Financial topics

[Gordo]

...so one would expect 3 years of a down market,

You can't tell how long it will take a market to bottom, it can drop to reasonable valuations in a month, or over 15 years. At least on a price to peak earnings valuation method, we are at valuation levels of 1931. As stated before, this was a horrible time to buy when you consider that stocks dropped precipitously until the '32 bottom, but you'd be seeing profits just one year beyond that bottom, so all in all NOT really a bad time to buy in the long term picture.

[John]

Dear Gordo,

> I know, yall think a multi-year, uninterrupted deflationary death
> spiral is imminent, after all, just look at the Great Depression
> period or Japan. Well this isn't '29-'32 and it isn't Japan. We
> are about to find out what a determined Fed and a willing
> government partner can accomplish when it comes to inflation in a
> fiat currency world (money backed by nothing). You don't know any
> better than I do what can be accomplished by this current dynamic
> duo, nor do you know if and when a key player may be replaced by
> someone who does not agree with the policies or practices of their
> predecessor.

> All I know is that treasuries have gone parabolic, which is what
> bubbles do before bursting:

> http://finance.yahoo.com/q/bc?s=TLT&t=6 ... z=m&q=l&c=

> Perhaps this change of course will be very brief, as in 6-8
> months. Maybe the 10-year yield hits 7-8% before plunging to new
> lows all in the same year (wouldn't that be fascinating?) as
> people realize government intervention is only a temporary
> stimulus not likely to help much. Likewise, a 20% rise in the
> stock market would basically complete a 40% gain from the bottom
> which matches the gain from the '29 crash that was of similar
> proportion to the 2008 crash. After that new lows could follow in
> the same year.

I would agree with you completely if stocks weren't also in a huge
bubble. Stocks have been at bubble levels since 1995, and that
bubble has to burst just as the treasuries bubble has to burst.

And the situation IS much worse than in 1929 because the stock market
bubble is a couple of orders of magnitude bigger.

I keep trying to imagine what the scenario will be when both the
treasuries and stock market bubbles burst, possibly simultaneously,
and I can't think of any scenario that isn't a catastrophe.

I realize that I'm the gloomiest person in the world, but I just
can't see how this ends in any way but total disaster.

Sincerely,

John

[Gordo]

I'm thinking treasury bubble bursts first (imminent) while stocks go up for a short while, then it reverses (possibly in second half of 2009) with stocks tanking again - but treasuries are a wild card at that point - I think with stocks tanking, treasury yields will fall again, possibly back down to where they are now (so bubble bursts then re-inflates) but its certainly possible that both fall at the same time, which would be just the sort of unexpected thing that can happen in a crazy period like the one we are in.

[freddyv]

...so one would expect 3 years of a down market,

You can't tell how long it will take a market to bottom, it can drop to reasonable valuations in a month, or over 15 years. At least on a price to peak earnings valuation method, we are at valuation levels of 1931. As stated before, this was a horrible time to buy when you consider that stocks dropped precipitously until the '32 bottom, but you'd be seeing profits just one year beyond that bottom, so all in all NOT really a bad time to buy in the long term picture.

Actually if you had bought and held as late as mid-1931 (I believe we are not nearly that far along in our current bear market) you would have to wait until about 1946 for the market to rise to and stay above that level. Buying at 1931 levels would have been a terrible time to invest in the stock market. Waiting until more of the excess was rung out and the economy had begun to stabilize would have worked much better.

Peak earnings is an excellent tool but an excellent tool in the hands of an amateur will still turn out poor work. Peak earnings, applied at the beginning of a prolonged economic downturn, would not only be useless but would be harmful.

William Hester of Hussman says this:
"...price to peak earnings is an inherently optimistic ratio often using an earnings figure from recently sunnier days - history tells us it's a fair assumption. The market's earnings power has always returned to previous levels."

Using peak earnings in almost ALL downturns, especially in a long term bull market, would be beneficial. The one time you would not want to apply this formula is at the start of a severe and prolonged economic downturn...such as we are facing now, IMO.

