similar track. Increasing sovereign risk further clouds their economic outlook, especially with the EU recognizing its threat to world stability. This month, Astra Zeneca announced it was spinning off its Chinese division for this reason.

 FIGURE AVAILABLE HERE ON CLIENT REPORT ONLY

 Figure 1– Stock Performance Tied to Population Growth as Seen in Japan

Firms with heavy customer/supplier exposure in China must cut operating costs and find new outlets and innovations to maintain or capture larger market shares

….

All our metrics are converted to real (inflation-adjusted) terms, offering insight in both inflationary and deflationary periods.

As with our Lockheed Martin, we fully expect quite a few of our holdings to continue closing out portions of their pension liabilities. Pension transfers doubled over the past year as premiums dropped as interest rates rose. Such actions improve credit, cost of capital, and valuation if key metrics remain constant or improve.

…

For lower credits whose asset quality (collateral) drops during periods of sector weakness, additional borrowings come at a high cost, often unable to be captured by the shrinking operating margins.

With world economies embarking on years, if not decades, of slowing nominal (relative to post-war) growth, our proprietary financial adjustments carry important significance in estimating fair value.

Example. The purchase or sale of a futures contract is listed as an investing activity in the statement of cash flows, even though the contract is intended as a hedge of a firm commitment to purchase inventory. Thusly, we would adjust to an operating cash flow. This would not be picked up by almost all analysts, if any.[1]

Starting with the following year, firms must disclose where and when derivative instruments and their related gains and losses are reported in the statement of cash flows. To the extent we derive additional information, it will be incorporated into our restatements.

It amazes us that the geniuses at the Federal Reserve do not recognize that the more they raise short-term rates from current levels, the greater long-term rates drop since the US is already experiencing a slowdown. Should such actions occur, cost of debt capital, assuming constant spreads, drops, defeating the Fed’s agenda for inflation restraint.

Any bank restraint will likely be supplanted by the “shadow banking system,” only a portion of which is regulated and could lead to future hard-to-control issues for financial regulators

[1] Ask other advisors the various adjustments they make to the published financial statements on derivative positions.

…

TAXATION

The 15% alternative minimum tax should result in unexpected consequences for many investors. Because the change is based on a rolling average three-year $1B back-test, firms may be required to pay higher taxes even though profits and cash flows drop.

In addition, an upcoming accounting standard on taxation can be expected to have a weighty impact on valuations, providing investors with essential breakouts of foreign, local, and federal tax (subject to a 5% threshold). The standard will allow for greater introspection of risk in which the various countries’ firms operate, with the result, our worksheets will have a closer margin to the estimate of fair value.

As generative AI moves up the curve, it will allow firms to prepare tax reports and insights either not possible now due to time constraints or records being held across a wide range of locations, customers, and suppliers.

When instituted, Pillar 2 requirements are complex and will cause investor havoc, but one which we will be fully prepared for. Pillar 2 has already been adopted by a large number of countries.

The 2017 Tax Cut and Jobs Act rewards our higher-than-benchmark credit portfolio, as it limits the amount of interest that may be deductible to 30% of taxable income. However, it permits depreciation and amortization to be deducted from the taxable income calculation.

Capital-intensive industries will be vulnerable to higher taxation as they can no longer fully deduct equipment expenses in the year purchased. This residual will lower valuation multiples for affected firms.

…

STOCK-BASED COMPENSATION

Investors tend to downplay the real cost of stock-based compensation.

As investors read the statement of cash flows, under operating activities, stock-based compensation is added, it being a non-cash item over that reported in the income statement.

But does this provide investors with all the tools they need to evaluate firms worth?

Stock-based compensation is far from a small cost, even considering the beneficial tax effect. The employer generally is eligible for a tax deduction equal to the full amount of the stock minus the exercise price when the employee vests in the restricted stock or the intrinsic value of the stock when the option is exercised. 

When a restricted stock vests or a nonqualified option is exercised, the amount of the employer’s corporate tax deduction is fixed.

Equity issuance, even for firms in our portfolio, given their valuations and credit profile, is costly and should be recognized as such.

