Gallup's continuous polling is showing a continuing stagnation with a downward trend in discretionary consumer spending.
In this context, the buoyancy of many consumer stocks makes little sense. There's a difference between optimism and investing based on hope against the facts. When even a semi-free market has essentially no value placed on money for as long as two years, with Treasuries paying less than one dollar in total interest per $100 invested for two full years, then the profit outlook for reinvested profits, which is what helps drive the stock market, is poor.
Ultimately what matters in investing is value. Two standard ways to decide on the value of companies ties to their earnings and to the value of their assets. The accountant and investments expert Andrew Smithers, who loudly and contemporaneously called the stock market a bubble in 2000, has just provided another quarterly update of his estimate of the fair value of the S&P 500.
Please look carefully at the linked chart he provides on his website. His earnings-based (CAPE) estimate of fair value and his asset-based estimate (q) are in close agreement that the stock market is massively overvalued. Averaging fair value provided by CAPE with that provided by q gives a fair value of about 725. This in turn means that based on Friday's closing prices, the stock market can be estimated to be about 57% overvalued.
People point to ultra-low interest rates to justify high valuations. Unfortunately, that's circular reasoning. A dead economy is required to justify near-zero short-to-intermediate interest rates. If one carefully studies the Smithers chart, one can look at the 1930s and 1940s, as well as the early 1920s, to find times when there were low to very low interest rates and very low stock prices in relation both to earnings power and assets.
Not only are American common stocks very risky, their prices are increasingly disconnected from the experience of everyone I know and every poll or survey I see. No one I know sees business doing especially well or about to do well. The idea that stock traders know better is a dubious one. It's far more likely that ultra-cheap money is fueling the bull moves in all sorts of assets. The investor's task is to separate wheat from chaff, AIG from Chubb, Honda from GM, stocks vs. Treasuries circa 2000 and circa 2007.
The situation re stocks is reminiscent of the old punch line, "Who are you going to believe, me or your lying eyes?"
Another analogy is Wile E. Coyote suspended in midair.
Yet another analogy is a chart of the Japanese stock market since 1989. It looks like ours, about a decade out of phase. It shows several massive bull moves in a 21 year structural bear market.
This blog has argued for a long time that the best places for investment money were the trend-following ones of being long Treasuries (and implicitly other high quality bonds) and gold. Both of their structural bull markets remain intact. The gold bull is mildly extended short-term and is up about 30% year over year, which is a red flag. The 30 year Treasury is also extended, but the longer duration bonds represent the only part of the Treasury curve which I believe is not yet in bubble valuation.
The chronic weakness of consumer spending continues to support the Treasury bull, and the Fed's response is to print money, which then supports the gold bull. In that context, stocks (other than precious metals stocks) are an afterthought.
Someday the trends will change. Are they changing here and now?
I doubt it.
Copyright (C) Long Lake LLC 2010
Showing posts with label Q. Show all posts
Showing posts with label Q. Show all posts
Saturday, September 25, 2010
Thursday, April 1, 2010
The Fed Begins to Reveal the Extent of Its Malfeasance in re Bear Stearns
Bloomberg. com is running Fed Releases Details on Bear Stearns, AIG Portfolios. The key part of the article is:
“No one should have been surprised that it looks like the Bear and AIG portfolios are junk,” said Robert Eisenbeis, a former Atlanta Fed research director who is now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey.
What was suspected is now known. And the key man in the NY Fed purchase of this junk is quoted today as saying that it is "deeply unfair" that some financial institutions are coming out of this mess in such better shape as many individuals. Thanks, Tim. You've got quite the conscience.
Wall Street and government jointly engineered a housing and general credit boom/bubble, extended it with the subprime shenanigans and securitization thereof and wild and crazy corporate takeover action, and then per Michael Lewis' "The End" helped end the saga. Knowing all this, the former Nixon operative Henry "Hank" Paulson, was "persuaded" to accept the position of Secretary of the Treasury. The President then had plausible deniability. From this position Mr. Paulson worked hand in hand with supposedly independent Ben Bernanke and Timother Geithner to hand JPMorgan Chase the trophy of Bear Stearns on a platter. He also presumably worked hand in hand with the chiefs of Big Finance. Later, shortly after Barney Frank assured everyone that Fannie and Freddie were sound and an alleged housing fix legislation was passed in summer 2008, and Fannie and Freddie sold debt worldwide, all of a sudden they had to go into conservatorship. By not shutting them down, they became unending sources of commissions for stockbrokers. The same is true for AIG and even Citigroup.
