Financial topics

[browner55]

Hello John,

If you fit the last century's earnings into an exponential growth curve, and extrapolate that curve to 2009, then you get a trend value for about $41 for 2009. So in the absence of a bubble, you should not expect earnings per share to be above $41 for some time to come.

But it's a lot worse than that, since earnings have to fall much farther, to compensate for the bubble highs. This is the Law of Mean Reversion, which says that if a value is well above trend for many years, then it has to fall well below the trend value for roughly the same number of years. This is simple math, since it says that the average growth rate in the future will equal the average growth rate in the past.

Much more in the article:

http://www.generationaldynamics.com/cgi ... gd.e100102

As reported S&P 500 earnings came in around $17.48 for the first quarter of 2010. The estimate based on reporting so far for the second quarter of 2010:

http://www.bloomberg.com/news/2010-08-0 ... aug-4.html

Thanks, I am in agreement with this (for the most part). However, I would like to see someone dispute an argument in which corporate earnings can continue to grow (most likely d/t govt stimulus), but due to generational factors (newfound fears), companies hoard cash (which they are). Also d/t the same factors, not as much money is invested in the stock market. This would create a scenario in which earnings rise due to expense cuts, govt stimulus, but the stock market stagnates (instead of crashes). In this scenario, the PE could go down dramatically and "revert to the mean" without a full blown market crash.

[Higgenbotham]

Thanks, I am in agreement with this (for the most part). However, I would like to see someone dispute an argument in which corporate earnings can continue to grow (most likely d/t govt stimulus), but due to generational factors (newfound fears), companies hoard cash (which they are). Also d/t the same factors, not as much money is invested in the stock market. This would create a scenario in which earnings rise due to expense cuts, govt stimulus, but the stock market stagnates (instead of crashes). In this scenario, the PE could go down dramatically and "revert to the mean" without a full blown market crash.

One common argument I hear for the market stagnating and not crashing (paraphrasing it according to the analysis on this site):

Separate the S&P 500 earnings into two geographic components - earnings from the US and other countries that have reached their limits, and earnings from the newly developing BRIC countries, etc. The earnings from the first category will compress as the law of mean reversion would indicate. The earnings from the second category are on a different growth trajectory, reached bottom in 2008 and will continue to expand from that low point. In my opinion, BRIC can't grow near fast enough to compensate, especially in the face of a slowing G8 or whatever it would be.

I'll take a pass on continuing to argue that the government is out of stimulus tricks. For one, I was premature in arguing that point last August, which would mean even if the April 26 high in the market holds, I was 8 months too early (an eternity if you are short an index, which I was and still am). Second, I've already made several more comments to that effect lately (around the time the European crisis hit, not so much this week). If you want to take any of the comments I've made to that effect and chop them up, I'll try to respond.

[aeden]

"companies hoard cash (which they are)."

No, they are raising cash "those who can" since this is a balance sheet recession. The Hill expect's more productivity from there diatribe to future earning's uttered today from the treasury. Many have watched the end of the analog age and the maturity of the digital process controls. For some of us it has been many decades. The forums are littered observations from the inside out with those who are doing what it takes to provide product's that make the civilization function as you know it. You need to discern the Political Economy and the subsequent rent dissipation effect to the productive capital. What I am trying to convey is what is essential and what is taken from the productive capital pool of formation. These ratio's tell the story and Washington will be late as always about the productivity gains they spin into fiscal projections to wit. Also as posted the debt aggragate means stagnation fueled with inflation given commodity prices seen to deflate to current spot ratio's. This is expected for now
I am amazed at the level of discorse in the forum's and it posit's hope the word will spread to conditional realities. John's analysis is fundamentally correct
and the Political intellegencia is missing the point to projection analysis based on flawed logic the the current aggragate condition.
http://mises.org/etexts/hayekintellectuals.pdf Waste is the issue in time of the advance of innovation provided. I will distill this only to the break down
of communication as a means to a end to control.

Meanwhile: Labor Department said first-time claims for unemployment benefits rose unexpectedly last week.
Not to me. http://generationaldynamics.com/forum/v ... 2680#p5874
Reference: The market does not favor big business or even business in general; it favors consumers. By their choices in the marketplace, consumers decide whether a business can get big, stay big, or stay in business at all. Consumers are sovereign in a market economy: their spending determines what it produces; their saving determines how fast it grows. The choices of consumers also determine indirectly the wage rates of workers.