--Fred

[John]

Dear Fred,

> Peak earnings is an excellent tool but an excellent tool in the
> hands of an amateur will still turn out poor work. Peak earnings,
> applied at the beginning of a prolonged economic downturn, would
> not only be useless but would be harmful.

> William Hester of Hussman says this: "...price to peak earnings is
> an inherently optimistic ratio often using an earnings figure from
> recently sunnier days - history tells us it's a fair assumption.
> The market's earnings power has always returned to previous
> levels."

> Using peak earnings in almost ALL downturns, especially in a long
> term bull market, would be beneficial. The one time you would not
> want to apply this formula is at the start of a severe and
> prolonged economic downturn...such as we are facing now, IMO.

Everything you say here is true, but as you point out, using "peak
earnings" incorrectly can cause problems. I would add that "peak
earnings," like "forward earnings," is just one more tool in the hands
of analysts and brokers to defraud the public.

First, here's the latest chart of fourth quarter earnings estimates,
based on figures from CNBC earnings central, with data provided by
Thomson Reuters:


Date 4Q Earnings growth estimate as of that date
------- -------------------------------------------
Feb 6: 50.0%
Jul 1: 59.3% Start of previous (3rd) quarter
Oct 1: 46.7% Start of quarter
Dec 5: 10.0%
Dec 12: 5.9%
Dec 19: 0.5%
Dec 26: -0.9%


This is the fifth quarter in a row that we've seen this pattern --
huge, wildly optimistic earnings growth estimates at the beginning of
the quarter, turning into 20% losses as actual earnings come in.

My question is this: How many quarters does this have to go on the
same way before we can legitimately accuse Thomson Reuters of fraud?

I mean, how stupid -- or how crooked -- do they have to be to repeat
this same mistake, quarter after quarter? When do we have the right
to believe that they're fraudulently boosting earnings estimates, in
order to collect fat commission and fee checks?

This isn't exactly an off-the-wall accusation, something that's so
shocking that we can be sure no one ever would ever do it.

That's what the ratings agencies did (Moody's, S&P, Fitch). That's
what the "monoline" bond insurance agencies did (Ambac, MBIA, FGIC,
and ACA).

Fraud has been hugely rampant in the last five years. In fact, the
Bernie Madoff scandal spreads farther and wider every day.

So why would it even be the slightest bit strange to think that
Thomson Reuters might be guilty of fraud as well?

And after five quarters of "Oops, we made a mistake," in exactly the
same way, it's really pretty obvious that they're doing what Moody's
did -- publishing phony statistics, in order to make fat fees and
commissions by defrauding the public.

This past Sunday, CNN's media review show Reliable Sources, hosted by
Howard Kurtz, discussed the causes of the financial crisis, and how
the media missed the story:

> KURTZ: Joining us now to examine what the media did wrong and
> right this past year, Jessica Yellin, national political
> correspondent for CNN; Amy Holmes, political contributor for CNN;
> Bill Press, host of "The Bill Press Show" on Sirius Satellite
> Radio; and Terry Smith, former media correspondent for PBS's "News
> Hour."

> ...

> URTZ: Thanks, Whoopi. When we come back, with the financial
> crisis still dominating the news, are the media doing a decent job
> of unraveling what went wrong? And how did they miss the warning
> signs over the years?

> (COMMERCIAL BREAK)

> KURTZ: Now that we're in a full-fledged recession, the newspapers
> have been filled with stories about what went wrong. But with
> $350 billion in federal bailout funds having been funneled to the
> big Wall Street banks, AIG, Fannie Mae, Freddie Mac, Citigroup,
> General Motors and Chrysler, the question is whether this
> coverage is too late and too little.

> (BEGIN VIDEOTAPE)

> KURTZ: Bill Press, we're starting to see these long, detailed
> accounts of failures at the SEC, most recently in investigating
> Bernard Madoff and his $50 billion Ponzi scheme. They didn't find
> anything wrong.

> Where were all these stories before?

> SMITH: I'd like to know the same thing. Look, two years ago, the
> SEC got some reports about Madoff, and this was kind of phony
> baloney. And they investigated it and they gave him a clean bill
> of health.

