I know a few people on the list (the people who run these companies), and I've got to say, if you're in, you should get out. The big risk is with publicly-owned companies. What class of stocks you own (voting/controlling vs. non-voting/non-controlling) will be the difference in when and how badly you are taken to the cleaners. Remember: A single share of stock at $500 will give them enough money to keep their private jet aloft for a half-hour, or so, after that, your money, for that share, is gone. Even if the flight is to increase revenue (theoretically, 'cause we all know that ain't happening in reality) that revenue will only enhance your holding(s) if the voting-class stockholders don't take it as salary or perks first.
About HB stocks rallying - Could it be the proposed senate version of the stimulus package? There is supposed to be some tax refunds for years of losses against taxes paid for 5 yrs back. Does anyone have the details?
Marcus Aurelius writes:
I know a few people on the list (the people who run these companies), and I've got to say, if you're in, you should get out. The big risk is with publicly-owned companies.
MA - any of the folks you know considering taking their companies private? I mean wait for the stock to just about zero... then LBO the thing for pennies THEN run the company like it ought to have been run the last year and a half (hibernate & prepare for the eventual Spring a few years from now).
If they bought 'em cheap enough & slashed ops to conserve cash instead of build out at all cost - they might actually survive. But we know no public company would be allowed to do that 'cause it would hurt 'growth'.
Any thing you can share? Not looking for names or investment inside info - could care less really - just curious on the machinations going on. Its the 'ops' side of my brain asking.
"MA - any of the folks you know considering taking their companies private?"
Why? Go CH11, shaft common to zero, reorg debt, and emerge to try to run a recession builder, rather than the boom builders as they are structured now.
OT: very strong durable goods report. Strong upward revisions. This looks indeed more like the beginning of an upturn than the end of it. This is like 2003-2004 or 1993.
There is talk among the rank and file of taking at least one of the companies private - I've heard nothing from management (although, I suspect they have looked at every option).
Again, if the company goes private, the second-class shareholder stands to loose everything, while the voting class (not always the preferred stock, BTW) is left with a skeletal, but functional business concern.
Also, "THEN run the company like it ought to have been run the last year and a half" isn't really applicable. These guys want money, and money only, and will not run a company for less than big bucks. In a private (and I mean dinner table private) conversation with one of the CEOs in '05, I warned of the coming crash and was rebuffed for even thinking such a thing. That fellow predicted 20% appreciation in house prices for the foreseeable future. We parted ways shortly thereafter (on a related note, I was recently told by this fellow's wife, that he said that he wished he had listened to me).
Anyway, these guys got rich on a bubble. I don't think they're such great businessmen outside a bubble environment. I think they're taking a cue from Bush and taking what they can, while they can. Why work hard when you can retire comfortably. We'll see.
Finally, in 2004 (or thereabouts) one of the first names on the list purchased an estate in FL (with no previous connection to the state) for upwards of $70 million (look it up - I don't want to drop names). This was the first confirmation that the numbers I was seeing were foreshadowing a crash - FL has the homestead exemption.
Why? Go CH11, shaft common to zero, reorg debt, and emerge to try to run a recession builder, rather than the boom builders as they are structured now.
If they let it go CH11 anyone can make a bid on reorg - if they buy just PRIOR to CH11 they get the company for pennies and hold control. In CH11 who knows who comes out in control?
If it goes CH11 the insiders frequently get tossed unless it is a prepackaged BK - they get tossed because they were the reason it goes CH11 in the first place.
The key question is how much liability comes along with the zero price if buying prior to debt scrub in CH11... if a lot of debt than zero is too much to pay for these firms. Insiders know all that - more than is reported usually, where the bodies are really buried - that's why I ask.
Washington Post on Jim Cramer!
The Fed In The Echo Chamber
"Call this the rise of financial populism. Cramer is its biggest star, and, in some ways, it has fundamentally altered the climate in which the Federal Reserve makes economic policy." Robert J. Samuelson - The Fed In the Echo Chamber - washingtonpost.com
would counties end up having to unload mc mansions in tax sales? offering "no property tax for 10 years" or so in order to stop spending money on upkeeping?
Going back to the SP Case-Shiller numbers release today, heres a comparison of the LA numbers from the last cycle and our current one.
During the last cycle prices peaked June 1990 at 100.24 and bottomed March 1996 at 73.07 (5 year and 9 months). Total drop in prices was 27%.
Year-over-year price appreciation peaked May 1989 at 30% and reached a bottom August 1993 at -10% (4 years and 3 months). Year-over-year price appreciation was negative from November 1990 until September 1996 (5 years and 10 months).
Current cycle:
Prices peaked September 2006 at 273.94, and were now at 240.43 for November 2007 (1 year and 2 months later). Drop in prices so far is 12%.
Price appreciation peaked at 31% in August 2004, and were now at -12% (3 years and 3 months later).
Key Points:
Prices dropped 27% over almost 6 years last time. This time prices have dropped 12% over 14 months. (In the last cycle prices had dropped 5% over the first 14 months.)