From JPMorgan:
The assumption that the Bureau of Economic Analysis had made regarding factory inventories in their initial estimate for Q2 GDP was a bit off the mark, and it now appears that growth last quarter was closer to 1.7%, rather than the 2.4% reported last Friday. (Of this downward revision, 0.1%-point came in yesterday's construction report). Inventories at manufacturers of nondurable goods decreased around $4 billion in June, rather than increasing $1 billion as BEA had assumed. As a result, it now appears economy-wide nonfarm inventories increased at a $55 billion annual rate last quarter, and stcokbuilding contributed 0.5%-point to GDP growth, rather than the 1.1%-point initially reported. With the implied revisions, second quarter growth is now looking especially soft. On the brighter side, the prospect of a big inventory overhang weighing on third quarter production -- which loomed large in the initial estimate -- now appears less threatening.

http://generationaldynamics.com/forum/v ... 2140#p4361

As we are reminded by Mises
It is characteristic of current political thinking to welcome every suggestion which aims at enlarging the influence of government. Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes. If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more and more, until finally it disappears completely. The most serious dangers for American freedom and the American way of life do not come from without. What is needed to prevent any further credit expansion is to place the banking business under the general rules of commercial and civil laws compelling every individual and firm to fulfill all obligations in full compliance with the terms of the contract. If you have to convince a group of people who are not directly dependent on a solution of a problem, you will never succeed. Only to bureaucrats can the idea occur that establishing new offices, promulgating new decrees, and increasing the number of government employees alone can be described as positive and beneficial measures. The issue is always the same: the government or the market. There is no third solution.
We have watched this again and they never learn... Even us who have watched from Corporate for decades are stunned and also the social darwinism as they destroy themselves with pragmatic efficencys. They have no idea what is coming and think every one else will save there bent of mind top to bottum.

Geo Corporate Rent Dissapation alignments resets:
The structural factor is a shift in the composition of U.S. output in the coming years. The economic recovery commences in the fourth quarter of this year as expected and continues into 2010, some American households and businesses will doubt it even though various reliable economic reports will confirm it and keep an eye on the index of Leading Economic Indicators (LEI) also in addition to PMI.

Quote from a friend "what problem since DC Market is fine" This was last year all the numbers today tells the tale of lets say 2 city's. We know what we see and it is what it is. There is no single index used to calculate beta. We posted causation issues that the interest rate in New York has nothing to do with North Dakoto and the Liberal Keynesians always flatly ignore reality. Consumers are found and as a article earlier forwarded they are pushed around like vegtables on a plate.
There can be no recovery since we all know malinvestment must be cleared from the incompetant to competant individuals but this must press further to acountabilty.
Notes: Monday, Oct. 07, 1985
In 1932, with international trade in collapse, Franklin Roosevelt denounced Smoot-Hawley as ruinous. Hoover responded that Roosevelt would have Americans compete with "peasant and sweated labor" abroad. Then, as now, protectionism had a strong if superficial political appeal: by election eve, F.D.R. had backed down, assuring voters that he understood the need for tariffs. Protectionist politicking, however, could not save the Republicans in 1932. Smoot and Hawley joined Hoover in defeat. The Democrats dismantled the G.O.P.'s legislative handiwork with caution, using reciprocal trade agreements rather than across-the-board tariff reductions. The Smoot-Hawley approach was discredited. Sam Rayburn, House Democratic Speaker from 1940 until 1961, insisted that any party member who wanted to serve on the Ways and Means Committee had to support reciprocity, not protectionism.We shall see. Amos warned us. Nov 15, 2009

[Higgenbotham]

However, I would like to see someone dispute an argument in which corporate earnings can continue to grow (most likely d/t govt stimulus).

http://generationaldynamics.com/forum/v ... 2480#p5327
http://generationaldynamics.com/forum/v ... 2500#p5370

It's along these lines.

[jwfid]

Browner 55 and all,

I think I can explain why the S&P 500 p/e ratio is lower than earlier quarters. The issue has to do with my earlier comment about the suspension of "mark to market" when companies report their earnings (especially the banks). Q4 of 2008 was such an atrocious quarter that earnings for the S&P 500 were actually negative! However, just before Q1 earnings for 2009 were scheduled to report, the agency or commission that decides what parameters public companies have to report each quarter (I'm sorry I've lost all my links and time is limited for me, so I'm trying to go by memory)(I know it is not the SEC) allowed the suspension of mark to market and stray from GAAP. Now companies and especially banks can value assets that are difficult to price like real estate to practically whatever they want to. This is why Q1 2009 earnings were so much better. When Q4 of 2008 finally rolled out of the annual reported earnings this year, all of a sudden everyone's spreadsheet and graphs show dramatic improvement!

