Effor.com

I was browsing through MarketWatch.com tonight and saw this story from Todd Harrison.  If you’re unfamiliar with Todd, he’s the founder of Minyanville.com, and he caused an uproar in the trading community last year when he announced that he had moved 100% of his long term money into cash.  The Dow was at 11, 346 when he said that.

Back to the story.  Today Todd says that he thinks a chart of 2009 is going to look like a “W”, and that “We’re currently dancing around the middle spike“.  In other words, the current spike in stocks is just a spike, and it’s going to head lower again.  I agree.

To explain his reasoning, Todd says “The market has room to run in the context of the lower highs that define a bear market. The first test will arrive around S&P 950, which is dual resistance in the form of the 200-day moving average and the one-year downtrend.”

The flies in the sustained recovery ointment are two-fold, which is why I’m of the view that this is a bear-market bounce. First, rampant inflation requires legitimate demand for goods and services coupled with the healthy velocity of money, neither of which can be artificially manufactured by the litany of government acronyms or tough talk from the Beltway.

Second is the unavoidable reality that the cure for an imploding debt bubble isn’t the inducement of more debt but rather the destruction of it. That is the single greatest flaw in the “all-clear” thesis; we’re swimming backwards against a growing tide of credit dependency and the cumulative imbalances that have built since the turn of the century.

Employment is still dropping, housing prices are still dropping, earning are still declining.  I see no reason to buy back in at this time.

gk

Just scanning the headlines on Google News tonight and happened across this in the NY Times.

The highly complex tactic has become a cause of growing concern within the Internal Revenue Service in recent years because it deprives the Treasury of billions of dollars a year, according to private-sector estimates.

It “deprives the Treasury of billions of dollars a year”?  Really?  How about phrasing it something like “it doesn’t take billions of dollars a year from the companies who earned it”?

BTW – The “highly complex tactic” simply says that a company isn’t taxed on money it earns outside of the country as long as it re-invests the money in the country where it was earned.  As in building a better, more efficient factory, or buying the materials it needs to keep producing the product

The NY Times (and Obama) seem to think that they are being “deprived” of billions of dollars per year.  How?  Did they earn it?

That’s what I thought.  Now shut up and quit spending so much of our money.

gk

It’s been a while since I’ve had time to post any new info, and as I was reading through the news tonight, it occurred to me to close the loop on the dismal S&P 500 earnings in Q4 of 2008.  To sum it up, they sucked.

Standard and Poors has the final numbers for 2008 here.  (Link will open an Excel spreadsheet from S&P.)  Take a look at the “12 month values” tab where you can see the annual earnings of the S&P 500.  In particular, look at columns “C” and “D” which are the operating earnings and as reported earnings.  The 2008 operating earnings came in at $49.51 and as reported came in at $14.88.

Operating earnings are the lowest since June 2003, and as reported earnings are the lowest since – well, they’re the lowest as far back as S&P reports, which is 1987.  As reported earnings haven’t been this low since at least 1987.  The S&P 500 closed 1987 at 247.08, and the DJIA finished that year at 1938.83.  That should give a little perspective on why I think stocks are still way too high.

Want more?  Take a gander at the “Estimates & PE’s” tab.  Look at the estimates for earnings and PE ratios.   Notice anything weird?  Like a negative P/E ratio in cell H33 maybe?  Here’s a clue – there’s NEVER been a negative P/E ratio for the S&P 500.  Negative numbers aren’t good when you’re talking about earnings.  And S&P is estimating a P/E ratio of -465.29 at the end of September 09.

Super high numbers aren’t good when you’re talking about P/E ratios.  With that being said, I give you cell H34 as Exhibit B.  That number is 1951.66.  Go ahead, look through the spreadsheet.  Try to find a P/E ratio anywhere in the past that was that high.  I’ll wait…..

You back?  Cool.  The highest P/E ever in the SP500 was at the end of 2008, when it was 60.7.  Does that give you some perspective?  That tells you that stock prices were way too high at the end of 2008 – and justified the sell-off into the March lows.

The current estimated P/E (for Q1 2009) is 128.  Which is the highest ever so far.  But as I showed above, the forward looking numbers are even worse.  So why do some people think this is the time to buy stocks?

That’s not a rhetorical question, as I don’t see anything that justifies current stock prices.  Even with projected earnings (which I think are still too high) the P/E’s are sky high.

Either the earnings need to soar, or the price needs to drop.  I think the price will drop, because I’ve seen nothing that indicates the recession is close to ending which would cause earnings to skyrocket.

What do you think?

gk

Here’s a post copied from Save Capitalism. Check out his blog if you’re interested in how a capitalist from Sweden views the economic meltdown.  It’s good stuff!

gk

Capitalist Blog Revolution (III) : We all hate Keynesians now

It’s a cool rainy day in Knoxville, so I’ve been catching up on my reading.  Yesterday’s Daily Reckoning had a great article titled “How to Save the World” and I want to post a bit of it here with some comments, because it sums up the cause – and the solution – to the economic train wreck we’re all watching.