Last cycle the peak to trough for the rate of price appreciation took 4 years and 3 months. In the current cycle were at 3 years and 3 months.
The last cycle saw 5 years and 10 months of year-over-year falling prices. So far in this cycle were had 10 months of year-over-year falling prices.
Either weve still got a long way to go on the down side, or its different this time.
The tax loss carryback usually allows for 3 years back. This expands the carryback to 5 years. Most of these homebuilders made so much money in the last 3, I'm not sure expanding it to 5 makes much difference.
Marcus, I know who you are talking about - NVR's Schar. If his management of NVR in any way reflects the sorry goings on of the Washington Redskins (he's a minority owner) then that company is in for a world of hurt.
From 1980 to 2005, the share of U.S. households owning stocks or mutual funds went from less than 19 percent to 50 percent.
Also, this explains why a stockmarket collapse could be far more damaging today than in 1987, contrary to Bernanke's assertion that rate cuts were the reason the 1987 crash didn't take down the economy.
Maybe, instead, it was because most consumers weren't dependent on stocks for their wealth.
PCE/Personal Income on Thursday will be big for me. Strong numbers there and I may scale back and start nibbling on the long side a little.
dunham,
If this is the way you invest after reading all the wisdom here, I feel sorry for you.
This is going to be a long, deep bear market, and the climb back won't be quick or smooth. It doesn't matter what any little piece of data says. The big picture has spoken, and the die is cast.
MDC went BK many years ago. Now, one of the better run public builders with a conservative game plan. Top officers and stockholders same as prior company. So, BK not necessarily bad for executive officers.
From 1980 to 2005, the share of U.S. households owning stocks or mutual funds went from less than 19 percent to 50 percent.
Also, this explains why a stockmarket collapse could be far more damaging today than in 1987, contrary to Bernanke's assertion that rate cuts were the reason the 1987 crash didn't take down the economy.
The amazing thing is, Wall Street talked so many Mom and Pops into stocks while two trends were going on that don't help Mom and Pop at all: 1) lesser stock dividends; and 2) institutional domination of the markets on both long and short sides.
When you buy stocks that don't pay dividends only for the possibility of future appreciation, you're setting yourself up to be eaten by the sharks.
Are you really sure you'll get your money out before the sharks eat it? The great stock con job is just amazing.
It would not be wise to invest on the basis of commentary found on a blog either, even on as prescient as this one has shown to be. It is also important to react when the facts change.
I certainly feel like a crash is imminent - so far, this bear market has performed as advertised and expected - big move down, bear rally hitting former support areas, MSM telling us the bottom is in and we are onward and upward, etc. Market is being set up for a HUGE selloff right now.
That said, if people are still making money and spending money, we may get out of this yet, and I'm keeping my options open. It can't hurt to hedge myself to the long side in good companies with good fundamentals. We'll see.
Full disclosure: Own OTM SPY Puts w/ Feb/Mar/Apr expirations.
I don't think that means very much. It's largely due to the decline in popularity of pensions and the proliferation of IRAs and 401k plans
I dunno, why were stocks so popular in 1970s then?
The problem is not merely that there are 7 million fewer shareholders
than there were in 1970. Younger investors [Baby Boomers?], in
particular, are avoiding stocks. Between 1970 and 1975, the number of
investors declined in every age group but one: individuals 65 and
older. While the number of investors under 65 dropped by about 25%,
the number of investors over 65 jumped by more than 30%. Only the
elderly who have not understood the changes in the nation's financial
markets, or who are unable to adjust to them, are sticking with
stocks. [From "The Death of Equities" ca. 1979.]
Does that quote really say stocks were popular in the 1970s? It tells you the percentage change, but it doesn't tell you where things started.
I'd be surprised if considerably more than 19% of the population owned stocks in the 1970s. It may be a little more, since 1980 is when equities were at their low point, but I don't think they were significantly more popular prior to 1980.
larryk, Thanks for the link. I saw a summary. If it goes through IBs, Mortgage banks, HBs... all the losers should rake in a ton of cash. I wonder what it does to the size of the package. Should mushroom it to $300B.
HB performance has been out-of-control for the last two weeks.
I honestly can't understand how any of these companies make any money in the next two years.
It would not be unthinkable to suggest that the whole model that HBs are based on - suburban subdivisions - is nearing extinction as a viable growth model.
The HBs that are positioned to compete in urban, infill areas should make it out a live, but the PHMs, the CTXs, the BZHs - don't understand how they ever get back to profitability.
For what its worth, TOL has an urban division (building some awful glass condos in Brooklyn, Queens and Manhattan), but I don't know if it will be enough.
Does that quote really say stocks were popular in the 1970s? It tells you the percentage change, but it doesn't tell you where things started.
Well, I meant the 1960s, but you're right -- the exact ownership rates are necessary to get a clear picture, but the overall article suggests a large widespread migration out of stocks during the 1970s.