I'm sure John or others can repost a link to the S&P website that allows you to download an excel spreadsheet and you can see for yourself. I warned of this occurring last summer in this forum.

I would not be surprised, if reported earnings to GAAP standards were still in effect, that the true S&P 500 p/e ratio was still above 100.

Numbers don't mean crap anymore. Actually, I think they are worse than crap because the numbers lie and paint that smelly crap to look tasty and delicious.

Joe

[aeden]

http://jessescrossroadscafe.blogspot.co ... sachs.html

As you know so it will be.

[Higgenbotham]

http://jessescrossroadscafe.blogspot.co ... sachs.html

As you know so it will be.

We all know it. And I don't read Jesse and would doubt he reads this forum. But the words are the same.

Goldman Sachs is primarily a big hedge fund with a lot of political clout and an inside line with the Fed. They have a trading, hedge fund culture these days. It was not always like this. At one time a firm's reputation and their word was everything in a system founded on confidence. With a trading culture it's all about the bottom line, with profit as virtue, and deceit in the name of profit is no vice.

Base money can be multiplied 100 fold by a hedge fund and used to drive stock prices up or down. The algos don't care whether they are long or short. There's only one thing they care about and that's making money.

Quite a bit of that came with their change in status from a predatory trader to mainstream bank in name only, with a predator's instincts and reward system. And this multiplied their potentially negative impact and influence on the entire financial system.

The post Bretton Woods regime has become unstable. The "money" created could be divided into two classes: predatory (speculative) and capital used for legitimate business purposes. Predatory capital can be used to generate or even to deflate bubbles very quickly and it can also go into hiding. What we've seen post 1971 is an exponential increase in predatory capital. Oddly enough, where predatory capital chooses to hide irrespective of fundamentals creates false assurances, which can lead to sudden crashes...In fact, the more money they make, the higher the ratio of predatory to legitimate capital. My guess is the net effect is to suck value out of the real economy. It can become self feeding.

This leads back to our points about profits. So-called profits that accrue due to predatory methods are only temporary and are not really profits, but overall losses to the system.

[aeden]

It's not that government has lacked information needed to fix the problem. It is institutionally incapable of bringing about the desired result, since the principles of profit and loss, private property and contract, enterprise and entrepreneurship, do not exist in government. Any Government operates with an eye to its own short-term survival, and those of its connected interest groups, and nothing else.

Basil Moore 1983, “Unpacking the post Keynesian black box: bank lending and the money supply”, Journal of Post Keynesian Economics 1983, Vol. 4 pp. 537-556; here Moore was quoting a Federal Reserve economist from a 1969 conference in which the endogeneity of the money supply was being debated.
“In the real world, banks extend credit, creating deposits in the process, and look for reserves later”.

We see who paid for that.

Their empirical conclusion was just the opposite: rather than fiat money being created first and credit money following with a lag, the sequence was reversed: credit money was created first, and fiat money was then created about a year later: Having failed to understand the mechanism of money creation in a credit money world, and failed to understand how that mechanism goes into reverse during a financial crisis, neoclassical economics may end up doing what by accident what Marx failed to achieve by deliberate action, and bring capitalism to its knees. Academic economics responded to these empirical challenges to its accepted theory in the time-honoured way: it ignored them.

The process continues market compression we mentioned....

mannfm11 » Thu Jul 23, 2009 9:57 pm "In that vein, he is somewhat right in that a bubble don't need an economy, only speculators who think they are getting rich out of the money they are putting into something. Bubbles always break. In accordance with John, W.D. Gann wrote in his book, making money out of commodities that every generation had its bull markets, but evidently only the generations John mentions and their cousins have bubbles because it takes a type of manipulation to have one. Values are never what prices say they are.

The point is we mentioned how dangerous it is in this climate. Namely winners and losers chosen. Higgy and myself and a few other I fail to mention also
clearly understand the climate. Clearly we must understand the disconnects and to be forthright the FED is finally catching on but the intent we mention is the decimation of working capital enumerated as malinvestment not to mention to servive debt which mann has a firm grip on in the forums. I wish to be clear on the threat we face since we focus on earning's based on complicated metric's. I can only interpolate a few to sense net working capital and see who gets red circled along the way by the Political Clubbing Beast. We can linger a few quarters more in my myopic opinion as the process unfolds we watch and thanks to your thought provoking facet's conclude it will be longer than all wish given the trends we see. What I mean is contraction and debt Implosions in true context to regional play foreign and domestic we see here on GD.