The next phase of the looting involves the "surprise" failure Lehman. It was something out of a bestseller from the 1960's: "The Magus". At the end, the anti-hero realizes there is no god. He's on his own. So briefly, stockholders were panicked by the collapse of Lehman. The Fed God had stepped away! Goldman Sachs and the offspring of J. P. Morgan & Co., Morgan Stanley, became the only 2 survivors of the Big 5 investment banks, as the Fed bypassed normal procedure and converted them to bank holding companies on the spot. AIG was used a conduit to pass more newly-printed money to enrich various Big Finance institutions including foreign ones. And so on. All this of course was with the approval of candidate and then President-elect Obama. Thus the Geithner nomination despite the tax-fiddling revelations.
In a carefully planned set of operations, the favored large Big Finance traditional banks were each allowed (or commanded) to swallow one failing competitor. Wells Fargo got Wachovia; JPM got WaMu; BofA (in)famously got Merrill Lynch.
We learned that even money in the bank is of dubious value in a crisis, as the FDIC would have needed a bailout had Congress not pledged to do whatever it took to support it.
(We also learned once again that when pictures of the Depression make the front pages of Newsweek, it's getting near the bottom of the stock market.)
Anyway, unprecedented money-printed ensued. We are now reading about surging stock markets as economic growth accelerates. Since for every buyer there is a seller at the same price, all the indicators such as sentiment are of only mild value. Ultimately stocks and bonds are financial assets that have an unknowable value. How does an investor decide what to do in a world such as the above where the powers that be are in such control of macro matters and have so much more knowledge about what's really going on than you or I?
We always knew that Wall Street was never interested in anything but its own well-being, but we never knew how much on its side the Feds and the Fed were. Most Americans are effectively renters in their own homes and have minimal savings. Corporations and their chieftains are prospering in another "jobless recovery".
The debt:GDP ratio continues to climb even as households are tapped out, with government expanding its balance sheet to more than make up the difference.
With a left-of-center government, liberal economists rule the roost. Robert Shiller is calling for yet more government support for housing. The administration is doing more in that regard--at what cost?
The cost of government borrowing is at rock-bottom rates. An expanding state requires more taxes. We should look forward to a combination of rising business and personal taxes along with the effects of all the money-printing showing up as rising prices as the coincident economic indicators catch up with the forward-looking indicators that continue to be stable to rising. Yet as employment income and interest income lag, discount and deep discount stores look to stay strong. DLTR has sharply rising earning estimates and trades at about 14X current-year earnings.
Watson Pharma (WPI) has broken out to a multi-year stock price, has record earnings and a lowish valuation; as credit money flows more freely, takeover activity will pick up and unlike Teva, WPI is a bite-sized acquisition for many companies.
MCD fits the theme of financially strong companies with rising earnings estimates. Its dividend yield exceeds that of a 7-year Treasury and likely will rise substantially by 7 years from now. So it's a classic growth and income play.
Financial strategists who have gotten this bull move right, namely Barry Ritholtz and David Kotok, are on similar pages. They are thinking that most of the good news is out now and that S&P 500 1250-1300 represents an important target. It is 1169 now. Another 7% upward move will put Andrew Smithers' estimate of fair value as judged both by q and cyclically-adjusted P/E (CAPE) at around 60% above fair value. Going back to 1900, this was perhaps seen in 1929. It was only seen in about 1997 and then through 2001 and then not again according to his chart, though CAPE hung around the 60% overvalued mark through much of the aughties, q was a bit lower.