Take a look at this link, more data may actually be in there:
Speaking of Demographic Changes in the Stock Market:
--401k's/457/Roth's weren't available en mass prior to the late 80's.
--Contribution limits meant that most households didn't have a meaningful amount of stocks ($ value wise) until years later (2000?).
--The previous generation of buyers weren't doing so in the face of a generation of sellers. Never before has a large percentage of the population invested in stocks over a lifetime and then retired on the proceeds. The next (current) generation of long term buyers are doing so in the face of a generation of sellers. Demand in the past may have been artificially high due to a belief in past performance and a oversupply of buyers v.s. a derth of sellers.
--Current demand is based upon the absolute universal belief that stocks go up over the long run. That is coming into question. (old axioms like House prices always rise falling by the wayside). The S&P has underperformed money markets over the last decade (3.1%).
--Those who invest for retirment in Japan know that stocks are not the place to be. What is different there about the inherent nature in investing in companies, that means stocks don't rise over time? Is the only difference one of sentiment? Is the sentiment here due for a change?
I remember people pulling what was left of their portfolio out of the stock market at exactly the wrong time in the 70's downturn. Same old story; timing seems to be only accurate at the wrong times!
lama, according to what I read the carryback goes 5yrs from 2yrs. Big difference. It's enough to drive some speculative interest and since these stocks are so heavily shorted massive short squeeze and hedgie unwinding.
Cut the interest all they want, it will help the
. fraudulent markets and mortgage companies in the very short run but the banks and corporations have cut the heart out of the middle class and made homes unfordable. If people were having a hard time with mortgage rates before, now those that lost homes have ruined credit for the next 7 to 10 years, if not for life. New lending standards require a 20% down for a decent and fair interest rate. Guess what, Americans have blown through their pitiful little savings. Also consider that good paying jobs are still being outsourced along with whole business that generates them. The government continues to reward companies with tax advantage for taking the jobs and manufacturing abroad. When you put all these facts together, you have a housing market that will continue to spiral downward, with prices dropping and a limited number of qualified buyers. Those that had the money to buy or hold on to their house will have to tighten their belts and thus less consumer spending. We have a perfect storm and catch 22 situation. Short version is that the economy will continue to decline. The billions being spent in Iraq for destruction and war does not help. The US debt is massive and foreign investment is growing along with the influence that they can exert on our markets and National Security. Additionally the interest on the US debt is growing exacerbating our ability to barrow or pay down our debt. This only leads to higher interest rates and a lack of confidence n the markets. These problems will wash through the markets like a tidal wave leaving a lot of destruction. The pitiful stimulus package may be just enough short term, to stop the bleeding until Bush can safely escape the mess he has made. Pity the poor SOB that has to clean up all the shit he has left behind. He or she may end up with lower approval ratings than Bush and it is doubtful they can win a second term. Home prices will have to drop to the level of buying power left in the middle class. At the same time those wanting homes will have to save 20,000 or more for a home or pay a punitive interest rate. That will put one hell of a strain on consumer spending. With more homes for rent, the rental rates are dropping. That will stress those speculators that had a good enough cushion to survive the first round of foreclosures. They will have to make up the difference between the mortgage payment and the amount they receive in rent. If they have several rentals , it can get costly and we can expect more of those to go under bringing even more losses to the banks and more homes on the market.
We've come to one of the all-time inflection points in financial markets. The danger at inflection points is to believe what has always worked will continue to work.
For many years running, probably the most successful mutual fund manager was Bill Miller of Legg Mason Value Trust. He beat the S&P 500 Index for something like 15 straight years.
In 2005, he did okay but failed to beat the index for the first time. In 2006, his performance was even worse, and last year he trailed the index by 12.8%. So far this year, he trails by 2%.
What happened? Things changed. The old formulas no longer worked. Last year, he went down with such stocks as Citigroup, Pulte Homes, Morgan Stanley and Sears Holdings. Oh yeah, and in a "value fund," his #1 holding today is Amazon, with a P/E of over 100. Quite simply, he's lost.
The point is -- most people on this board were smarter about money than Bill Miller was last year. Trust your knowledge and instincts. Especially at inflection points.
--401k's/457/Roth's weren't available en mass prior to the late 80's.
--Contribution limits meant that most households didn't have a meaningful amount of stocks ($ value wise) until years later (2000?).
--The previous generation of buyers weren't doing so in the face of a generation of sellers. Never before has a large percentage of the population invested in stocks over a lifetime and then retired on the proceeds.
I think maybe you're getting at this -- the fact that it's easier to buy stocks doesn't make them intrinsically more valuable.
In fact, I would argue that the sort of blind shot-gun method of stock buying we've advocated (e.g. using index funds) may make investors less aware of their real value than less diversified investors.
This could have a negative effect on business if suddenly businessmen are being rewarded for issuing stock instead of creating wealth -- industry could become too focused on merely creating the appearance of wealth.
