Financial topics

[John]

-- Market summary, Monday morning, March 9, 2009

I was surprised to read a story on WSJ.com, apparently on page C1 of
today's printed paper, with the headline:

Dow 5000? A Bearish Bet That Looks Quite Possible
http://online.wsj.com/article/SB123654810850564723.html

It seems to me that if I were long in the stock market I would
immediately sell, in order to beat the rush to 5000.

Here's an interesting graph from the article:



What this shows is that even "operating earnings" are now crashing.
As we've been discussing, analysts and journalists have been using
operating earnings for years essentially as a tool to lie to the
public, including their clients.

But now even that lie is catching up with the journalists and
analysts.

As I've said several times in the web log, this continues to be a
time of "maximum danger" for investors, as a panic selloff may occur
at any time.

By the way, the big international finance story this morning is the
continued collapse of Japan's export economy.

Sincerely,

John

[John]

This morning on Bloomberg I heard the cute anchor say, "The S&P P/E
index is 10, and it's 11 with forward earnings."

Whenever I hear these numbers, I'm always ready to scream, "Where the
hell are you getting those numbers? Those numbers are completely
ridiculous!!"

I know that I keep saying things like this, but I just can't believe
what's going on. It's like I'm a character in a bad movie with a
script that could never happen in real life. But somehow the movie
never ends, but only keeps getting worse.

Sincerely,

John

[abs]

Here's what I think is a decent link to an investment firm who is actually reporting P/E ratios correctly and detailing out different index levels based on future earnings. I do not agree with the "peak to peak" methodology used in the report, but interesting nonetheless. Take a look and let me know what you think:

http://www.decisionpoint.com/TAC/SWENLIN.html

Andrew

[JLak]

Also, he's a progressive capitalist, not a socialist. Huge difference.

This is a matter of semantics. Elementary schools teach socialism as an autocracy, but Karl Marx never believed that was possible. "Progressive capitalism" in a market crisis period is right from the playbook of Das Kapital. More importantly, what's your point? That there is no hope for our generation because we've been fed bullshit by liberal loons our entire lives and were always kept too busy to read real books for our own edification?

Well, since Marx's theory of history will not likely come to fruition, I have to ask what is your point? The whole idea of progressivism is to maintain the capitalist system by moderating its negative effects. If a socialist revolution were a possibility, there would have to be a prior failure of capitalism. Socialism (as commonly conceived) is a 20th century ideology; it will not have any place in this one.

Although it seems a bit off-topic, I believe that this debate is of primary importance in the financial picture, even if it is more philosophical than financial. Financial markets are inherently forward-looking and the essential question is "Where are we headed?" Marx himself (not Lenin or Engels) is very clear about this: success of free markets results in cycles of state corruption, self-destruction, and 'progressive' social movements. This has been going on since the Renaissance, so it's nothing new except that he predicts that there will be a tipping point at which private industry can no longer bear the social cost. This is, I think, the real crisis. Are we there yet? Clearly the failure of several despotic states named for the theory have shown that Marx wasn't perfect in his prediction, but I would not dismiss the concept so lightly. The last depression ended with an ideological war that lasted for 50 years. At the end of it, autocratic 'socialism' failed, but capitalism got a lot more 'progressive' and Japan seems to have hit the tipping point. If this was just a 'correction' then a 1950's cpi-adjusted price for the Nikkei is a no-brainer investment in any environment, yet their generational crisis still wears on them. Now that it's our turn, let's consider 50 years from now, when I'm finally forced to withdraw my 401(k). What will it be worth? I ask again: Are we there yet?

[John]

"Massive dead cat bounce; trust it at your peril."

-- Bloomberg TV, quoting some European financial exec.

[agnostic]

Yesterday I read an interesting article on the bloomberg site:
http://www.bloomberg.com/apps/news?pid= ... 5hxhuxW61g

The article title makes you think the subject primarily will be Benjamin Graham, the father of "value investing". After an initial couple of paragraphs that mention his outlook [he is several decades deceased] in a favorable manner, the article veers off to an irritating jumble of P/E number comparisons that have no rhyme or reason. The first mention of where the S/P 500 might end up is in paragraph 2:

Graham measured equities against a decade of profits to smooth out distortions, a method that shows the S&P 500 trading at 13.2 times earnings, according to data compiled by Yale University Professor Robert Shiller. At the bottom of the three worst recessions since 1929, the average ratio fell below 10. To reach that level, the S&P 500 would sink another 27 percent.