> Now, somebody has got to be covering the SEC, I think. I mean, I
> don't know those people, but somebody should have been there
> saying, wait a minute, what's going on?

> There were no stories about it.

> KURTZ: There were some stories about risks at Fannie Mae and
> subprime loan risks and all that, some of which dated back to the
> Clinton administration. But these stories rarely made page one or
> the network newscasts. They always seemed to be back in the
> business section.

> HOLMES: But isn't the news always following the latest crisis? So
> they didn't cover it until it was a crisis.

> KURTZ: Right.

> HOLMES: And would we have paid attention if they gave us, like,
> the warning signs and the red flags...

> (CROSSTALK)

> KURTZ: That's an interesting question. We didn't get a chance to
> find out.

> PRESS: But Jessica mentioned Walter Reed. You know, The Post did
> a great job. Nobody else would have know about this story without
> "The Washington Post." The Post should have been on the Wall
> Street meltdown before we found out about it. KURTZ: And the
> "Wall Street Journal" and the "New York Times"...

> SMITH: They should have looked at the housing bubble and said
> this is out of control, and really drilled down and dug down and
> found out...

> KURTZ: There were a lot of stories about how housing prices
> couldn't continue to rise at that rate forever, but they always
> focused on the people who owned the houses. What very rarely was
> looked at was that the banks who were making the loans would run
> into trouble.

> But let me ask you, Terry, when things are going well, everybody
> is making their money, everybody is buying homes, everyone is
> selling homes, all the profits are piling up, are journalists
> reluctant a bit to be the skunk at the party?

> SMITH: I think they tend to go to sleep. In other words, they'll
> ride the good times along with everybody else, and they tend to
> not dig as deeply as they should, so that's a big problem. And it
> certainly occurred in this case. This is a D minus at best.

> YELLIN: And right now, how about all this Treasury money?

> PRESS: Thank you.

> YELLIN: The funds that went out to these banks? We can't find out
> what they're using it for, they're not going to report, and
> there's no accountability.

> PRESS: There is no follow-up, which is -- I think they're going
> to sleep now on the so-called TARP. We've put out $350 billion.
> We don't know where that money went. We don't know what they did
> with it.

> KURTZ: When you get into derivatives and housing policy and
> banking regulation, I think TV has trouble dealing with that kind
> of complexity.

> YELLIN: Well, it's too detailed to make it interesting sometimes.
> And until you have a personal story, somebody who has had a
> personal loss, it doesn't connect to a viewer.

> HOLMES: They need that TARP money and for journalists to say the
> Bridge to Nowhere. Like, they need that metaphor that everybody
> understands and get into the details...

> SMITH: Bill has raised a really good point. Why aren't right now,
> news organizations saying, why is all this money not making a
> difference? Why is it not turning the economy around? Why is it
> not loosening credit? Those are good questions.

> PRESS: Here is what you need, I think. You need the personal
> stories.

> I was in New York last week, talked to a friend of a woman who --
> her husband invested $75 million with Bernard Madoff. She was fat
> on the land and the next day totally wiped out, like that.

> KURTZ: But part of the challenge of journalism you're saying is,
> you know, the numbers get so big that they almost become abstract
> and meaningless.

> HOLMES: What is a trillion dollars?

> KURTZ: Bring it down to the level of some person who invested
> their life savings...

> PRESS: And got totally wiped out. Yes. And there are tons of
> those stories out there.

> KURTZ: And I think there needs to be more coverage -- it sounds
> boring, federal regulatory agencies. But that's what's at the
> heart of this whole mess, and that's where I think in part many of
> us fell down on the job.

> HOLMES: I would agree with that, but I would also give journalists
> a little bit of a break, which is, are they supposed to be smarter
> than our own policymakers who didn't see it coming?.

> PRESS: Yes.

> HOLMES: When Hank Paulson who didn't see this coming?

> Yes?

> PRESS: I would hope so.

> HOLMES: I mean, they're reporting on the story as it happens.