Putting the two themes together, the public has no idea of what anything is really worth or what it will do. We can say that we are already close to 1929 levels of stock overvaluation, which was only exceeded in the past 110 years by the millenial, post-Cold War fervor of the late 1990s. An economy cannot function on rising asset prices. Eventually we can hope for, or even expect, new technologies such as economical green energy-related ones to help improve our lives fundamentally. But those companies that will implement that will likely be ones you have never heard of and that will eat the lunch of some seemingly safe big names that are now in the indices.
There is no easy solution. Remembering the lessons of the historical record and the recent past are not certain to be useful in predicting the future, but at the least they are certain to be useful in understanding it as history unfolds.
As the Fed apparently moves toward a world in which depository institutions need NO reserves, there is every reason to think that the yang to that yin, gold, will at least retain its current relative value to other financial assets. The thing about gold is that one has to earn it, or at least steal it. It's either present or it is not. Whereas, electronically-created "money" with a corrupt Federal Reserve Bank of New York in charge of said creation and distribution, acting on behalf of its corporate owners such as JPM, is not a glittering example of responsible wealth creation or accumulation.
The speculation here is that gold prices will fall less than stocks if stocks fall and that they will more or less match or exceed the performance of stocks in a renewed up-move for stocks.
Copyright (C) Long Lake LLC 2010
“No one should have been surprised that it looks like the Bear and AIG portfolios are junk,” said Robert Eisenbeis, a former Atlanta Fed research director who is now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey.
What was suspected is now known. And the key man in the NY Fed purchase of this junk is quoted today as saying that it is "deeply unfair" that some financial institutions are coming out of this mess in such better shape as many individuals. Thanks, Tim. You've got quite the conscience.
Wall Street and government jointly engineered a housing and general credit boom/bubble, extended it with the subprime shenanigans and securitization thereof and wild and crazy corporate takeover action, and then per Michael Lewis' "The End" helped end the saga. Knowing all this, the former Nixon operative Henry "Hank" Paulson, was "persuaded" to accept the position of Secretary of the Treasury. The President then had plausible deniability. From this position Mr. Paulson worked hand in hand with supposedly independent Ben Bernanke and Timother Geithner to hand JPMorgan Chase the trophy of Bear Stearns on a platter. He also presumably worked hand in hand with the chiefs of Big Finance. Later, shortly after Barney Frank assured everyone that Fannie and Freddie were sound and an alleged housing fix legislation was passed in summer 2008, and Fannie and Freddie sold debt worldwide, all of a sudden they had to go into conservatorship. By not shutting them down, they became unending sources of commissions for stockbrokers. The same is true for AIG and even Citigroup.
The next phase of the looting involves the "surprise" failure Lehman. It was something out of a bestseller from the 1960's: "The Magus". At the end, the anti-hero realizes there is no god. He's on his own. So briefly, stockholders were panicked by the collapse of Lehman. The Fed God had stepped away! Goldman Sachs and the offspring of J. P. Morgan & Co., Morgan Stanley, became the only 2 survivors of the Big 5 investment banks, as the Fed bypassed normal procedure and converted them to bank holding companies on the spot. AIG was used a conduit to pass more newly-printed money to enrich various Big Finance institutions including foreign ones. And so on. All this of course was with the approval of candidate and then President-elect Obama. Thus the Geithner nomination despite the tax-fiddling revelations.
In a carefully planned set of operations, the favored large Big Finance traditional banks were each allowed (or commanded) to swallow one failing competitor. Wells Fargo got Wachovia; JPM got WaMu; BofA (in)famously got Merrill Lynch.
We learned that even money in the bank is of dubious value in a crisis, as the FDIC would have needed a bailout had Congress not pledged to do whatever it took to support it.
(We also learned once again that when pictures of the Depression make the front pages of Newsweek, it's getting near the bottom of the stock market.)
Anyway, unprecedented money-printed ensued. We are now reading about surging stock markets as economic growth accelerates. Since for every buyer there is a seller at the same price, all the indicators such as sentiment are of only mild value. Ultimately stocks and bonds are financial assets that have an unknowable value. How does an investor decide what to do in a world such as the above where the powers that be are in such control of macro matters and have so much more knowledge about what's really going on than you or I?