[aeden]

While it's true that savings rates are important, I think destructive actions by corporations are a trigger for many things. Savings drop because debt goes up and debt goes up because large (corporate) banks issue vast sums of credit for luxury expenses. As long as inflation is maintained the actual cost of repaying debt is low, and the game keeps being played. This is the reason why deflation is considered THE END OF THE WORLD AS WE KNOW IT! It is TEOTWAWKI as the world we have known for 35 years or more has included easy access to credit. Without that easy credit, there's much less money for consumer goods, and that translates directly to lower sales and a lower GDP.

Savings will increase in large part because with no access to credit, people who have to have a new car must save for it, and that makes them nearly 100% resistant to blandishments to add on extras they don't really need. The same goes for technical improvements that sound good but aren't necessary for functionality.

If the economy goes further into the crapper, and deflation denial is no longer possible, look for 3D entertainment to be quietly dropped as a non starter. At least the TV portion of it. A lot of other gimmickry will go the same route.

A refocus by the consumer on necessity will drop the GDP by a large percentage. Frantic attempts to force the consumer to spend would just move demand forward, thus dragging GDP down further in the future.

We either build infrastructure to lower costs and increase jobs, or we keep on sinking. And that's going to require higher taxes, and that is a totally different direction from the past.

WASHINGTON (AP) -- Consumer borrowing fell in June for a fifth straight month as households keep cutting back on credit card use.
Borrowing dropped at an annual rate of $1.3 billion in June, the Federal Reserve reported Friday. That marked the 16th drop in overall credit in the past 17 months.
Spot on OLD1953 as a class disappears as mentioned as the leveing process we noted early on on another note. In the long run the Consumer will decide
but the Political class will reason it away.

[aeden]

SDR Club never rest...
http://www.imf.org/external/np/pp/eng/2010/041310.pdf

Nominal anchor. As a stable store of value, bancor could serve as a global nominal
anchor. The variability of traded goods prices that is currently related to exchange
rate volatility would be reduced. By not being tied as tightly as the SDR to the
conditions of a particular economy or a group of economies, bancor could provide
greater monetary stability, especially since key central banks retain monetary control
under an SDR-based system and their respective economies and currencies would be
expected to face episodic stresses and volatility (such as higher inflation or deflation).

This leads back to our points about profits. So-called profits that accrue due to predatory methods are only temporary and are not really profits, but overall losses to the system.

http://www.debtdeflation.com/blogs/2010 ... sky-model/ Trends to note... Busy i will be...
http://www.debunkingeconomics.com/Paper ... ircuit.pdf

ZIRP has a problem and the Masters have a problem with those who think for themselves. The paper provides no limit whatsoever, and the politicians are the Masters. Any system, that would push the money from the vaults to a World paper currency and World central bank would heighten the moral hazard and lead to a global inflationary regime such as we've never seen. The road to serfdom of free people.

http://en.wikipedia.org/wiki/Bancor

http://www.govtrack.us/congress/billtex ... l=hc110-40

http://homepage.newschool.edu/het//profiles/keynes.htm

The worst evils which mankind has ever had to endure were inflicted by bad governments.
Ludwig von Mises
Meanwhile:
Until the Federal Reserve adopted an implicit inflation target in the 1990s, the money supply tended to rise more rapidly during business cycle expansions than during business cycle contractions. The rate of rise tended to fall before the peak in business and to increase before the trough. Prices rose during expansions and fell during contractions. This pattern is currently not observed. Growth rates of money aggregates tend to be moderate and stable, although the Federal Reserve, like most central banks, now ignores money aggregates in its framework and practice. A possibly unintended result of its success in controlling inflation is that money aggregates have no predictive power with respect to prices.

As you can see the established thought cannot account or wish to acount for the endogenity of the money supply.
http://carecon.org.uk/DPs/0513.pdf
Out of thin air until Volkner dried that topic up we survived if you are old enough to remember and note that cycle we endured to
arrest endogenity avarice.

About all I see is the refusal of the assumption of individual and collective rationality, about the crucial role assigned to institutions and about the
attention paid to the socio-political dimension. The individual in the broader context is absorbed to the State as property no more no less.
Keynes to distinguish between finance as a stock, and investment and savings as independent but related flows from the income that investment later
generated. “‘Finance’”, he emphatically declared, has nothing to do with saving. At the ‘financial’ stage of the proceedings no net
saving has taken place on anyone’s part, just as there has been no net investment. ‘Finance’ and ‘commitments to finance’ are mere credit and debit book entries, which allow entrepreneurs to go ahead with assurance. Unsustained trajectory's and the taxpayer as vegtables on a plate is all I can conclude to date.