Financial topics

[mannfm11]

Robert Prechter says we are at the end of wave 1 and a strong rally is possible. If we are at the end of wave 1, wave 3 is a crash wave. Wave 2 corrections are sharp. There are some things happening that give the appearance that someone is getting bullish in the world. There are just too many idiots left.

The money supply figures are confusing. I don't believe them. When the Fed buys stuff from banks, there isn't a move in the money supply because banks don't have accounts for themselves. Maybe the Freddie/fannie money is going into an account. Point is, we couldn't be having a recession if this was real money borrowed to buy something tangible. We would be having a boom.

Next, the Comstock stuff is really interesting and lends a lot of credence to what I have been saying all along, target under 3000 on the Dow and 300 on the SPX. I don't believe we get of easier than Japan.

[John]

My head is spinning from what I'm seeing. This whole stimulus plan
seems to me to be going off the rails.

One thing that was clear from the Richard Koo presentation is that
this whole thing can only work if spending done in a very disciplined
manner. In particular, it's vital that the money gets spent in such
a way that it's returned to the Treasury (after being spent a time or
two, the holder either saves it or uses it to pay down debt - either
way, it gets into a bank where the bank uses it to buy Treasuries).

But nobody's even thinking about that. It's just a chaotic free for
all to spend as much money as possible in any way possible.

And then, Obama is now talking about being "fiscally responsible." I
don't know whether to laugh or cry.

The defense budget is being cut, and Richard Koo specifically named
defense as the most effective use of stimulus money (though he said
that he personally disliked that conclusion).

Obama is going to pour money into state budgets, because states can
create jobs.

And now he's going to tax "rich people" and businesses, in order to
be "fiscally responsible," as if private sector businesses don't
create jobs.

Oh wait ... And while all this is going on, he's going to implement
universal health care, and solve global warming.


We're on a ferris wheel
A crazy ferris wheel
A wheel within a wheel
That suddenly reveals
The stars begin to reel
And down again around
And up again around
And up again around
So high above the ground
We feel we gotta yell
We're on a carousel
A crazy carousel.


http://www.generationaldynamics.com/ww2010/carousel.mp3

John

[JLak]

2009 Budget: "...$3.94 trillion in the current year"
Employed people in the US: 142,099,000
Average worker's share of government expenses:
3.94 trillion / 142 099 000 = 27 727.148
Median income: $32,140
That's 86% of median income and we're just warming up!

Sources:
http://www.foxnews.com/politics/first10 ... ma-budget/
http://www.bls.gov/news.release/empsit.nr0.htm
http://en.wikipedia.org/wiki/Personal_i ... ted_States

[freddyv]

Next, the Comstock stuff is really interesting and lends a lot of credence to what I have been saying all along, target under 3000 on the Dow and 300 on the SPX. I don't believe we get of easier than Japan.

I had been to the Comstock site before but apparently never looked that close or had just forgotten about them. I was very impressed with their research and their application of that research. At a time when I have been almost willing to start believing that we could perhaps be at a bottom, despite my previous predictions of Dow 3,000, they have reaffirmed my belief that we not only will likely go to well under 5,000 but may indeed be headed for levels even I have not been predicting.

I base this on what they point out is outright self-dillusion about earnings. We all knew that estimated earnings was going to be a problem but I didn't know that operating earnings was being so misused, though I had a lot of questions about that. They cleared up those questions and made me realize that aside from all the obvious macro economic problems, the generational dynamics involved and the more obvious valuation issues, there is a huge fundamental shift that must take place (as predicted by Generational Dynamics) before we have hit bottom and we are a long ways away from that. It will only come about once we have either quit lying to ourselves and each other about such things as estimated earnings and operating earnings, or when we have really been put through the "maximum ruin" wringer.

As I read their articles I really started to see the possibilty, given two more years of negative earnings, of the Dow falling 90% as it did during the Great Depression. Standard & Poors itself already has a 62 P/E ratio predicted for later in 2009 - http://www2.standardandpoors.com/spf/xl ... EPSEST.XLS - That would mean the S&P could fall to 188 and we would still have a 15 P/E given their earnings projections for 9/30/09. Let's also note that those earnings estimates they are using are likely on the optimistic side and we could easily see full year negative earnings by the end of 2009.

