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CryoLife Inc. Message Board

  • dlhild@ymail.com dlhild Aug 15, 2012 12:42 AM Flag

    Catch 22:

    This discusses events outside CRY’s control. Yet these macroeconomic forces are an important factor likely to affect CRY’s future share price.

    On some levels to analyze the USA economy is straight forward. It works better when it grows. However, exponential growth can’t go on at the same rate indefinitely either. So here we go. The basic GDP equation is C + NI + G + NE = GDP. In this equation C = Consumer Spending, NI = Net Investment Spending, G = Government Spending, and NE = Net Exports. When economists do this analysis, they shift things like Social Security payments, Medicare payments, Medicaid Payments, and the like from G (Government) to C (Consumer). They then conclude that C = approximately $10.6 trillion, NI = approximately $2.8 trillion, G = approximately $3 trillion and NE = approximately negative $500 billion. If you take the $15.8 trillion GDP and divide it by the US private sector workforce of approximately 135 million you get a number that rounds roughly to $118,000. Basically this seems to me to say that on average, in the USA economy, every $118,000 in GDP = 1 job. This is perhaps not a perfect metric, but there is certainly some logic behind it.

    Here’s the ‘Catch 22’. Let’s say we hit the so called ‘fiscal cliff’ at the end of 2012. Automatically tax rates would jump and spending cuts would occur. The total impact is estimated to be roughly $400 billion annualized. $400 billion divided by $118,000 over time equals roughly 3,300,000 jobs. Again, then what happens to aggregate spending, home prices, home foreclosures, tax receipts, unemployment payments, tax receipts etc.? It gets worse, so even more jobs are then lost.

    Large immediate tax increases, large immediate spending cuts (even at the government level), and high total US credit market debt levels are almost certain to slow future economic growth, relative to what it was in the past 70 years. When a company grows slowly, its P/E falls. Since the economy generally is growing slowly, the P/E of the Dow, S&P, DAX, etc. will go lower too.

    On the other hand, the USA can’t continue to have domestic deficits continually grow faster than GDP. This exponential math destroys us over time as well. No matter what then, these problems will slow future economic growth. Hence, it appears that over the next several years the USA GDP growth rate will be low, probably in the ball park vicinity of 2%. It takes about 2.5% GDP growth to absorb new people joining the work force. Hence, this low growth environment is likely to negatively affect most equities prices generally via a falling P/E ratio. Also, it is likely to result in high levels of unemployment continuing for many years to come (probably 10% range). In addition, health care costs growth will need to be contained or the economy itself will be destroyed. In 1960, USA health care spending consumed 5% of GDP. Today USA health care spending consumes 18% of GDP. To make it mathematically worse, health care spending is growing faster than incomes and GDP. Note too that the USA isn’t doing a very good job when it comes to health care generally. If you look around the world, no other country spends more than 12% of GDP (Switzerland), and these countries cover everyone with ‘pretty good care’. Hence, expensive procedures are going to become less common.

    Conclusion: Slowing economic growth coupled with medical cost containment is likely to negatively affect CRY. Equities generally and hence CRY specifically will be negatively affected. Also, human tissue may become too costly to use in very many procedures. This may already be the case. This is just my opinion. You’re responsible for your own due diligence.

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    • I think the macro could improve dramatically if the Romney Ryan ticket gets lucky. ( On the other side of the coin the macro might be a lot worse with Obama.)

      I look at CRY at providing some very important services and being undervalued. They have a lot of growth opportunities looking out a couple years. I think they will hit some winners that could drive profitability a lot higher.

      This is my own opinion. Do your own homework.

      • 2 Replies to thebuckeye777
      • I would have to agree as I recently have bought in here as a private individual investor. Fear mongering scare tactics have most always been in vogue when the economic climate is undergoing hard times. There is gold and other financial instruments for those who would agree with that agenda. Henry Kaufman & Joe Granville just couldn't hold the markets down for very long back then. IMO-Any administration who would impose a tax on medical device companies. RE: 2.3% excise tax on the gross sales amount for medical-device manufacturers. Those imposing clearly IMO don't understand the consequences of their economic policies. I remember all to well the imposition (a tax the rich) for a tax on expensive watercraft. IMO it seemingly didn't workout well for US jobs and was repealed. If left without revisions. I see the same type of tax destroying jobs of small medical device companies. Either way, I like this companies prospects going forward and still think its a buy in the low five range. IMO a possible catalyst could be a change in administrations and a repeal of the medical device tax. With regard to the medical device tax. I've not looked into the details as to what may actually applies to this company. If any apply at all to this company? If Anybody with such knowledge knows. I'd sure like to see details. TIA

      • dlhild@ymail.com dlhild Aug 15, 2012 7:04 PM Flag

        Buckeye, if you are optimistic over a Romney-Ryan ticket, it has to be based upon a world view, not analysis.

        The cake is baked. Neither party can turn this thing around. If both parties came together and looked at real problems and solutions, then there is a slight chance but slight never the less. They aren't going to come together, so it won't.

        I suggest you spend 70 minutes watching this video. It is not political. It is pure analysis, and explains the current situation quite well.

        http://www.zerohedge.com/news/chris-martenson-lecture-why-next-20-years-will-be-marked-collapse-exponential-function

        Europe, England, Japan, and the USA are all screwed by excessive debt. It is going to be a slow deleveraging process, and all assets classes are going to be affected I think. If not for the 'Bernanke Put" the world would be in deflation and it would be 1935. We may circle back to that point yet. Please watch the video and give me your thoughts.

        Before we bottom we will likely see gold over $2,500, the Dow under 8,000, and bonds get killed at some point as well. My bet would be some level of deflation first followed by quite high inflation. Either way, P/E's are coming down. Also, I would bet that we are near the peak of the earnings cycle (may have 12-18 months left) then we will likely see earnings come down. S&P earnings are around $85 now, projected to go to around $100. I'm betting that 18 to 36 months out, S&P earnings will be ball park $80. Put a 12x P/E on it and it is easy to seee the S&P at 960...or lower. This is the macro force pushing CRY down. What is pushing CRY up I think may be an improving earnings cycle. My simple pencil pushing comes up with EPS numbers higher that the high numbers the analysts are currently showing.

        Also, the USA has to stop fighting wars. If we destroy the economy, we will not be able to field a military capable of invading Granada. Read "The Rise and Fall of the Great Powers", by Paul Kennedy, a Harvard Business school mandatory read. What this showed is the wars, and other commitments and promises, destoy great powers. Happened to every single one from 1450 to the present. The USA will be no exception.

        Another suggested book is the "End Game" by John Mauldin. It shows the debt problem too.

 
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