Financial topics

[freddyv]

I almost enjoyed reading this article about how everyone on Wall Street is "throwing in the towel."

http://biz.yahoo.com/ap/090223/wall_street.html

It is certainly not the bottom but THIS is the beginning of capitulation, IMO.

Another year of this and a few people jumping out of windows and I will be ready to go long.

--Fred

[mannfm11]

It is not the bottom Fred. There isn't any capitulation because there isn't any money. It doesn't occur to you guys that there isn't any money on the sidelines. At least not the expanding amount of money that is needed to inflate asset bubbles. We ripped a hole in the last bottom today. The problem is that the players are all in and those that stayed in are now watching their surplus retirement go away. I tried to talk some guys into selling out when it rebounded in October, telling them it was going to be their last chance. Look at the history of depression markets and deflation markets. THE HALFWAY POINT BECOMES THE TOP FOR AROUND 20 YEARS. Take a look if you don't believe me. 1937, the Dow made the 50% point then it sunk back into the abyss. You have to remember that FDR had the mechanism at his disposal of devaluing gold by decree then and the changing of the money. We are beyond the last change unless you want to consider wholesale printing without the acquisition of assets, which would totally deflate the system through the abandonment of the dollar around the world. Once money becomes worth less than the ink on some of the bills, it ceases to be a money supply. You can't defeat deflation in this manner, only destroy what is left of the economy. But, back to the market. We didn't get back to the 1/2 way point until the 1950's after that. If you look at Japan, it is now at a new low. It hit the 1/2 way point a couple of times in the mid and late 1990's. The second time actually caused a Super Cycle Bear like Robert Prechter to consider the Japan bear over while the US bear was beginning. At least that is what I recall reading. In any case, we are at a low after 19 years and it is 1/3 the 1/2 way point almost. You are looking at the top here.

It doesn't occur to anyone in bull land that the entire market of the past 20 years was one inflationary fiasco, built on an almost impossible level of debt, created in a time when the banking system was based totally on debt and the reserve currency of the world had created such a money supply that the entire world could participate. This game was up in 2000. In 2000, the US stock market hit a valuation of roughly 200% of GDP. Never had a US market reached over 80% of GDP. The US market was almost priced high enough to encompass what the entire world market should have been worth. But, we had bubbles in China and Europe as well. The housing bubble was the only thing that put the extra 7 years on that boom. As much as some people would like to blame the 2000's housing bubble, it saved us from collapse then. In fact, it was the actions of FNM and FRE in the 1990's that created the entire game, issuing high powered money in sums never imagined before. Go back and check if you don't believe me because I have been reading about this game for 9 years now and nothing about this is a surprise to me. FNM and FRE created this mess and you see the politicians all the time try to sweep this away. The US government is 20% of GDP and we had a stock market increase a full 100% against GDP in the 1990's. This meant the US government took in an entire years extra income out of the bubble. That is why it appeared we were going to have surpluses as far as the eye could see, because they projected the trend to continue and trends like this can't continue.

The problem is debt and the only solution is more debt. The reason Japan hasn't ever recovered is because their government debt merely replaced their private debt and the assets deflated all the same, meaning the private side can't inflate on its assets. We are about to see what a real depression is like in Japan as there is now a deflated US bubble as well. There is a lot of play on a China rebound now. There are a lot of Chinese assets that need to be liquidated so they need to interest a few fools into buying some of them. It really doesn't matter that maybe they only unload an excess $50 to $100 billion. That amount of money beats zero and is as much as any corporation in the world is going to earn over the next 5 years, unlike the previous 5. Remember, Citi was the most profitable company in the world in the early part of this decade.

The measurement for this decline is sub 5000 this time. It won't be the last, as this is going to be an extended wave that goes on another year and a half. We are only 16 months into something I believe is going to last around 34 months. And, the more debt they create trying to stop this, the longer this mess is going to last. It is clear that we are going back to gold and silver because people are going to have to find anything they can to exchange between themselves and the paper money is going to consume itself.