I like this line: It is not often that we are called upon to advise the world’s government. In fact, we can’t remember a single time. But we can’t resist a lost cause. So, we offer the Daily Reckoning Plan to Save the World, or DRPtStW for short.

Humor like that always make Bill Bonner’s articles a great read.

Just read the Financial Times. This week it has a windy series on the “Future of Capitalism,” inviting readers to imagine how the decaying old creed might be reformed. Alas, for capitalism, it’s out of the frying pan, into the toilet. Larry Summers, Obama’s number one financial advisor, voiced the prevailing view: “This notion that the economy is self-stabilizing is usually right, but it is wrong a few times a century. And this is one of those times…there’s a need for extraordinary public action at those times.”

Larry Summers is wrong.  The economy is self stabilizing – if only government would get the hell out of the way and let the stabilization happen.

The gist of his program can be expressed in another wistful absurdity: The consumer economy died because of too much spending; now we will revive it by spending more. “Give me your cunning bankers, your hopeless CEOs, your huddled masses of chiselers, spendthrifts and boondogglers,” says the Obama team, “and we’ll give them other peoples’ money!”

This is Keynesian economic theory in action.  It’s just as wrong now as it was in the 1930’s, but the government feels it has to do “something” even it it doesn’t makes sense.

Note – government spending in times of economic slowdown can help alleviate the suffering, but only the government has money to spend.  We’re $11 trillion in debt. Too much debt caused the problem – does anyone really think borrowing more is going to fix it?

“There’s no place that should be reducing its contribution to global demand right now,” explained Summers. “The world needs more demand.” But it was demand that the world recently had too much of. English speakers took on too much debt to create it…and built too many houses and too many shopping malls to satiate it. And despite the ready cash offered by Bush, Bernanke, and Paulson, demand has sunk, because the real problem is not an absence of spending, but a surfeit of debt. In America, for example, total debt went from 150% of GDP in the ’80s to 350% in 2007. The financial markets panicked when it became clear that debtors didn’t have the cash flow to pay off the debt…and that an entire world economy had been fizzed up to supply products to people who couldn’t afford them. Investors have been discounting debt-soaked assets ever since.

The fix is obvious – reduce the level of debt. About $20 trillion worth of debt, in the United States alone, needs to disappear. Then, consumers can go back to doing what they do best – consuming. But how do you reduce the debt level? Former Treasury Secretary Andrew Mellon had the right idea in 1929: ‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…It will purge the rottenness out of the system…Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

It really is that simple.  That’s capitalism.  People who make bad decisions go broke, and people who make good decisions get wealthy.  Government interference only gums up the process and keeps it from working.  Which is about the only thing governments do well.

What’s the cure for a depression? It’s a depression. Let willing buyers and sellers mark debt down to what it is really worth. Mellon’s plan was not followed by the Hoover or Roosevelt administrations. Instead, they introduced elaborate bailouts, stimulus programs, and boondoggles. That is why the depression is known as the Great Depression, rather than the So-so Depression. By the end of the 30s, the US economy was almost exactly the same size it had been at the beginning. Likewise, in Japan, holding off liquidation brought a “lost decade” in the ’90s. Bush followed in Hoover’s footsteps. And now, the Obama administration follows in Roosevelt’s and Miyazawa’s.

Here’s our advice: forget it. Let the depression do its work. Let the bad times roll!

Great article Mr. Bonner.

gk

Saw this on Save Capitalism today.  Good stuff to help illustrate what terms like “credit” and “lending” really mean – IOU.

gk

The latest numbers from Standard and Poors are even worse than yesterday.  Now, even Operating earnings are negative, not just as reported earnings.

Check it out here.  Link will open an Excel spreadsheet.

Notice the Operating earnings for Q1.  The total for the S&P 500 is now negative 56 cents.  As reported earnings are now down to negative $20.73.

And I just noticed that I’m even calling them “negative earnings”.  They are losses.

That’s why stocks are tanking.  Any questions?

gk

Here are the top 10 news stories today from Reuters Business News as of 4:55 PM ET.  Notice a pattern?