The structure of the paragraph implies that the article writers are using 13.2 as the current S&P 500 P/E. If you drop that value by 27% you get (13.2*.73 =) 9.64, and indeed 9.64 is "below 10". So this paragraph is self-coherent.

The next 80% portion of the article is fairly decent, pointing out several big-name analysts who blew forecasts last year. In the close, the article switches back apparently to the independent "thoughts" of the writers:

In the previous three economic contractions since 1929 that lasted as long as the current one -- the Great Depression, the oil shock in 1973-1975 and the 1981-1982 recession -- the S&P 500 bottomed only after the index fell to 8.74 times profit on average, based on data compiled by Yale’s Shiller.

To match those levels, the S&P 500 would have to fall 21 percent to 537.95, based on analysts’ profit estimates for 2009 that strip out the impact of non-operating charges such as investment losses and writedowns.

All I can say is WOW. First of all, it is clear that whoever wrote this section has already forgotten what he/she wrote at the beginning .. now someone is talking about "fall 21 percent", whereas earlier it was "sink another 27 percent". Maybe Bloomberg's process involves two monkeys typing simultaneously in different parts of an "article", and the editors don't care if monkey A knows what monkey B typed.

Secondly, it does not bother the person writing at this stage that Shiller uses "past earnings" that are reported earnings, while the new calculation is "future earnings" based on operating earnings. Utter, total garbage.

[agnostic]

One more comment on the bloomberg article. About 4 paragraphs in, it quotes a Robin Griffiths who boldly uses the D-word:

“We are in a depression, therefore I would expect Graham’s and Shiller’s earnings ratios to get down to a single figure,” said Robin Griffiths, who first studied Graham in 1966 and helps oversee $15.5 billion at Cazenove Capital Management in London. “If it is a bad depression, it could take the S&P 500 to 400 or 500. It is clearly becoming better value as the market comes down, but it is nowhere as cheap as it can get.”

I have to say it is, in a small way, encouraging that Bloomberg will let any of their writers quote someone who uses the D-word. Perhaps this is a sign that the major financial websites/TV networks are moving away from "faith-based analysis". I suppose if Bloomberg ever gets around to using "when will the depression end?" in an article title -- that will be a sign the market is near the bottom.

[jwfid]

John quoted Bloomberg:

"Massive dead cat bounce; trust it at your peril."

-- Bloomberg TV, quoting some European financial exec.

I've been following a blog written by "Rangerider". Today, he adds two entries. The first concerns the news that Citibank actually made money the last couple of months. He disputes Citibanks news because the earnings are based on exotic non-GAAP accounting. The second entry is about the use of credit default swaps and the need to find out who AIG's counterparties were.

http://rangerider.blogspot.com/

Joe

[ojavaid]

http://www.charlierose.com/view/interview/10137

He mentions the word "generations" around the 22 minute mark. Of course, he still doesn't get it.

My visceral dislike and mistrust of him continues. He comes across as an Ivy League-class huckster.

[John]

> All I can say is WOW. First of all, it is clear that whoever wrote
> this section has already forgotten what he/she wrote at the
> beginning .. now someone is talking about "fall 21 percent",
> whereas earlier it was "sink another 27 percent". Maybe
> Bloomberg's process involves two monkeys typing simultaneously in
> different parts of an "article", and the editors don't care if
> monkey A knows what monkey B typed.

What I think is happening is that journalists and analysts are
melting down. For years they used "forward earnings" to compute
phony P/Es, but forward earnings are now crashing.

For years they used "operating earnings" to compute phony P/Es, but
operating earnings are now crashing.

What's happening is that journalists simply don't believe the
figures. If you take the current earnings, then you have to conclude
that the Dow is going to fall to the 3000 range. They simply don't
believe it. And so they're beginning to act like "monkeys," typing
anything they can to try to avoid what they can see with their own
eyes.

Denial has been taken to an even higher level.

Actually, I'm puzzled myself about how you compute the P/E these
days, with fourth quarter earnings negative. How do you compute P/E
with zero or negative earnings?

Sincerely,

John