EBITDA Duh

What do you think of the market? The financial pundits have plenty of explanations, all of which have been eagerly accepted by the average investor. Much of the blame has been placed on the corporate scandals that began with Enron and Global Crossing and have since consumed executives and investors at Tyco, ImClone, WorldCom and others. Many sober Op-Ed pieces have been written about how these fallen idols have destroyed Americans’ faith in the market. Fingers also point to the terrorist attacks of Sept. 11 as a culprit in the tumbling Dow. The rumors of a U.S. invasion of Iraq are also listed as a contributing factor, not to mention the ongoing terrorism and counterterrorism which is inflaming the Arab-Israeli conflict. But as tempting as it may be to connect the market’s slide with corporate scandals and foreign wars, perhaps the truth is not quite so dramatic. The fact is that the so-called “turmoil” in the market is not turmoil at all; what we are seeing is a reality check, in which stock prices that were in the stratosphere have begun to return to earth.

The numbers tell the story. The Dow Jones industrial average has traded at a mean price/earnings ratio of about 14. At the Dow’s peak in 2000, it was trading at over twice that average, indicating that investors were making optimistic assumptions about the market’s future. Currently the Dow is trading at a p/e of about 20-still a lot higher than the norm. A look at the S&P 500 tells the same story: a historical p/e of 14 that climbed as high as 46 earlier this year and is still trading at about 20 times earnings.

The Nasdaq at its peak was selling at p/e ratios anywhere from 165 to 400-even beyond the stratosphere compared to its historical norm of about 52. At the moment, the Nasdaq still has a ways to go before any semblance of reality returns.

But whatever happened to those old-fashioned Ben Graham 10 times p/e ratios and book values? Why of course, they were replaced by the new parading-dong known as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), invented by the folks on Wall Street known as investment bankers. Pretty soon it was EBITDA this and EBITDA that, and everywhere you looked it was EBITDA DA. The I.B.’s knew they could not M&A anything at 150 times earnings, but at 20 times EBITDA, there were many fish to fry. And why ruin a beautiful earnings growth trend with those pesky nuisances such as interest, taxes, depreciation and amortization? And just before the bubble burst, the I.B.’s started to think that EBITDA was too soft, too romantic, too Italian. Why not throw in salaries, and now we have a stronger, more Germanic formula known as EBITDAS. Now ve can really find some cheap stocks out there.

And not to be left out, the accountants, with P&L’s and balance sheets not worth a tinker’s dam, had little to do. And tired of Cleaning, Pressing and Alterations, they decided to consult-and did they ever. After all, they wanted Armani suits and Hermès ties, too.

Schneiderman Fights For His Political Life

It’s rare that a young, energetic and bright politician manages to create a little noise in that sleep-away camp for mediocrities, the State Legislature, but Eric T. Schneiderman has done just that in the 31¼2 years he has served in the State Senate. The Upper West Side resident has thrown himself into both politics and public policy with impressive passion, and needless to say, he has made a few enemies along the way. Envy is the price one pays for being talented and a state legislator.

Just as Mr. Schneiderman ought to be preparing to gain some important seniority in a body that seems to regard gray hair and wrinkles as a sign of wisdom, he is fighting for his political life. The challenge, oddly enough, comes not from the Republicans he has tortured for several years, but from within his own Democratic Party. After watching the boundaries of his State Senate district shift northward, towards the Latino neighborhoods of upper Manhattan, during redistricting, Mr. Schneiderman now is trying to fight off a primary challenge from former City Council member Guillermo Linares. Mr. Linares is trying to become the first native of the Dominican Republic to win a State Senate seat. Because the district now holds a large number of Dominicans from Washington Heights, Mr. Linares stands a chance of upsetting the incumbent.

This is an absurd development, and Mr. Linares and his supporters should be ashamed of themselves. There is no reason for any Democrat to oppose Mr. Schneiderman, who has been a strong voice for his party in Albany. The basis for the challenge, it seems, is brass-knuckle, Tammany-style ethnic politics.

During his 10 years as a City Council member, Mr. Linares fashioned an admirable record as an independent politician who took orders from nobody. In the current race, however, he seems to be a willing tool of people like Bronx Democratic boss Roberto Ramirez, who knows how to play the ethnic card. What’s so disappointing is that Mr. Linares and Mr. Schneiderman probably agree on 90 percent of the issues they would confront in the Senate and in the community. The main difference between them, then, is their ethnic background.

Political races based on ethnicity are hardly unheard of in New York City. But this one is particularly destructive. Mr. Schneiderman has done nothing to deserve this challenge to his career.

He’s smart and he’s effective. No wonder the bosses would like him removed.