Jeremy Siegel is right and the Roubini minions are missing the point
Jeremy Siegel wrote an op-ed on the WSJ saying the current earnings methodology is incorrect. He is right in some scenarios yet all the Roubini minions who feel they need to be bearish to be right are attacking him. They would be right in normal circustances but Siegel is correct when you are talking about massive negative earnings, negative networth and stocks close to $0(low weighting in the index)
Lets say all the financials go down to $0.01c a share and they continue to lose billions matter of fact they lose so much, the SP500 earnings are negative according to the current SP methology
the PE of the SP500 is infinite, their earnings never recover and they keep losing forever
If you buy the SP500, you are essentially getting financials for free, yes they lose money but so what, you get all the other sectors who are making money and paying dividends for your income. You donot lose on the aggregate because common stocks under deeply negative networth, bankruptcy dont create a liability for you
Another example, lets say all stocks go to $0.01c a share except for XOM, they are all losing huge amounts but for some reason XOM keeps printing money, if you buy the SPY you are getting the sp499 for free and an nicely profitable XOM who will make you money and pay dividends. Yet according to the Siegel critics its a bad buy because the index has negative earnings and an infinite PE forever, yet what are you doing is essentially buying XOM and getting free options on the rest, since common stocks dont create liabilities even if they have negative networth or go bust
So the total earnings of the SP500 donot matter in those scenarios, what matters is what you get when you buy it and what price you paid for it. Thats because common stocks offers unlimited upside with limited downside
Bespoke wrote this
"Imagine you have two investments. The first is worth $1,000, and over the last year it generated $100 in ncome. The second investment is only worth $100, but over the last year, it had a loss of $100. Most people would probably think of their investments in the way S&P calculates the earnings for the S&P 500. You would have total investments of $1,100 ($1,000+$100) and earnings of zero ($100 profit on $1,000 investment plus $100 loss on $100 investment). "
Their mistake is not carrying that logic further, lets say the $100 investment(Inv1) on the second year loses $50,000(not a typo), and the $1000 investment(Inv2) earns $200. The Inv1 is a writeoff to you by then(its market value will be close to $0 as well), you probably dont expect anything from that ever again, you will mark down that investment to $0, so what that Inv1 earns is 100% irrelevant because common stocks dont create a liability to you. You will 100% care about Inv2 as it will became your index with 100% mental weighting, yet according to the current methodology as a long that 'dog' is in the index, it will produce massive negative earnings for that index and an infinite PE ratio
Bottom line is that financials are distorting the PE ratio of the SP500 and Siegel is right that stocks are cheaper than they appear(Even though I'm not long yet)
Thursday, February 26, 2009
Tuesday, February 17, 2009
Timothy Franz Geithner
Treasury Secretary Timothy Geithner needs to get drunk too
Here’s some beliefs that I have that are guiding through this crisis
-Soft landings are rare
-Government is inherently inefficient and unlikely to implement correct policies fast enough or at all
-The rear-view mirror is a misleading guide to the future
The market and the media are constantly looking the politicians and policymakers for ‘solutions’ for the crisis and ‘how to get out’ by implementing XYZ policy.
What they don’t seem to get it that is possible that there is no solution, in an ideal world where government is efficient and intelligent US banks would have all been recapitalized and the US consumer would have been brought to solvency again through debt relief. We do not live in such world, the stimulus package is a great example, it’s a huge piece of legislation which virtually nobody who supported has read and has any idea if the things inside are necessary or are results of lobbyists, so beside a short-term positive impact on Velocity of Money the long-term returns from this 'investment' are likely to be small.
The truth is governments don’t tend to attract smart folks simply because its pays too little for the kind of work and exposure you get, you get what you pay for, people from Pimco recommend policies all day long, they would probably work if implemented, yet how come they don’t give up their millions of dollars in pay to work as a bank regulator? The truth is that governments are under human capitalized, I would be surprised if the average IQ of the US Congress is not lower than the average IQ of the SP500 board of directors
The fed as recently as one day after lehman’s failure was voting no change in the fed funds rate citing concerns about inflation, the fdic and the gses continues to keep trying mortgage modifications that fail more than half the time, trichet is complaining lowering rates more in the fact of massive deflation and banking meltdowns. The current financial system is more complex and globalized than most realize, there are numerous interrelationships that we are not aware of, this makes the world economy in this crisis a passenger in a sinking ship. There is little hope that the unintelligent captain with political motivations who helped and cheer leaded the problem can get us of of it.