We always knew that Wall Street was never interested in anything but its own well-being, but we never knew how much on its side the Feds and the Fed were. Most Americans are effectively renters in their own homes and have minimal savings. Corporations and their chieftains are prospering in another "jobless recovery".
The debt:GDP ratio continues to climb even as households are tapped out, with government expanding its balance sheet to more than make up the difference.
With a left-of-center government, liberal economists rule the roost. Robert Shiller is calling for yet more government support for housing. The administration is doing more in that regard--at what cost?
The cost of government borrowing is at rock-bottom rates. An expanding state requires more taxes. We should look forward to a combination of rising business and personal taxes along with the effects of all the money-printing showing up as rising prices as the coincident economic indicators catch up with the forward-looking indicators that continue to be stable to rising. Yet as employment income and interest income lag, discount and deep discount stores look to stay strong. DLTR has sharply rising earning estimates and trades at about 14X current-year earnings.
Watson Pharma (WPI) has broken out to a multi-year stock price, has record earnings and a lowish valuation; as credit money flows more freely, takeover activity will pick up and unlike Teva, WPI is a bite-sized acquisition for many companies.
MCD fits the theme of financially strong companies with rising earnings estimates. Its dividend yield exceeds that of a 7-year Treasury and likely will rise substantially by 7 years from now. So it's a classic growth and income play.
Financial strategists who have gotten this bull move right, namely Barry Ritholtz and David Kotok, are on similar pages. They are thinking that most of the good news is out now and that S&P 500 1250-1300 represents an important target. It is 1169 now. Another 7% upward move will put Andrew Smithers' estimate of fair value as judged both by q and cyclically-adjusted P/E (CAPE) at around 60% above fair value. Going back to 1900, this was perhaps seen in 1929. It was only seen in about 1997 and then through 2001 and then not again according to his chart, though CAPE hung around the 60% overvalued mark through much of the aughties, q was a bit lower.
Putting the two themes together, the public has no idea of what anything is really worth or what it will do. We can say that we are already close to 1929 levels of stock overvaluation, which was only exceeded in the past 110 years by the millenial, post-Cold War fervor of the late 1990s. An economy cannot function on rising asset prices. Eventually we can hope for, or even expect, new technologies such as economical green energy-related ones to help improve our lives fundamentally. But those companies that will implement that will likely be ones you have never heard of and that will eat the lunch of some seemingly safe big names that are now in the indices.
There is no easy solution. Remembering the lessons of the historical record and the recent past are not certain to be useful in predicting the future, but at the least they are certain to be useful in understanding it as history unfolds.
As the Fed apparently moves toward a world in which depository institutions need NO reserves, there is every reason to think that the yang to that yin, gold, will at least retain its current relative value to other financial assets. The thing about gold is that one has to earn it, or at least steal it. It's either present or it is not. Whereas, electronically-created "money" with a corrupt Federal Reserve Bank of New York in charge of said creation and distribution, acting on behalf of its corporate owners such as JPM, is not a glittering example of responsible wealth creation or accumulation.
The speculation here is that gold prices will fall less than stocks if stocks fall and that they will more or less match or exceed the performance of stocks in a renewed up-move for stocks.
Copyright (C) Long Lake LLC 2010
Monday, March 22, 2010
Financial Markets and Health Care "Reform"
Whether an investor considers the just-passed reshaping of the health insurance system in the U. S. as beneficial reform or "deform", your thoughts quickly turn to that which you can control: your money.
I confess that I have not kept up on the amount of tax increases that are now scheduled to take effect over the next few years before the real costs (benefits to recipients) are felt by taxpayers. For now, this legislation withdraws spending power from the public and taxes interest income and capital gains, I believe with a new 3.8% "Medicare tax" (a misnomer, as revenues go to the general fund).
This is occurring while two fundamental measures of stock market valuation each show at least 50% overvaluation: cyclically-adjusted price-earnings ratio (CAPE) and "q" (valuation of non-financial stocks based on replacement cost). Please click HERE for a link to Smithers & Co.'s chart and commentary on this.