I remember people pulling what was left of their portfolio out of the stock market at exactly the wrong time in the 70's downturn. Same old story; timing seems to be only accurate at the wrong times!
Last year, Mom and Pop just loaded up on emerging market mutual funds, especially in the latter half of the year. What does that tell you?
My small mind is impressed that Habitat for Humanity is sweet 16 with more than a mile (5820) of homes built in 2006. Who would have thought that building for the poorest of the poor (US standards, not third world) could result in a viable, respected company?
See page 3, bottom of left column, "When to File".
I agree that any good news will have a profound impact on the prices as the activity (shorting) on these stocks seems to price in a likely bankruptcy or 2 or 10.
--I am beginning to think we may avoid a technical recession for a variety of reasons. But I think the alternative is worse.
The only reason I was positive in my retirement stock accounts over the last 10 years (although CD's beat me), was the huge stock price drop after the bubble crash. Without that ability through dollar-cost-averaging, I would have spent the entire decade purchasing overpriced stock (as opposed to only half the decade).
If we have a system dead set against stock price adjustment, this means that it will be years before we as a nation of saver/investors in stock will look back and see negative longterm returns to inflation. Rather than get the opportunity to buy on the dips, We'll have one huge slow convex, turtle shell shaped stock price growth, forcing us to buy above the trend line for longer and longer periods.
lama, thanks for the accounting clarification. Still gives access to plenty of already gone cash for these cash strapped entities. My hope is the TRUE costs get exposed & it doesn't go through because the Dems block it.
I wonder if Habitat for Humanity will stay that high. A young guy I know volunteered for a couple years--until he realized that the recipients were better off than he is.
Volunteering is something you do when you have enough money. In a protracted recession I suspect people will have to focus on earning a living instead.
"Pity the poor SOB that has to clean up all the shit he has left behind. He or she may end up with lower approval ratings than Bush and it is doubtful they can win a second term."
If the situation gets bad enough, it's always possible that the new pres could go populist and roll over the entrenched interest groups -- financial, corporate, regulatory -- and put the start of a new system in place.
That assumes that we elect somebody with FDR potential. It's not clear that any of those exist.
Which would simply mean that the next guy gets to be Hoover, and things get even worse, and the next guy is the system-changer.
The only reason I was positive in my retirement stock accounts over the last 10 years (although CD's beat me), was the huge stock price drop after the bubble crash. Without that ability through dollar-cost-averaging, I would have spent the entire decade purchasing overpriced stock (as opposed to only half the decade).
I used to think the exact same thing. I did a lot of buying with the S&P was around 800 after 9/11, but after reading Robert Shiller's work and taking some more time trying to understand stock values myself I realized I was probably lucky -- stocks appear to have been overpriced since the mid 90s and have never been fairly priced since then.
When I was buying with the S&P 500 at 800 points I now think it easily could have gone to 350 if it weren't for Greenspan's unprecedented monetary stimulus.
Zero, I wonder if Habitat will be able to pick up building lots for cheap when the other builders go BK?
I don't think the demand for affordable housing will go away. Especially when the economy is as weak as it is.
I read years ago, one of the ways to find a job in a weak economy is to volunteer in addition to the job search; it keeps your mind off the depression of no job, and helps build contacts.
My neck of the woods, northern Utah, is doing relatively well but the local food bank is still pretty busy. Always looking for more volunteers.
"Zero, I wonder if Habitat will be able to pick up building lots for cheap when the other builders go BK?
I don't think the demand for affordable housing will go away. Especially when the economy is as weak as it is."
In my local Habitat group -- I know some of the volunteers -- free land is exactly what they want. Sometimes a piece is donated by an individual; sometimes they get several lots from a developer as his way of discharging his "affordable housing" obligation to the county.
HFH in some areas also do multi-unit housing. If somebody wanted to donate a smallish quarter-built condo complex, they'd probably be all over it.
"I read years ago, one of the ways to find a job in a weak economy is to volunteer in addition to the job search; it keeps your mind off the depression of no job, and helps build contacts."
This is a good strategy; though in my area, most of the Habitat guys are retired, so I'm not sure how many hot contacts they could give you.
Volunteering is something you do when you have enough money. In a protracted recession I suspect people will have to focus on earning a living instead.
Zero | 01.29.08 - 1:50 pm | #
That is where 'co-ops' can be effective. I help make house for you if you help make house for me. I knew folks who started business co-ops in the 70s rust belt on a similar theme... I asked them what was the difference between a co-op and a small privately owned business... I was told a co-op starts out bankrupt whereas small businesses end up there. Oh - I get it (LOL).
Anyway they pulled salaries out for the better part of two decades before closing it up. They all got experience, survived stagflation and made enough to eat, live and raise families. Nothing wrong with that.
Yes. Those and others. I'm becoming an expert in 3rd-world construction techniques.
Marcus Aurelius | 01.29.08 - 2:20 pm | #
I was a mentor at a small local private college with an engineering program - tried to get students involved in those kinds of things. Brown water recycle/reuse. Local material utilization (straw bale & such). Passive solar... on and on.