I do however accept that the downturn could be smaller than otherwise because SLIGHTLY better public policy that in the 1930’s(at least in the US, a good example is the fed commercial paper facility, aggressive easing or slightly higher tendency against protectionism) in the other hand the financial system is more complex and globalized plus some of fiscal holes that a few countries are in could be enormous, that is out global leverage is, if not bigger, far more dangerous due interrelationships(think of all the trillion in losses that are and will be taken worldwide, what if they keep happening in banks of countries with a higher tendency toward protectionism and a few wrong moves set off a round of tariff wars?) which could negate the slightly better (US, European)public policy factor. There is an worldwide asset, credit, economic implosion and the losses just keep mounting, we went from one of the strongest global growth periods in decades to one of the worst in decades in about a year, so extremes are clearly to be expected from this financial system
Great Depression?
Here’s some beliefs that I have that are guiding through this crisis
-Soft landings are rare
-Government is inherently inefficient and unlikely to implement correct policies fast enough or at all
-The rear-view mirror is a misleading guide to the future
The market and the media are constantly looking the politicians and policymakers for ‘solutions’ for the crisis and ‘how to get out’ by implementing XYZ policy.
What they don’t seem to get it that is possible that there is no solution, in an ideal world where government is efficient and intelligent US banks would have all been recapitalized and the US consumer would have been brought to solvency again through debt relief. We do not live in such world, the stimulus package is a great example, it’s a huge piece of legislation which virtually nobody who supported has read and has any idea if the things inside are necessary or are results of lobbyists, so beside a short-term positive impact on Velocity of Money the long-term returns from this 'investment' are likely to be small.
The truth is governments don’t tend to attract smart folks simply because its pays too little for the kind of work and exposure you get, you get what you pay for, people from Pimco recommend policies all day long, they would probably work if implemented, yet how come they don’t give up their millions of dollars in pay to work as a bank regulator? The truth is that governments are under human capitalized, I would be surprised if the average IQ of the US Congress is not lower than the average IQ of the SP500 board of directors
The fed as recently as one day after lehman’s failure was voting no change in the fed funds rate citing concerns about inflation, the fdic and the gses continues to keep trying mortgage modifications that fail more than half the time, trichet is complaining lowering rates more in the fact of massive deflation and banking meltdowns. The current financial system is more complex and globalized than most realize, there are numerous interrelationships that we are not aware of, this makes the world economy in this crisis a passenger in a sinking ship. There is little hope that the unintelligent captain with political motivations who helped and cheer leaded the problem can get us of of it.
I do however accept that the downturn could be smaller than otherwise because SLIGHTLY better public policy that in the 1930’s(at least in the US, a good example is the fed commercial paper facility, aggressive easing or slightly higher tendency against protectionism) in the other hand the financial system is more complex and globalized plus some of fiscal holes that a few countries are in could be enormous, that is out global leverage is, if not bigger, far more dangerous due interrelationships(think of all the trillion in losses that are and will be taken worldwide, what if they keep happening in banks of countries with a higher tendency toward protectionism and a few wrong moves set off a round of tariff wars?) which could negate the slightly better (US, European)public policy factor. There is an worldwide asset, credit, economic implosion and the losses just keep mounting, we went from one of the strongest global growth periods in decades to one of the worst in decades in about a year, so extremes are clearly to be expected from this financial system
Great Depression?
Wednesday, February 4, 2009
World Fate in the Hand of Morons
Sell Everything? Protectionist Nightmare Might be On The Way
The news flow regarding world trade is going from bad to downright frightening, we all know trade credit is collapsing but that is just icing on the cake, the real ‘hammer’ will be laid by politicians. The ‘Buy American’ provision looks like to be on its way, while that provision says it can be removed if it violates language in existing trade agreements that is not the point, the point is that human nature has not changed, the temptations for politicians are still there and for now they seem to be respecting pre-credit bubble burst agreements however its just doesn’t look likely they will contain their visible hand from messing world trade.