--Fred

[mannfm11]

I have done work on CPI adjusted prices against 3% dividend peaks in the past Fred. I was reading something I posted on my blog that I had derived out of Shillers SPX data. The post was really poorly written, which I am prone to do when I am generating figures to write about, but in the Shiller data he had the CPI for every month for the beginning of time. It took until 1958 to get even CPI wise with 1929 and then after the bear of the 1970's, it took again until November 1985. The bottom of the 1970's bear was 1975.

In any case, in the period between 1925 and 1930, there as really strong dividend growth. The same held true between 2003 and 2008. I wish they taught a lot more about asset inflation and what is behind it, but something tells me the powers to be don't want to educate people on how the system works. I saw Sheila Bair on TV for a minute last night talking about teaching money in school, but someone like myself who has a way beyond average understanding about how the system works would find what they taught to be worthless. The reason I know this is because if the populaton understood the game, we wouldn't have the current system of credit. The debt is money, money is debt game is a fraud and it is clear that it is a double fraud because FDR set it up where the bankers get rich then the people get the bill. You can bet FDR, Governor of NY, knew how banking worked.

[mannfm11]

Im having a hard time with the 1000 Fred because of the oils. A dollar in the dow is worth 8 points. There has been talk of taking some of the low dollar stocks out of the dow and putting in something like GOOG or AAPL. This would give the index some points to lose and it would lower the amount of points per dollar because there would be dollars added to the index. (the dow is very simple to figure on a daily basis, but you have to sum up the stocks and find the divisor. When they change the index, they divide the new sum by the closing price to get the new divisor). If they did this, GOOG could lose 200 or 300 points and the oils which are now worth in the range of 1000 points might become worth more in the range of 600 or 700. I am having a hard time getting XOM down to under 20 or so under any circumstances i can see now. It appears that Obama might destroy the private medical business in the US so there ae quite a few that could go in the crapper. In any case, to get to 1000, the Dow has to sum down to about 125, which is an averge of $4 per stock at present. Without something to raise the divisor, I can't figure out how that occurs.

[MisterB]

What happened with the Stimulus Bill was truly sad! It didn’t get money into people’s hands – it just was a spending spree for all the projects that the democrats always wanted to spend money on. Most of the money is NOT immediate spending it’s spending in future months and years. There is also only a modest amount of money for true infrastructure spending on roads etc. I’m of the minority viewpoint that last year’s Stimulus checks did actually help. From a psychological point of view immediate rebate checks would have helped change the tone. Even if some of this money would have been saved or used to reduce credit card balances that still would have helped the mood of the populous. A rebate for a car purchase would also have helped.

The tax announced tax increases are weird in that they will take place starting 22 months from now. Mr. O. is freaking out and discouraging the investor class and the upper-income and California home buyers WITHOUT actually raising any money for nearly 2 years! Apparently, the idea is to show that he is fiscally responsible to the treasury market buyers.

An alternate thought is that Mr. O. and his supporters actively want to PUNISH the upper income middle class. (The truly wealthy like Mr. Gates, Mr. Buffett and Mr. Soros don’t care if their deductions are capped – I doubt if any of these gentlemen have a home mortgage.) If your income is under $250,000 of income you get the various tax breaks and tax credits; if you are over $250,000 you get NO breaks and pay more taxes. That’s two America’s!

[John]

EARNINGS STATS: BY THE NUMBERS

As of Friday, February 27th:

The blended earnings growth rate for the S&P 500 for Q1 2009,
combining actual numbers for companies that have reported, and
estimates for companies yet to report, fell to -31.4% from -30.6%, due
in part to downward revisions in GM and Goodyear Tire & Rubber.At the
start of the quarter, the estimated growth rate for Q1 was -12.5%.
(Data provided by Thomson Reuters)
http://www.cnbc.com/id/15839135/

Date 1Q Earnings growth estimate as of that date
------- -------------------------------------------
Jan 1: -12.5% Start of quarter
Feb 20: -30.6%
Feb 27: -31.4%


It looks like the first quarter estimates have started much lower than
for previous quarters, but they're falling much deeper.