They were mostly upper middle class kids from the burbs and thought I was nutz. They are probably right.
Habitat just finished a duplex around the corner from me. The lot was a tax repo with a teardown on it (I live in the only "ghetto" in Vermont, and there are few abandoned buildings floating around). Most of the work from the foundation up was done by older folk associated with the Lutheran Church. It used to be the case that owners had to put some sweat equity into their units, but I don't know if that was the case for these two units.
ac said: "...I did a lot of buying with the S&P was around 800 after 9/11, but after reading Robert Shiller's work and taking some more time trying to understand stock values myself I realized I was probably lucky -- stocks appear to have been overpriced since the mid 90s and have never been fairly priced since then...."
I not only read Shiller's work, but got all the Cowles historical data from his website and conducted my own research. By comparison with the 1960s, 70s and 80s inflation in the 1990s and 00s is persistently lower, so it's logical and reasonable for valuations (PEs) to be higher.
Naturally, in the bubble they got too high even for a lower inflation environment, but stocks (SP500 as proxy) are an excellent long-run value today, about what they were like back in 2002- when the SP500 was below 900.
I think you're right on. I think Greenspan's Irrational Exuberance speech in 1996 was accurate, just ignored.
The dynamics we noted in earlier posts (increasing stock market participation, tax incentives to do so, ease of contribution through employement, paycheck deductions to ensure consistant purchasing, derth of retiring sellers..so far..) has meant stock prices remain elevated, feeding positive sentiment.
Those dynamics are changing or slowing significantly. So will sentiment in my opinion.
And the real pain won't be caused by a crash, but a slow and financialy painful underperformance.
"It used to be the case that owners had to put some sweat equity into their units, but I don't know if that was the case for these two units."
Still supposed to be the case, but if the new tenants don't have the ability it can be difficult. I remember one house my friend helped build where two of the four occupants were disabled; the father was a paraplegic. They found something for him to do, but I think it was symbolic.
AVERAGE JOE: "Those who invest for retirment in Japan know that stocks are not the place to be. What is different there about the inherent nature in investing in companies, that means stocks don't rise over time? Is the only difference one of sentiment? Is the sentiment here due for a change?"
The big differences between Japan and USA are that: (i) US stocks are not as overvalued as Japanese stocks were in the late 80's or early 90's (even after the bubble burst in 1990, Japanese stocks were severely overvalued), (ii) Japanese stocks have very low ROE (as long as American stock have high ROE, they will be more attractive than many other competing assets).
My opinion is that the US stock market will likely not post returns in the 2000's like the 80's or 90's. The big reason stocks did well in the 80's and 90's is because interest rates were on a major long-term downtrend. Without interest rate declines, US stocks won't do as well as the 80's or 90's. But that doesn't mean that they won't post returns between 5% and 10% (versus 10%+ in the 80's and 90's). Such a return should still beat nearly all other assets.
It used to be the case that owners had to put some sweat equity into their units, but I don't know if that was the case for these two units.
I have H4H homes around me too - just up the block - usually they have more potential recipients than homes so typically future recipients work on homes even prior to their own build... at least that is how it is done around here. I know folks who got a home that way and they worked on 3-4 builds before they even got one for them self (and worked on it too).
With the glut of buildings out there and home ownership not perceived of as being the end all it was a decade ago - maybe the pool of potential recipients (and available labor) has dried up somewhat. I don't know. Love to hear from others in the know.
Naturally, in the bubble they got too high even for a lower inflation environment, but stocks (SP500 as proxy) are an excellent long-run value today, about what they were like back in 2002- when the SP500 was below 900.
Over the long-term why should stocks prices increase much more rapidly than the nominal GDP when corporate earnings increase at that rate and earnings per share at a lower rate?
Surely the historical GDP growth trend is already discounted, isn't it?
why have Japanese stocks, which hit 40,000 in 1990, 16000 in 1998 and are at 13,000 now, such a poor place to put money. Presumably inflation has been low, rates are low, and their companies are run every bit as good and effeciently as ours. What's the difference? Why is it smart to own stocks (pieces of a company) here but a financial disaster there?
"With the glut of buildings out there and home ownership not perceived of as being the end all it was a decade ago - maybe the pool of potential recipients (and available labor) has dried up somewhat. I don't know. Love to hear from others in the know."
No shortage in Santa Cruz County; ag is the biggest business here, but rents are high because of development restrictions and because we're a Silicon Valley bedroom area. So there are a lot of low-paid farmworkers who can't find a good place. Some of the families on the Habitat list are living in illegal garage conversions -- five or more people, dangerous wiring and heating, and they still can still pay $7-800 a month.
Barely,
One thing I could say in defense of some of the home builders is that they had to follow the crowd as a necessity to do business. They wouldn't sell many houses if they had insisted on financing them with 20% down if the development down the street is giving money away. Same with the banks...maybe many of them knew their actions were long-term folly, but had to compete short-term.