We are not advocating firms not providing this incentive to current and future employees, but to generally recognize the cost into valuation when making the decision. Equity can help lower cost of debt capital when used judiciously in debt instruments.

Furthermore:

• Equity dilutes current shareholders, so additional cash flows could be required to maintain current valuation levels.
• If the tax deduction is less than the book compensation cost, the employer has a “tax shortfall.”
• BALANCE OF THIS SECTION SENT TO CLIENTS ONLY

HOW WE ADJUST OUR ESTIMATE OF FAIR VALUE WHEN A COMPANY REPORTS A SHORTFALL

Our fair value estimate may be altered when an investee reports a shortfall in their normalized key financial metrics. Under normal circumstances, a shortfall, either during a short-term period or cycle, has a quantifiable and limited impact in our investment process, as it has already been considered thru the cost of capital (see Commentary), or via our normalization restatements.

Such may be cause for an outright sale or, as written in our “Commentary” which follows, be already factored into our cost of equity. Each case must be tailored to the firm and issues involved, both quantitative and qualitative. As our firms are expected to see real growth from cycle to cycle, normal cycle or temporary issues of cost or revenue wash out over time, despite what investors believe at the time to be atypical.

The primary relevant factors are:

1. How does the shortfall impact our expected normalized real free cash flows and growth rate? What is the timing of any likely recapture of revenues delayed, discounted to current and fair value?

Identify the causes and whether they can be assumed to be of a longer-term duration. If so, for how many periods? If the shortfall was due to a significant client, supplier, geography, or external factor, is it……………………BALANCE OF THIS SECTION SENT TO CLIENTS ONLY

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We know bear markets are no fun.

Such is why we devote as much time studying risk as we do to the ability of a firm’s managers to generate cash from assets, all the while placing the firm(s) on course for future growth in normalized and adjusted cash-based return on capital.

Our firms have strong corporate identities (market share) with sound financial structures, and financial back-up (calls on credit) should such ever be required. Their alliances with the debt community are deep.

Bear markets, whether financially or otherwise induced, test the mettle of not just corporate managers but us as well in the delineation of our cost of equity. And on that score, you should feel very much at ease, as almost a half-century of analysis can attest.

Our firms will (not might or should) bounce back to new highs when the current period is over, a forecast that cannot be made about so many other firms whose share prices in the bull market were exaggerated and are now facing a period of rising interest costs and tax rates.

For example, many firms have counted on the bull market and contributed lower cash payments to their pension plans. Such maneuvers artificially raised GAAP-based cash from operations, an activity for which we adjust. Higher tax rates will also be in the cards for many firms due to changes in tax laws; a topic addressed in our last report.

Unfortunately, investors have not yet distinguished between firms like ours and other firms, even those benefitting from tax credits under the Inflation Act.

KH

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IMPAIRMENTS – A CT CAPITAL ADVANTAGE

Impairment occurs when fair value is below amortized cost. Some business decisions, including the sale of assets, could well result in an impairment charge.

Our cash-based return on capital model is excellent at catching future impairment charges under GAAP, especially as one of the tests in the Standard is a drop of total firm market value below book. We concern ourselves with impairments likely to reduce cash flows, as most impairments are recorded as non-cash GAAP events. The impact on future cash flows is to be determined.

Impairments may also lead to covenant violations due to cash flows or collateral impacts.

You recall the worldwide credit crisis was exacerbated by FAS 157 and its fair value provision, which forced firms to mark inactive securities to market. This was later replaced with other conditions, including the income approach used by our firms with no need to sell portfolio holdings to supplant cash and whose portfolio consists of non-active fixed income instruments. Assets for sale are shown in OCI (other comprehensive income), and currently show, for our portfolio, no deviation from normal.

Though the impairment-related Standard calls for an annual review, a change to interim reporting may be called for, especially for firms with inflated inventory and goodwill, the latter which may not be amortized or deducted for tax purposes. Impairments are normally set at the individual unit level.

Taxable M&A goodwill may result in tax-deductibility and needs to be studied, including the impact on future taxation.