John

[John]

> Next, the Comstock stuff is really interesting and lends a lot of
> credence to what I have been saying all along, target under 3000
> on the Dow and 300 on the SPX. I don't believe we get of easier
> than Japan.

The thing that led me to the Comstock funds web site in the first
place was an interview I heard a couple of weeks ago with Charles
Minter, Director & Co-Portfolio Manager, Comstock Partners. I
transcribed a portion of the interview, but never posted it before.

> We really believe that we cannot be using government intervention
> in amy manner -- whether it's the banks, whether it's the
> automobile companies, whether it's virtually anything -- the
> housing market, especially.

> The housing market is so large right now - it was $21 trillion.
> It's now around $17 trillion. We really can't see how it's
> possible to stop a $17 trillion market from reaching its fair
> value by intervening for $75 billion or $150 billion.

> [Matt: Which banks do you think will survive this crisis?]

> Well, JP Morgan will survive it. Wells Fargo could. Two that
> are shaky right now are Citigroup and BankAmerica.

> [Bloomberg anchor Matt Miller: Discuss earnings]

> We think it's just insane what Wall Street are looking at, and
> looking at operating earnings.

> It just makes no sense. Operating earnings exclude writeoffs.

> The only way you get people coming on the air and talking about
> the market being fairly valued, or undervalued, or really cheap,
> is to look at operating earnings, which only came into existence
> in the late 1980s, and became more and more popular as everybody
> on Wall Street needed to use them, especially during the financial
> mania of the late 1990s, in order to justify the prices they were
> paying for the S&P 500.

> They should have been using reported earnings, which are GAAP
> earnings, and we have a history of reported earnings going back
> for 90 years. We have no history of operating earnings.

> [Miller: The problem is, Charlie, that if you look at reported
> earnings, expectations for this year on the S&P are about $35,
> right? And if you look at it that way, the P/E ratio begins to
> look at little bit more insane.]

> Right. Essentially we've been keeping track at Comstock - you go
> into the web site of S&P consistently throughout the year. We
> write down exactly what those earnings estimates are virtually
> every week.

> They've come down very, very sharply this year.

> For example, the operating earnigns came from $112 early in the
> year to approximately $68 now. Those are estimated earnings for
> 2009.

> 2009 reported earnings - they started at $73, and are now at $32.
> And they only earned $28 in 2008.

> [Miller: $32 means a P/E of 24. What do you think is more
> realistic right now? I mean, would you rather see it come down to
> 12? Because it's a huge drop for the S&P you're implying.]

> Really what we're saying, Matt, is we started a secular bear
> market in the year 2000. We believe before this secular bear
> market ends, we will reach trough levels on the operating earnings
> for the S&P 500 and for reported earnings. Definitely for
> reported earnings.

> And with reported earnings at $32, we're going to have to get down
> to essentially 320 on the S&P.

> Now what we're trying to do at Comstock is give the bulls the
> benefit of the doubt, by essentially using a trend line earnings,
> or smoothing those earnings. With those smoothed earnings, we
> come up with approximately $60. $60 at 10 times $60 is still 600,
> and that's the best case we can come up with.

> Miller: OK, that's Charlie Minter of Comstock partners, looking
> for 600 on the S&P.

There's a lot of really interesting stuff in this interview.

First, he points out a $21 trillion housing market is not going to be
affected much by a bailout of several hundred billion dollars, and
that's certainly true.

This is why I always tell people to focus on the top-level
securitization, not the details at the bottom. All the Washington
officials, even including Ben Bernanke, talk about solving some
particular point problem -- such as saving a bank or building a
bridge.

When you look at the entire problem from the top down -- the $1
quadrillion in credit derivatives -- you realize how hopeless the
problem is. We've already seem many structured securities fall in
value by 70-80% from their notional value as the credit bubble leaks.
If the $1 quadrillion in credit derivatives fall by only 5%, then
that's $50 trillion in losses. There's no bailout or stimulus that
can even make a dent in $50 trillion in losses.