Maybe their would have been shareholder suits if they hadn't gone along with the crowd?
Now they all want Congress to have you and I pay for it all. No harm in asking for a bailout. When do I get mine?
"The big differences between Japan and USA are that: (i) US stocks are not as overvalued as Japanese stocks were in the late 80's or early 90's"
Boy that sure is an easy call now with 20/20 hindsight.
How do we know we're (the S&P)not overvalued now? I guess we'll just look at where we are in 20 years and then decide...and oh, by the way...stocks were overvalued in 2000. So don't buy stocks during that years.
Surely the historical GDP growth trend is already discounted, isn't it?
It depends on what discount rate you use. Currently, the yield on high-yield corporate bonds is a little over 10%. This is a surrogate for the cost of capital for mid-tier, mid-size U.S. companies. It's quite a bit higher than the same cost six months ago.
If you discounted a 5% annual growth in earnings by a 10% cost of capital (discount rate), you would arrive at a fair P/E ratio of about 12-14.
The problem is...
it doesn't look like mid-tier or small U.S. companies can grow earnings by 5% over the next few years. Earnings may contract by at least 5-10% per year over the next 2-3 years.
with more debt defaults, the cost of capital could go even higher than 10%, which could bring P/Es below 10.
The Russell 2000 currently has a TTM P/E of over 40.
I just boughtmore TWM. I now expect the Russell 2000 to decline by about 40-50% from current levels, based on speed and direction of trends, CDS spreads, and growing corporate default risk.
AVERAGE JOE: "How do we know we're (the S&P)not overvalued now? I guess we'll just look at where we are in 20 years and then decide..."
Well, it all comes down to an individual call. Of course no one knows for sure. All we can do is to look at metrics that we think are useful. The US stock market will likely drop due to the slowing economy/recession but looking out 5 years, I think it will perform better than most.
How do we know it is not (too) overvalued? Well, the classic measure it the P/E ratio. If you look at that and adjust for peak earnings (say earnings drop 20% more) then the P/E ratio will still be around 21. That's not cheap but it isn't expensive either.
Another measure that some use is to look at earnings yield (i.e. E/P) vs bond yield. If P/E is 21, earnings yield is 4.7% and that's still above bond yield. Given that inflation is not a threat and bond yields are not expected to only go up gradually (except in goldbug circles of course), stocks will still beat bonds.
You can also look at measures like dividend yield or price-to-book-value but I believe structural changes have altered the historical meaning of those (eg. many companies buyback stock, which was an innovation in the 90's; many companies have intangible value (eg. brand, intellectual property, patent, etc) that is not properly captured in book value; etc)...
Anyway, we'll see what happens. I'm just a newbie but I'll be betting in favour of the US and Japanese markets over the next 5 years. Unless you can market time gold or an emerging market or something, this should beat the rest IMO. I see the US market dropping throughout the year and maybe for one more year but then it's off to the races (but returns will not be like they were in the 80's or 90's)...
Most of those rallies are temporary IMO but nevertheless... the problem for the shorts is that it gets very risky the lower the price goes. For example, those who initiated a new short position on Ambac, a monoline, at the bottom near $5 a few weeks ago will have posted around -125% return. Those shorting homebuilders will face even bigger problems. Some beaten down stocks like Beazer have 80% of their float shorted. Some of these companies are going bankrupt but if you pick the wrong one, well...
Having said all that, I think the stock market is going to enter a correction so the shorts will survive for the time being. What I think will kill the shorts is that their hedges are going to collapse along with the broad markets. I notice a lot of bears are long commodities, gold, and emerging markets. My guess is that everything is going to decline (i.e. mini-deflation)...
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Okay, a naive question regarding stocks. Several have mentioned a trend away from dividends and to appreciation. We have baby boomers retiring who will have to sell the stock for cash to live off of, right?
Who are they going to sell to? The younger generation has a terrible savings rate and I even hear discussion of making it easier to borrow from the IRA.
I am a younger saver but recently completely exited the stock market. I think a bad recession is coming and I am appalled at the integrity of our financial leadership right now. I will asses the market again in a year or two.
Seems like demographics, the economy, and general sentiment add up to huge downward pressure.
It's probably a leverage/liquidity unwind, not a squeeze. If it's an unwind, you'll soon hear news about frozen and failing long/short hedge funds.
Squeeze is moderately bullish, unwind is very bearish.
When hedge funds freeze (deny redemptions), they have to unwind to build up cash and avoid more losses. January is the worst performance month in the history of hedge funds, in part thanks to homebuilders.
I believe I saw a news brief recently that Habitat is becoming the beneficiary of abandoned or unwanted lots and homes in a number of places. As this trend will probably increase, I expect that Habitat will need to learn how to manage an embarrassment of riches and sometimes to say "no".
RED PILL: "We have baby boomers retiring who will have to sell the stock for cash to live off of, right?...Who are they going to sell to? The younger generation has a terrible savings rate and I even hear discussion of making it easier to borrow from the IRA."