> KURTZ: That's true. We don't have subpoena power, but we do have
> the power to ask questions.

> All right. Terry Smith, Amy Holmes, Jessica Yellin, Bill Press,
> thanks very much for joining us.

> Still to come, a former associate of Matt Drudge plans to stir
> things up in Hollywood. Is there room for a conservative Web
> site?

> (END VIDEOTAPE)

> http://transcripts.cnn.com/TRANSCRIPTS/ ... rs.01.html

So they're blaming financial reporters for not catching the story:
"They should have looked at the housing bubble and said this is out of
control, and really drilled down and dug down and found out..."

This is really hilarious, given how incompetent the financial
reporters were at WSJ, CNBC, and elsewhere. I was always calling
these people total morons on my web site, and now we have Reliable
Sources essentially agreeing with me, but without using the
clinically correct medical term, "total morons."

OK, that's all in the past. What about today?

Well today, we have exactly the same error in earnings estimates FOR
FIVE QUARTERS IN A ROW!!! Isn't it time for these for these total
morons to get smart and start "drilling down and digging down" to
find out exactly what's going on at Thomson Reuters? How much money
are they making for putting out these phony estimates? What are the
conflicts of interest?

So that brings us back to "peak earnings."

When you use peak earnings to compute price/earnings ratios, the
result is basically suspect, because there's no historical data on
which to base a comparison.

In the case of P/E1 (price divided by one-year trailing earnings),
this historical average is 14.

But what's the historical average for P/Epeak? I don't know. I'd
guess around 11 or 12.

What's the historical average for P/Eforward, where "forward
earnings" are the bloated analyst estimates for the year ahead? I'd
guess around 8-10.

So the fraudulent analyst or broker would say, "The P/E ratio for
this stock is 13, which is below the historical average of 14, so buy
this stock and pay me a commission."

In fact, the broker is using peak or forward earnings, so the stock
is way overpriced.

Using one year trailing earnings, the S&P 500 P/E1 average is
currently at 18 -- see the chart at the bottom of the Generational
Dynamics web site home page. And P/E1 has been way above average
since 1995. By the Law of Mean Reversion, P/E1 has to fall to 5 or
below for 10-15 years.

Using forward earnings for anything is a complete fraud. I can't see
any purpose for it at all.

Using peak earnings might have a purpose. The problem today is that
peak earnings were earned in the huge 2003-2006 bubble period. If
you want to use peak earnings as one measure to compare the value of
one overpriced stock to another overpriced stock, then peak earnings
might be useful, but not for much else.

Sincerely,

John

[freddyv]

...
Using peak earnings might have a purpose. The problem today is that
peak earnings were earned in the huge 2003-2006 bubble period.
....

Yes, a period when valuations were not simply high based on the historical average but the earnings themselves were too often not real earnings. The financials are the best example of this; they will NEVER (well, not for another 70 years or so) get back to making money the way they did in the past decade and that money was spread all throughout the economy. This is what deflation is all about and some people just don't get that those eanrings are not coming back and we will either have a tremendous crash or we will continue on the decline for years and even decades. Either way, the party is over.

John, while you get mad at these "morons" I consider them tools to tell me when the investing wind is changing. As long as Larry Kudlow keeps pulling statistics out of his ass that nobody has ever used before to prove that the economy is strong and ready to rebound I know that we have yet to reach a bottom.

The fact that Cramer is now the king of dividend investing tells me that we are making progress, however.

--Fred

[freddyv]

Signs we have a long way to go and a few lessons yet to learn:

"GM will also offer low-interest loans on dozens of other models in an attempt to drum up year-end sales, will offer loans to consumers with lower credit ratings."

"The Treasury has committed almost $9B more than the $350B of TARP funds it has been authorized to use."

"The Federal Reserve took an aggressive step yesterday to drive down mortgage costs, setting itself a goal to buy $500B in mortgage-backed securities by mid-2009 under a program it announced last month."