Our cash flow-based models already incorporate fair asset values into our value estimate. Assets reported below their ability to produce cash are thus late to the game. The same is true for assets such as PP&E, which may be near the end of their useful life for accounting purposes yet are fully capable of producing goods for years to come.

The Inflation Reduction Act may prove to be the most important new legislation impacting cash flows and valuation, requiring a comprehensive understanding of firm accounting (both global and domestic) and actual cash tax. Tax credits and incentives have sway over taxes due otherwise.

The alternative tax provision for a minimum 15% based on a firm’s book income must be evaluated in conjunction with the many offsets;[1] as far as the 1% tax on buybacks is concerned, it is of minor influence, and could be overcome if the firm is to issue stock or to repurchase other securities. CT Capital has the abilities necessary to dissect the data in an appropriate form, which is then plugged into our valuation models.

Free cash flow estimates require getting the fingernails dirty and normalizing results, transactions, accruals, and estimates within the line entries, and, later, tax credits. Most analysts use simplistically lazy models.

[1] In this provision the Act generally establishes the 15% tax liability for firms having a $1B average annual adjusted financial statement income. It is an alternative minimum tax to the extent that its “tentative minimum tax” exceeds its regular US federal income tax liability plus its liability for the base erosion anti-abuse tax (BEAT). Impacted firms do receive a credit against future liability.

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Subject: FROM CT CAPITAL-A STORY AND LESSON FOR THE WEEKEND

Hi,

Quite a few years ago, the law firm I used was the same as Carl Icahn, where his personal attorney was a partner.

My attorney knew of my M&A client, who was vastly more well-known than Icahn for his takeover antics, including “greenmail,’ which at the time, while not illegal, had no additional costs to the threatened firm, as was later the case. My client bought a few leading firms and hence became one of the wealthiest men in the US.

In fact, I had several meetings with Icahn’s attorney for no reason other than an introduction.

When the news broke of his buying TWA, I was told he ran around his office singing: We bought an airline. We bought an airline.

I called my then attorney to tell him it was a big mistake, from unions to pensions to cyclicality, and other negative risks are thrown in, like fuel costs.

I thought of this and am happy Mr. Icahn learned a lesson he has wisely put to use since, as we see the historic rise in valuation multiples of firms with strong growing real cash returns over its cost of equity. This metric was undoubtedly not the case with TWA, later to file bankruptcy proceedings.

We see our owned firms, from the mega-cap Accenture to the small firms like Watts Water and Quanta rise a multiple of their cost. Yet had they been handed a large merger premium at the time of our cost would have been hailed by investors, and no more so than institutional investors.

Investors and firm executives who do not get the lesson here will always be doomed for underperformance, despite hitting the hot industry or trend from time to time. Investment advisors will see lots of journalistic coverage in the process, and the institutional money will flow, just as it did for the Paulson’s and other hedge fund managers post the credit crisis. Such is now the case with private equity, despite many risks for those firms, including size and transparency.

As the saying goes, all that glitter is not gold, and why our firms rise over multiple cycles without the benefit of fads or large cyclicality.

Ken

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Politicians were so adamant to get the hell out of fossil fuels they neglected to consider the unintended co of doing so as quickly as their campaign promises.

See our important report in which we discuss the impact to financial assets, which sectors and names stand to benefit, and more importantly, and in combination with stepped-up sovereign risks and changes to tax codes worldwide, those sectors and names which will almost certainly see their valuation multiples compress.

Kenneth Hackel, CFA

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Tesla remains our favorite short position, only enhanced by Musk actions the past few weeks. Comments this morning to be followed by updated review out this weekend.

KH

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With non-GAAP presentations rampant, the importance of our making financial statement adjustments is a critical component of our analysis. The energy sector is far from alone in this regard. Classification error in the statement of cash flows, where firm leeway is often permissible under GAAP, requires such adjustments and results in large ranges in free cash flow estimates for analysts not making proper adjustments, such as leaving activities as financing or investment cash flows instead of movement to operating. The unadjusted analysis would result in incorrect conclusions of target price and risk.

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