Borrowing from the IRA would be the dumbest thing since Bush thought ethanol was the future of energy... anyway...
First of all, the boomer selling will be gradual. It's not like as if everyone is going to unload assets at the same time. They will likely liquidate slowly based on their living needs.
As for who will buy it, well, it can be anyone. You don't need to worry about buyers because, at the right price, you will have buyers. As long as the GDP grows, and wealth is created, you will have new entrants (younger citizens, immigrants, etc) who will buy. Then you will have foreign capital, which will buy if the assets are attractive...
Countries like USA and Canada have positive population growth so it won't be a big deal. The problem--a minor problem--will be in Japan and Europe...
"I am a younger saver but recently completely exited the stock market. I think a bad recession is coming and I am appalled at the integrity of our financial leadership right now. I will asses the market again in a year or two."
well done red pill! the young generation is being squeezed with educ, health care and housing costs going up like crazy.
not to mention the fact that we are being taxed for social security and medicare and at the same time we need to save for our own retirement.
it's not that savings rate can go much higher for our generation. disposable income for us is a tiny fraction of what it was for the baby boomers when they were young. international investors might buy from old americans though.
If you look at that and adjust for peak earnings (say earnings drop 20% more) then the P/E ratio will still be around 21. That's not cheap but it isn't expensive either.
Didn't earnings drop closer to 50% last time around in recession that was so mild that it didn't even qualify as a recession by the common definition?
Also, we've seen P/E ratios bottom out around 6 during major recessions in the past.
Part of the problem, to my mind, of using P/E to discuss whether the US market is overvalued, is that the last 5 years have essentially been a value bubble.
If you look at the top 10 industries over the last 5 years, you see coal, steel, heavy construction, nonferrous metals, several flavors of oil services.
8 of the top 10 are traditional deep cyclicals. With cyclicals, you buy them at the trough of their earnings, when the PE is 255 and sell them at the peak, when the PE is 4.
In this case a low PE just means their earnings cycle has peaked.
HEre is a 50 year P/E ratio for S&P 500... the p/e ratios are 12 month numbers and it looks like they never ever hit 6 (hard to tell from the chart though)... the only time they went below 10 was in the 70's (they also were low during the 30's if I'm not mistaken)...
I don't think P/Es ever hit 6 since the 80's. I can be wrong but don't think so here...
That was the last time we had a major recession. Since the mid-80s we've had a long steady increase in consumer debt-to-income ratios. I think that explains why we haven't had a serious recession since. This is the reason I don't by the "Great Moderation" argument.
The next 15 years for me would be loads of fun if I spent all my retirement savings, but the 15 years after that might be a different story.
HEre is a 50 year P/E ratio for S&P 500... the p/e ratios are 12 month numbers and it looks like they never ever hit 6 (hard to tell from the chart though)... the only time they went below 10 was in the 70's (they also were low during the 30's if I'm not mistaken)...
And here's Robert Shiller's "normalized" data (up to about early 2006) based on real earnings for the preceeding 10 years (presumably a less cyclical measure):
julia said: "so then use p/e cyclically adjusted (using last 10 years of earnings), which are the only p/e you should use by the way."
Except this creates a new problem, a rubber yardstick.
I use peak earnings, myself. (Hussman is as vulnerable to unconscious bias as anyone else which is why I'm not complimentary of him, but he does have some good ideas.)
"That was the last time we had a major recession. Since the mid-80s we've had a long steady increase in consumer debt-to-income ratios. I think that explains why we haven't had a serious recession since. This is the reason I don't by the "Great Moderation" argument." -ac
I don't buy it either for the same reason. Great graph. Everyone should look at it and think hard.
It is stunning and dismaying to me that most people seem to think 25 years is forever.
I am psychologically preparing for something as severe as the great depression. If it doesn't happen I'll have a big party.
OT yet not. This is why there is a mess. This quote comes from the approval of the "stimulus package."
Americans "expect us to find ways to work together, not reasons to fight with each other," said Rep. John A. Boehner, R-Ohio, who forged the agreement with Pelosi in consultation with Treasury Secretary Henry M. Paulson.
"The sooner we get this relief in the hands of the American people, the sooner they can begin to do their job of being good consumers," Boehner said.
"Federal investigators have opened criminal inquiries into 14 companies as part of a wide-ranging investigation of the subprime mortgage crisis, focusing on accounting fraud, securitization of loans and insider trading, among other areas, the Federal Bureau of Investigation said."
Why are TTM Nasdaq and Russell P/Es so large?? 2007 was not such a bad year. The forward growth projection is huge if you go from 35-40x to 22x, I don't get it
AC: "Since the mid-80s we've had a long steady increase in consumer debt-to-income ratios. I think that explains why we haven't had a serious recession since."
I don't know if I agree with your definition of a "major recession". Anyway, what does debt/income have to do with anything? I don't think there is a correlation between debt to income and anything else, let alone asset prices. If you have some theories, I would love to hear it. I don't think debt has anything to do with it because look at Japan. Japanese citizens have very high savings rate yet economic growth is anemic and asset price increases are weak.