Can the anti-stimulus measures of upcoming revenue enhancements and the real and psychological effects of increasing taxes on income derived from savings (which savings derive from income that has already been taxed) provide the impetus for declining stock prices and rising prices of Federal debt?
In other words, the Japan scenario, in which imposition of a national sales tax was associated with the above results in the 1990s?
Yes.
Copyright (C) Long Lake LLC 2010
I confess that I have not kept up on the amount of tax increases that are now scheduled to take effect over the next few years before the real costs (benefits to recipients) are felt by taxpayers. For now, this legislation withdraws spending power from the public and taxes interest income and capital gains, I believe with a new 3.8% "Medicare tax" (a misnomer, as revenues go to the general fund).
This is occurring while two fundamental measures of stock market valuation each show at least 50% overvaluation: cyclically-adjusted price-earnings ratio (CAPE) and "q" (valuation of non-financial stocks based on replacement cost). Please click HERE for a link to Smithers & Co.'s chart and commentary on this.
Can the anti-stimulus measures of upcoming revenue enhancements and the real and psychological effects of increasing taxes on income derived from savings (which savings derive from income that has already been taxed) provide the impetus for declining stock prices and rising prices of Federal debt?
In other words, the Japan scenario, in which imposition of a national sales tax was associated with the above results in the 1990s?
Yes.
Copyright (C) Long Lake LLC 2010
Friday, March 12, 2010
Stocks Are not Cheap, No Matter how a Chart Is Drawn
As markets float upward following the path of least monetary resistance, the argument is made that the "market" is "cheap".
Today's Chart of the Day implies that P/E (price to earnings) ratios are comparable across the decades.
Unfortunately, that is not so. The greatest reason this is not so is the recent introduction of "non-recurring" earnings that are not presented according to Generally Accepted Accounting principles. In other words, today's earnings are often overstated relative to prior periods' earnings, thus falsely depressing the P/E.
This is one reason why dividend yields are so much lower than historical yields, despite alleged payout ratios that are much less different than before. (Another reason is the weaker financial strength of dividend-payers; decades ago there were numerous AAA-rated companies, now even though the economy can support more companies and they are bigger, there are hardly any.)
This blog recently pointed to Teva Pharmaceuticals, which is a litigious primarily generic products company, as a high-quality large-cap company that arbitrarily has decided that when it pays out hundreds of millions of dollars to brand companies for patent infringement or other patent-related costs such as out-of-court settlements, those dollars are not costs for purposes of earnings presentation.
It was not long ago that GAAP was the standard and only way earnings were presented. It was up to analysts to make the case that perhaps the stock price was too low due to GAAP peculiarities.
The problem now is that the financial community hardly ever goes beyond "earnings" in valuing stocks, unless it wants to highlight potential future earnings or earnings growth rate. Dividend yield and especially book value or asset value are forgotten. But the problem with pointing to non-GAAP "earnings" and excluding patent costs or the infamous "restructuring" costs (which pretend that closing obsolete factories is not a normal, recurring cost of doing business) is that the money is still not there.
A person can pretend that a sudden business or investment loss, or adverse IRS ruling is non-recurring. But a lender does care about income but also should care about net worth.
According to both the cyclically adjusted P/E and "q" (or Tobin's "q" ratio), stocks are about 50% overvalued. These two are favored by Andrew Smithers, a noted economist whose research has shown that these two measures are the two valid methods of measuring fair value in the stock market.
Because of the nature of those two measures, they cannot change quickly. A good year for earnings or real corporate wealth accumulation only changes them somewhat. Thus a 50% stock market fundamental overvaluation means that investors should be extra wary when a free chart purports to suggest that the "market" is historically "cheap".
Virtually all financial assets are expensive.
Choose your flavor. My flavors include financially strong companies that do not routinely present non-GAAP "earnings" with any prominence that have strong charts and strong real earnings trends, preferably with dividends, and with historically average or better than average fundamental valuations; gold for long-term safety; cash because everything appears too rich; and Treasuries because of the Japan scenario.
Copyright (C) Long Lake LLC 2010
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