There is little reason to believe US and world politicians are more disciplined today than they were in the past, spending as a percentage of GDP has been ballooning for decades and it only looks like it will continue. Hypocrisy is still widespread as tax fraudsters are running for office by the leaps and bounds. Free trade has been a consensus among economists for a really long time, Hoover got a letter signed by 1028 economists begging him to not go forward with Smooth Hawley, its likely he knew his measures would be damaging, however the temptations of politicians of trying to buy votes to stay in power were too great and he started a world trade war. We probably have the greatest risk of a world trade war now than we ever did since the depression, the risks are clearly on the downside as the future is depending on politicians who usually don’t posses a pristine track record. The G7 said no protectionism, then the individual countries proceeded to pass a number of tariffs and barriers to trade
It will be absolutely crucial to see how this ‘Buy American’ provision moves forward, could congress and the administration move in with this and simply ignore language from NAFTA and therefore give ‘reasons’ for Mexico and Canada to strike back? The consequences of such event could be apocalyptic as it would send a message to the entire world that the leader in worldwide trade thinks ballot boxes and special interests are more important than keeping their word, at that point all you can do is to sell everything, short the stock market, buy DEEP out of the money puts in the stock market as the consequences of such events tend to be underpriced by the market
The Chinese and Europe are also two to watch. The Chinese have been called currency manipulators and they were not pleased, verbal trade war has already began. We are not in what it seems to be a mining field where politicians will use each other mistakes and actions to justify their own lunacies. The Austrian Economist portfolio will not be in play in the case of protectionist hell, the Great Depression Portfolio(long gold, short stocks, long SPY puts, long treasuries, long select commodities, short select commodities) will be the name of the game.
At this point the outlook for world trade is not entirely clear but the news flow points that the same process is happening, in the beginning it’s the denial that protectionism is even taking place. Joe Biden downplayed the ‘Buy American’ provision, they want to tell us everything is fine and they are not that crazy. Except they are.
Even if the US is ‘different’ because their leaders are more aware of the consequences of trade wars(an not entirely resonable assumption), we are talking about dozens of countries, some led by nutcases, if you are an optimist, are you really that confident that the worst recession since WW2 wont lead dozens of leaders to do their usual lunacies because this time is different? The last time I checked Adam Smith was being ripped left and right in discussions
The news flow regarding world trade is going from bad to downright frightening, we all know trade credit is collapsing but that is just icing on the cake, the real ‘hammer’ will be laid by politicians. The ‘Buy American’ provision looks like to be on its way, while that provision says it can be removed if it violates language in existing trade agreements that is not the point, the point is that human nature has not changed, the temptations for politicians are still there and for now they seem to be respecting pre-credit bubble burst agreements however its just doesn’t look likely they will contain their visible hand from messing world trade.
There is little reason to believe US and world politicians are more disciplined today than they were in the past, spending as a percentage of GDP has been ballooning for decades and it only looks like it will continue. Hypocrisy is still widespread as tax fraudsters are running for office by the leaps and bounds. Free trade has been a consensus among economists for a really long time, Hoover got a letter signed by 1028 economists begging him to not go forward with Smooth Hawley, its likely he knew his measures would be damaging, however the temptations of politicians of trying to buy votes to stay in power were too great and he started a world trade war. We probably have the greatest risk of a world trade war now than we ever did since the depression, the risks are clearly on the downside as the future is depending on politicians who usually don’t posses a pristine track record. The G7 said no protectionism, then the individual countries proceeded to pass a number of tariffs and barriers to trade
It will be absolutely crucial to see how this ‘Buy American’ provision moves forward, could congress and the administration move in with this and simply ignore language from NAFTA and therefore give ‘reasons’ for Mexico and Canada to strike back? The consequences of such event could be apocalyptic as it would send a message to the entire world that the leader in worldwide trade thinks ballot boxes and special interests are more important than keeping their word, at that point all you can do is to sell everything, short the stock market, buy DEEP out of the money puts in the stock market as the consequences of such events tend to be underpriced by the market
The Chinese and Europe are also two to watch. The Chinese have been called currency manipulators and they were not pleased, verbal trade war has already began. We are not in what it seems to be a mining field where politicians will use each other mistakes and actions to justify their own lunacies. The Austrian Economist portfolio will not be in play in the case of protectionist hell, the Great Depression Portfolio(long gold, short stocks, long SPY puts, long treasuries, long select commodities, short select commodities) will be the name of the game.
At this point the outlook for world trade is not entirely clear but the news flow points that the same process is happening, in the beginning it’s the denial that protectionism is even taking place. Joe Biden downplayed the ‘Buy American’ provision, they want to tell us everything is fine and they are not that crazy. Except they are.
Even if the US is ‘different’ because their leaders are more aware of the consequences of trade wars(an not entirely resonable assumption), we are talking about dozens of countries, some led by nutcases, if you are an optimist, are you really that confident that the worst recession since WW2 wont lead dozens of leaders to do their usual lunacies because this time is different? The last time I checked Adam Smith was being ripped left and right in discussions
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