The best thing that could happen would be that the government help those that go bust to the point they lose their entire support to survive and liquidate the entire mess. Cash exchanged for assets to liquidate debt no longer exists and the loss is then taken. Not only is the money supply too large as it presents an unextinguishable liability as long as they try to preserve it, standing in the way prevents the wiping out of the bad debt which prevents the economy from beginning anew.

My point is this is an unwiding of what created the bull in the first place. This isn't a lack of confidence, but a mathematical equation reversing itself out of natural limitations. As such, we have a downtrend that will continue. There hasn't been a steady downtrend like this since 1930-1932, which should tell you something. It takes effective credit expansion to push markets upward and we are in the midst of a contraction that no one can do much about. The system is a black hole and it is going to consume every extra dime thrown into it.

[Gordo]

Think about what will happen if the US Government hinted that it was going to print more money (or "drop money from helicopter's"). What will bond holders do? What will many holders of US dollar denominated based assets do? They will dispose of any and all US dollar denominated assets in a flash. What do you call that? A reduction in the money supply! That is called DEFLATION, not inflation. Printing more money, will make matters worse and NOT better.

The same thing would occur if the market were to believe that the US was about to default on it's debt. Investors would dispose of all US dollar denominated bonds (treasuries) for the same reasons. And again, that would be a decrease in the money supply (aka DEFLATION).

I don't think you understand how secondary markets work. For every seller of a treasury bond, there is a buyer. They call that an "exchange". Investors can sell all the bonds they want, but that can't cause a decrease in money supply (it can and WILL cause a run up in rates however). On the other hand, the US Government & Fed CAN increase the money supply, and in fact, that is what they ARE doing. See:
http://www.shadowstats.com/alternate_data



p.s. We aren't going back to a gold standard either. Totally impractical, and there isn't enough gold, so we'd have paper gold, and then it would just be devalued at the will of politicians so what's the point? We may have a new currency at some point, but even that is unlikely (at least in the next century). We will just print bigger and bigger bills as inflation erodes the value of the dollar. But that isn't a real concern right now, is it? Deflation is the problem, and that means dollars becoming more valuable, right?

p.p.s. I love it when I hear people talk about deflation as if its some little known secret. Give me a break, the mainstream media has completely embraced the deflation story and they are as enamored with it now as they were with the inflation story when oil was $150/barrel and on its way to $200

[tobyguy]

I don't think you understand how secondary markets work. For every seller of a treasury bond, there is a buyer. They call that an "exchange". Investors can sell all the bonds they want, but that can't cause a decrease in money supply (it can and WILL cause a run up in rates however).

Any holder of US dollar denominated debt that is close to expiration can CHOOSE to not exercise their option to repurchase.
If many holders of notes and bonds were dumped on the market at once (in a panic), that would likely cause prices to collapse.
In the words of Rbert Prechter "if this were to happen, the net result of an attempt at inflating would be a system-wide reduction in the purchasing power of dollar-denoiated debt, in other words, a drop in the dollar vaule of total credit extended, which is deflation".

The point above being, they can't just keep doing what they are doing, contrary to popular belief - eventually investors will panic.

On the other hand, the US Government & Fed CAN increase the money supply, and in fact, that is what they ARE doing. See:
http://www.shadowstats.com/alternate_data

They can increase all the money supply they want. At the end of the day, if there aren't willing participants, it's all irrelevant.
9 trillion doallars of money set aside has done little if anything to change that.
Lenders fearing default are not lending. Borrowers, already stretched to the max, don't want to borrow any more and are more focused on paying off their existing debts.

Why? Social mood takes on a life of it's own and governement intrusions or external factors have done little to change that.

Also, I'll quote Prechter again about printing money, because there's an important distinction that should be mentioned.
"A more complex answer begins with the understanding that analysts constantly confuse credit creation with money creation. …credit is not money. Economists speak of “the money supply” as if they were referring to money, but they are not; for the most part, they are referring to credit. When credit expands beyond an economy’s ability to pay the interest and principal, the trend toward expansion reverses, and the amount of outstanding credit contracts as debtors pay off their loans or default. The resulting drop in the credit supply is deflation".