"AIG (AIG) wants permission to change some of the terms of its $60B government loan, according to sources close to the situation. The troubled insurer wants the Federal Reserve to raise the limit for non-cash assets that AIG can submit as part of its loan repayment. The changes, which would allow AIG to accept more stock and other non-cash payments for the assets it's selling, could help attract more bidders and higher prices. Under the current terms, at least 90% of the loan has to be repaid in cash."

"Home prices fell an astounding 18.0% in October from a year ago (vs. -17.8% consensus), the largest drop since the S&P/Case-Shiller Index was created in 2000 and the 22nd straight monthly decline. Prices fell 2.2% from the previous month. "

"The 2008 recession, widespread heavy discounting and adverse pre-holiday weather all coalesced to produce the weakest holiday season since at least 1970."

All of the preceeding quotes are from a single web page at
http://seekingalpha.com/article/112778- ... -know-news

--Fred

[freddyv]

An outstanding article titled: BEST OF BILL BUCKLER
http://www.investmentrarities.com/thebestofbb.html

This is one of the best, most readable explanations I have seen of what is wrong with our financial system at this time in history.

Here are some quotes to get you onterested:

"The only valid economic definition of credit is: Present goods for future goods."
...
Capitalism is about capital, pure and simple. It is not about consumption. That is what America forgot.

Now, the US is sliding into a fast steepening economic recession which, due to the enormous deflation in the US financial system, shows all the signs of turning into a full-scale deep deflationary depression.
...
The Disturbing Element - Credit Without Production:

A disturbing element can creep into the free market if there are people who can show up with valid means of monetary payment which they have borrowed. For a while, such people can acquire new additional economic goods beyond what they have produced. To the producers in the market, this process can and does make it look as if the market is improving if a lot of people show up to buy with money they have borrowed. In fact, of course, no more economic goods have been produced than before but the demand for them has certainly increased.
...
In his intentionally muddled treatise published in 1936, the main claim to intellectual fame of Lord Keynes was the assertion that he had overturned Say's law of markets. He did no such thing. He merely ridiculed Say's law with aspersions and wit. He never laid a glove on it directly. Then, he walked away.
...
...The final result of all this has been a worldwide stampede into the ONLY financial asset left that most people still think cannot fail. And that is, of course, government debt paper. Consider this December 18 quote from one of the primary dealers in Treasury debt paper: "Nobody is comfortable owning anything but Treasuries right now. If you're looking for something in history to compare this to, there's nothing."
...
As the year comes to a close, we have literally reached the point of no return. There is no return on Treasury debt paper. There is no return on official US central bank interest rates. There is nowhere to go but up for Treasury yields and nowhere to go but DOWN for the US Dollar. The Dollar has started on that road already. Treasury yields are sure to follow."


Once again I hope he is wrong but my strategy stays the same: short the market.

I say this mainly because all roads lead there; inflation or deflation are both bad for the market, at least in the near-term, and just about any scenario we can imagine that is bad will cause the market to go lower; it is the one common denominator, as far as I am concerned; the market will go down and it will go down significantly.

Also, by the time I came to the end of this article I had come to one other conclusion: our government will default on its debts, there seems to be no other way except for some sort of massive devaluation/hyperinflation sort of thing that I really can't even imagine.

Now it's true that I may end up dead broke with all the rest of you, standing in a bread line and fighting dogs for scraps, telling people about how I was a paper billionaire for about ten seconds, but at least I saw it coming and got to watch my demise instead of just sleeping through it.


Oh, btw, HAPPY NEW YEAR!
--Fred

[The Grey Badger]

The Gods of the Copybook Headings
Rudyard Kipling, 1919



AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.

We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.

With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: "Stick to the Devil you know."

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: "The Wages of Sin is Death."

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

[JimZ]

WHAT IF THE TREASURY BUBBLE BURSTS.

Ok, I admit it, I have a challenge understanding all the financial repercussions of this crisis. I have a fair amount of money in treasury funds (i.e. money market funds that invest in short term T bills). This is the first I have heard about a "Treasury Bubble" - I'd appreciate if someone could explain what the repercussions are. THANKS!!!!! And as a bonus question - what do you do if your $$ are in T-Bill funds because you have no idea WHAT is safe.