• Wall St pulled lower by banks, S&P below 700 - 14 minutes agoStocks fell in volatile trading on Tuesday, with the S&P ending below 700 for the first time since October 1996 as persistent uncertainty about the amount of money needed to shore up the financial sys…
• U.S. auto sales plunge as recession deepens - 57 minutes agoU.S. auto sales dropped by more than 40 percent in February to the lowest level in almost three decades as Americans pulled back from taking on more debt.
• Bernanke defends AIG rescue, says U.S. had no choice - 3 hours agoU.S. Federal Reserve Chairman Ben Bernanke on Tuesday defended the government’s latest bailout of embattled insurer AIG, telling irate lawmakers that he was also angry, but that the failure to act cou…
• Blockbuster hires advisers for debt overhaul - 11 minutes agoTop U.S. movie rental chain Blockbuster (BBI.N) said on Tuesday it has enlisted lawyers to help it raise capital and refinance debt, but stressed it has no plans to file for bankruptcy.
• Ford February sales plunge 48 percent - 2 hours agoFord Motor Co (F.N) reported a 48 percent drop in February sales on Tuesday and outlined sharply lower production targets for the second quarter compared with a year ago in the face of a deep slump in…
• Geithner: will work with Congress on bailout costs - 1 hour agoAcknowledging that U.S. financial bailout costs may rise, Treasury Secretary Timothy Geithner on Tuesday said the Obama administration will work with Congress to determine the size and shape of future…
• U.S. home sales plumb record low in January - 4 hours agoSales of previously owned U.S. homes tumbled to a record low in January, reversing the prior month’s gains, according to a report on Tuesday that indicated the economy’s downward spiral was gathering …
• Oil rises nearly 4 percent on OPEC - 51 minutes agoOil prices rose nearly 4 percent on Tuesday on expectations producer group OPEC will cut output again and as stock markets traded higher.
• Bank of NY, Russia to discuss legal settlement - 3 hours agoThe Bank of New York Mellon (BK.N) said on Tuesday it will meet with the Russian government to discuss settlement of a $22.5 billion lawsuit Russia has leveled against it.
• Treasury, Fed launch loan program, eye expansion - 5 hours agoThe U.S. Federal Reserve and Treasury on Tuesday extended a new securities loan program to include equipment and vehicle fleet leases and said a future expansion to $1 trillion may also include some o…

There’s not a single bit of good news.  Everyone is ready to call a bottom to the recession, housing, financial crisis, and stock markets, but why?  There have to be at least a few positive signs that things are going to get better at some point, and I don’t see any signs of that.

Eventually, things will pick back up, but I don’t see it happening yet.  And I’m not buying stocks yet either.

gk

Good series of articles in the NY Times today titled When Will the Recession Be Over?

It’s a good read with differing views, but the bottom line consensus is “not soon”.

gk

Ransom note?  Robbery note?  Hold-up note?  I’ve heard it refrred to by all those terms, but according to a one page “research note” by Joseph LaVorgna of Deutsche Bank, the US taxpayer is hosed no matter what the government does.

I heard about it on NPR – of all places – on Friday this week, and bookmarked it so I could comment on it when I had time.  NPR actually had a very good discussion about it on Friday morning, and the text of the discussion is here.  You can listen to the discussion here.   It’s pretty good.  But back to the ransom note.

In the note, Mr. LaVorgna says We have consistently argued the financial plumbing will remain broken and the economy will grossly under-perform as long as troubled assets reside on bank balance sheets. Moreover, the longer authorities wait to fix the problem, the bigger it will become because collapsing activity will turn good assets into bad ones.

Hey, I’ve got no problem with that.  I’ve been saying basically the same thing for the past year.  My disagreement comes in when Mr. LaVorgna goes on to give his prescription to fix the problem.  He wants the government (me and you) to pay up.  He basically says that you can pay me now or pay me later – but you’re gonna pay me no matter what.

In regards to the government buying up toxic assets, he says:  One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook.  However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base.

As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives.

I agree that taxpayers will pay something no matter what (I don’t have to like it, but it’s true) but I think he over-estimates the damage that letting these mismanaged banks fail would do to the economy. Yes, the current recession would be worse – but I think we’d already be rebounding if the government wouldn’t have intervened.  And the institutions that we’re dumping trillions of dollars into would be gone.

Others would have purchased the assets of these badly managed companies – like Bank of America, CitiGroup, and GM.  Investors in those companies would have taken massive losses, and the insurers of their bonds such as AMBAC and MBIA would also be wiped out.  So what?  A fool and his money should be soon parted.

Other institutions would have bought up the good assets at fire sale prices, and investors in those companies would be richly rewarded.  Which is how a free market economy works.

My biggest issue with the note is his suggested remedy to the problem:  We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

In other words, he wants the bailouts to continue, no matter what the cost.  I added no matter what the cost because the US government is also broke.  We don’t have the money to buy “toxic assets”.  We’re borrowing money right now to pay for the normal (grossly bloated) budget.  And you can’t pay down debt – which is what needs to happen – by borrowing more money.

Robbing Peter to pay Paul doesn’t work – no matter who does the robbing.  The last line of the NPR story I referenced above is something I can agree with: While they might disagree on who will bear the brunt of that pain, all the experts interviewed for this report say the longer the U.S. waits, the worse it will be for everyone.

Stop the bailouts now.  Quit trying to pretend there’s an easy way out.  Take your medicine and pay down the debt.  That will fix this problem.

gk