All the US government is doing is more of the same that got us into this mess in the first place. Do you actually believe that doing more of the same is going to get us out?

p.p.s. I love it when I hear people talk about deflation as if its some little known secret. Give me a break, the mainstream media has completely embraced the deflation story and they are as enamored with it now as they were with the inflation story when oil was $150/barrel and on its way to $200

Actually, it was only recently that the media even dared talk about deflation (so called experts too). But you are correct, the conversation is changing - and it's about time.

We haven't seen such a situation is most of our lifetimes and comparing it to the recent past isn't applicable.
Thinking governement can do anything to fix it is a sense of false hope IMO - or it'll be something that we will find out shortly.

Tobyguy

[StilesBC]

John,

Am I reading the chart on your homepage correctly? P/E ratios have spiked to 27? That is one year trailing earnings, correct?

[John]

Dear Matt,

> Am I reading the chart on your homepage correctly? P/E ratios have
> spiked to 27? That is one year trailing earnings, correct?

You're absolutely right.



I don't know whether this is simply an error, but it's really quite
believable. But it may be that this is the first week where they've
really factored in fourth quarter earnings, which are much lower than
previously forecast.

Sincerely,

John

[John]

From the 1939 book:
Since Yesterday (1939) by Frederick Lewis Allen

> Intermittently throughout the year 1933 the Senate Committee on
> Banking and Currency, with the aid of its inexorable counsel,
> Ferdinand Pecora, had been putting on one of the most
> extraordinary shows ever produced in a Washington committee room:
> a sort of protracted coroner's inquest upon American finance. One
> by one, a long line of financial overlords--commercial bankers,
> investment bankers, railroad and public-utility holding-company
> promoters, stockbrokers, and big speculators--had filed up to the
> witness table; and from these unwilling gentlemen, and from their
> office files, had been extracted a sorry story of public
> irresponsibility and private greed. Day by day this story had
> been spread upon the front pages of the newspapers.

> The investigation showed how pool operators in Wall Street had
> manipulated the prices of stocks on the Exchange, with the
> assistance of men inside the companies with whose securities they
> toyed. It showed how they had made huge profits (which
> represented the exercise of no socially useful function) at the
> expense of the little speculators and of investors generally, and
> had fostered a speculative mania which had racked the whole
> economic system of the country--and this not only in 1928 and
> 1929, but as recently as the spring of 1933, when Roosevelt was in
> the White House and Wall Street had supposedly been wearing the
> sackcloth and ashes of repentance. The investigation showed, too,
> how powerful bankers had unloaded stocks and bonds upon the unwary
> through high-pressure salesmanship and had made millions trading
> in the securities of their own banks, at the expense of
> stockholders whose interests they claimed to be serving. It
> showed how the issuing of new securities had been so organized as
> to yield rich fruits to those on the inside, and how opportunities
> to taste these fruits had been offered to gentlemen of political
> influence. It showed how that modern engine of financial power,
> the holding company, had been misused by promoters: how some of
> these promoters had piled company upon company till their
> structures of corporate influence were seven or eight stories
> high; how these structures had become so complex that they were
> readily looted by unscrupulous men, and so unstable that many of
> them came crashing down during the Depression. It showed how
> grave could be the results when the holding-company technic was
> applied to banking. It showed how men of wealth had used devices
> like the personal holding company and tricks like the sale of
> stock (at a loss) to members of their families to dodge the tax
> collector--at the very moment when men of humbler station had been
> paying the taxes which supported the government. Again and again
> it showed how men occupying fiduciary positions in the financial
> world had been false to their trust.

> Naturally the composite picture blocked out by these revelations
> was not fair to the financiers generally. The worst scandals got
> the biggest headlines. Yet the amount of black in the picture
> was shocking even to the most judicial observer, and the way in
> which the severity of the Depression had been intensified by
> greedy and shortsighted financial practices seemed blindingly
> plain. So high did the public anger mount that the New Deal was
> sure of strong support as it drove on to new measures of reform.

Freaky, huh?

Sincerely,

John

[JLak]

Social mood takes on a life of it's own and governement intrusions or external factors have done little to change that.