People always ask me how I can be so absolutely certain that the
bottom hasn't been reached, or that there's much worse to come, and
when you look at the top-level aggregates, it's perfectly clear.

That's the point that Minter is making about the housing market.
Instead of focusing on various plans to stop foreclosures or lower
mortgage interest rates or provide mortgage money to banks or
whatever, just look at the size of the market -- $21 trillion -- and
you know immediately that nothing can possibly work.

Minter then went on to talk about reported earnings vs operating
earnings.

I've never really looked much at operating earnings, though I would
have if I'd realized how much they're used. I always thought that
the low estimates for valuations (in the 10-12 range) came from
looking at bloated "forward earnings," which is stupid enough. I
didn't realize that "experts" and "analysts" were using a completely
different form of fraud, a form of "trailing earnings" that ignore
writeoffs. It's just one more example of the extent of the fraud
that "analysts" have foisted on the public and on their clients.

It's also interesting to see the reaction of Matt Miller, the
Bloomberg anchor.

Miller didn't object to Minter's reasoning. He objected to what
Minter was saying because he didn't like the result. ("The problem is,
Charlie, that if you look at reported earnings, expectations for this
year on the S&P are about $35, right? And if you look at it that way,
the P/E ratio begins to look at little bit more insane.")

I'm very familiar with this kind of argument. When I talk about
what's coming, people almost never challenge the argument I'm making;
instead, they just say, in effect, "What you're saying must be wrong,
because the results are impossible." This is the essense of almost
every argument used against Generational Dynamics, and I've heard it
literally thousands of times.

Finally, at the end, Miller summarizes the interview by saying, "OK,
that's Charlie Minter of Comstock partners, looking for 600 on the
S&P."

Well, no he didn't. He actually predicted an S&P index of 320. But
here I have to blame Minter. He well knows, as I do, that people who
predict Dow 3000 or S&P 320 are going to be considered psychopaths,
and so Minter threw in a bunch of bullshit at the end with that
ridiculous remark about "smoothed earnings," whatever that means.

Even so, Miller immediately snapped up this remark, and completely
ignored the heart of Minter's previous argument.

Sincerely,

John

[tobyguy]

All the Washington officials, even including Ben Bernanke, talk about solving some
particular point problem -- such as saving a bank or building a
bridge.....
When you look at the entire problem from the top down -- the $1
quadrillion in credit derivatives -- you realize how hopeless the
problem is. We've already seem many structured securities fall in
value by 70-80% from their notional value as the credit bubble leaks.
If the $1 quadrillion in credit derivatives fall by only 5%, then
that's $50 trillion in losses. There's no bailout or stimulus that
can even make a dent in $50 trillion in losses.

I believe that is because all these people can do is try to delay things until confidence comes back (what else CAN they do!).
It was confidence that allowed things to get to this extreme in the first place.
It was confidence that was holding up this house of cards to begin with.
They are just praying it'll come back soon, before confidence (thus the market) gets worse (or panic).

People always ask me how I can be so absolutely certain that the
bottom hasn't been reached, or that there's much worse to come, and
when you look at the top-level aggregates, it's perfectly clear....

I'm very familiar with this kind of argument. When I talk about
what's coming, people almost never challenge the argument I'm making;
instead, they just say, in effect, "What you're saying must be wrong,
because the results are impossible." This is the essense of almost
every argument used against Generational Dynamics, and I've heard it
literally thousands of times.

What's another 3000-4000 DOW points when we've fallen over 7000 already?

I also find it amusing people look at lehmans as the tipping point (government letting Lehman fail). How rediculous. They have it backwards. Lehman's was a result of a lack of confidence and panic and NOT the other way around (where people think Lehman's is what started the panic).

Unfortunately Uncle Ben and the rest of the US administration is going to find out the hard way that you can't change people's confidence like that.
Interestingly enough, taking a look at Greenspans recent comments (last few years), he's even admitted as much (but what else can they do!).

You got to try to do something right!?

Tobyguy