I find that there is a bit too much hocus-pocus on these boards about the zeitgeist. People today have the same motivations for lending or not lending that they did in the past. They do not want to be left out of a good opportunity or run over by a bad one. Bubbles get pumped up because the people doing the pumping are personally incentivized to do so in the short-term (yearly bonus), not because 'irrational exuberance' blinds them to long-term community-borne costs (obvious). The bailouts are clear examples that bubble-pumping (government) incentives are are alive and well despite obvious consequence. When the toxic liabilities get taken off the balance sheets, the banks will begin flooding the loan markets again, but at much higher interest rates. Why? They have to; it's their business.
Mood is nothing. Incentive is everything. Drink Reality(c).

[John]

Here's an explanation for the sharp spike in P/E ratios to around 27.

The following is a table of reported average earnings per share from
the S&P web site, via the Comstock Funds web site:


2008 REPORTED EARNINGS
Jan-08 $67.90
Mar-08 $63.30
May-08 $68.93
Jun-08 $72.56
Aug-08 $72.01
Aug25-08 $63.01
9/17/2008 $59.53
10/13/2008 $54.80
10/22/2008 $54.51
11/3/2008 $54.51
11/13/2008 $48.91
11/19/2008 $49.08
11/28/2008 $49.04
12/8/2009 $48.94
12/15/2008 $48.05
12/22/2008 $48.05
1/5/2009 $48.05
1/30/2009 $44.98
2/4/2009 $34.99
2/11/2009 $29.34
2/13/2009 $27.69

Download the spreadsheet file from:
http://www.comstockfunds.com/default.as ... group=Home


For simplicity, let's assume that the S&P 500 index has been at 760
since January 1.

Then, on January 5, the P/E ratio was 760/48.05 = 15.8.

On February 13, the P/E ratio was 760/27.69 = 27.4.

It's probably even higher now.

So there ISN'T an error on the chart. The P/E ratio now really is
27.4.

I don't know how to interpret this, except to say: It's got to fall
to at least 18 for existing models to work. That means that stock
prices are due to fall by 1/3 from their current levels in the
immediate future.

The P/E ratio will almost certainly fall to 5 or so by the 2012 time
frame.

Sincerely,

John

[freddyv]

Here's an explanation for the sharp spike in P/E ratios to around 27.

The following is a table of reported average earnings per share from
the S&P web site, via the Comstock Funds web site:


2008 REPORTED EARNINGS
Jan-08 $67.90
Mar-08 $63.30
May-08 $68.93
Jun-08 $72.56
Aug-08 $72.01
Aug25-08 $63.01
9/17/2008 $59.53
10/13/2008 $54.80
10/22/2008 $54.51
11/3/2008 $54.51
11/13/2008 $48.91
11/19/2008 $49.08
11/28/2008 $49.04
12/8/2009 $48.94
12/15/2008 $48.05
12/22/2008 $48.05
1/5/2009 $48.05
1/30/2009 $44.98
2/4/2009 $34.99
2/11/2009 $29.34
2/13/2009 $27.69

Download the spreadsheet file from:
http://www.comstockfunds.com/default.as ... group=Home


...

Sincerely,

John

But once again the financial media is either incompetent or dishonest. If you go to the Wall Street Journal page at
http://online.wsj.com/mdc/public/page/2 ... dc_h_usshl
or if you happened to check Bloomberg TV over the weekend both report a P/E ratio of 10 for the S&P 500. Both reported a 23 P/E the week before...HUH?

Yet when I look at all the other sources I have access to I see that "as reported" earnings have actually gone negative this quarter so how can the P/E ratio be dropping when earnings are falling faster than stock prices?

This page from Standard and Poors shows an estimated earnings of $28 for the year and I imagine that is mostly complete since most companies have already reported.
http://www2.standardandpoors.com/spf/xl ... iee500.xls

I see that people are starting to come around in their attitudes but in things like this I see a tremendous amount of continuing corruption and denial, mainly among those who are the "public face" of the investing community. Needless to say, CNBC is the worst at presenting inaccurate information and useless analysts who can only provide hope as a reason that stocks should go up.

--Fred