As far as I'm concerned, the key factors driving asset prices are (i) inflation or bond yields are proxy for inflation, (ii) valuation.
I don't know if I agree with your definition of a "major recession".
I don't have recession stats on hand right now, but I think I'd say a major recession is about a 3% real GDP decline. Neither 1991 or 2001 qualify IIRC.
Since 2002, prices of small-cap stocks and tech stocks have been growing faster than earnings, thus multiple expansion. Now, earnings are starting to contract. It's funny, but if you listen to tech news on CNBC Asia, it is TOTALLY GLOOMY and filled with negative earnings estimates.
REITs and emerging markets also had huge multi-year valuation spirals, and they also face earnings contraction.
Feds open subprime mortgage probe in 14 companies: report
By Sue Chang
SAN FRANCISCO (MarketWatch) - Federal investigators have opened criminal inquiries into 14 companies as part of a wide-ranging investigation of the subprime mortgage crisis, The Wall Street Journal reported on its Web site Tuesday. None of the 14 companies were named in the repor
ZIGURRAT: "The Japanese loaded up on debt prior 1989. A lot of it of the mortgage variety."
I have to check the numbers but I think the individuals have been mostly clean for at least a decade. The Japanese debt problem mostly lies with businesses and government. It's basically opposite the American situation. Even then, the problem is not necessarily the corporations but the banks. For at least a decade, Japanese corporate balance sheets have been clean. They have very low debt on their balance sheets (that's one reason their ROE is very low)...
probert. Russell P/E's are high because these are "growth" companies, like Chipotle Grill and other consumer dependent entities. When the consumer goes down, they will go down big.
julia: I don't know what baby boomers had a lot of disposible income in the '70s. Not me. And those drugs cost money!
exactly, but..that's crazy. I mean if we assume that 2008 will be similar to 2007 (fair enough) Russell 2000 is trading at 40x... well...
So how do we explain the 40x? Easy? your number probably includes unprofitable companies where the negative earnings make the multiple artificially higher (assuming one day they will be profitable). If you were to value these on a P/S metric, you would get a much more logical valuation.
Valuation on a price/sales basis is much more useful because it's normalized for margin variations, the russell 2000 according to some sources is trading at 0.9 - 1.0x
A more normal price/sales is 0.6 - 0.7, meaning the Russell has like 30% to go down further, not 50%. This is why I asked you where you got the P/E from, everyone calculates P/E differently, it's very annoying. I would look at P/S. It's not for nothing that Warren Buffett recommended it as a valuation for overall indeces.
I would look at P/S. It's not for nothing that Warren Buffett recommended it as a valuation for overall indeces.
E-commerce may have killed that as a valuation metric. There are a lot of mid-cap e-commerce companies built on zero-margin business models. Goods are sold with zero margin and earnings are entirely derived from exploiting opportunities of the stream of shoppers passing your way.
Amazon's "prime" accounts are a good example but it's more common than people think (it's my industry).
Even if e-commerce hasn't thrown P/S measurements out-of-whack the fact that we've shifted from a nation of manufacturers to retailers gives me pause on using P/S ratios as historical guides.
I don't know, your point sounds good but what is "alot"? What percentage of the index consists of such companies. Some of them might have lots of operating leverage... some of them are cut-throat like AMZN vs. OSTK. Also, many high ROIC companies get taken over by bigger corporations...
Let the BKs begin in earnest!
--
We are just in the first inning. Top or Bottom?
Jas
I know a few people on the list (the people who run these companies), and I've got to say, if you're in, you should get out. The big risk is with publicly-owned companies. What class of stocks you own (voting/controlling vs. non-voting/non-controlling) will be the difference in when and how badly you are taken to the cleaners. Remember: A single share of stock at $500 will give them enough money to keep their private jet aloft for a half-hour, or so, after that, your money, for that share, is gone. Even if the flight is to increase revenue (theoretically, 'cause we all know that ain't happening in reality) that revenue will only enhance your holding(s) if the voting-class stockholders don't take it as salary or perks first.
You might be left holding two bags (both empty).
Lennar's stock was up yesterday, but I can't see how they can hold up for much longer.
Oh, that charet is '06, wonder what '07 will be like. I suppose it won't be available for a while.
Bigger than Toll Brothers? Uh oh.
wow! i want to see home prices drop much more really badly!!!
About HB stocks rallying - Could it be the proposed senate version of the stimulus package? There is supposed to be some tax refunds for years of losses against taxes paid for 5 yrs back. Does anyone have the details?
Marcus Aurelius writes:
I know a few people on the list (the people who run these companies), and I've got to say, if you're in, you should get out. The big risk is with publicly-owned companies.
MA - any of the folks you know considering taking their companies private? I mean wait for the stock to just about zero... then LBO the thing for pennies THEN run the company like it ought to have been run the last year and a half (hibernate & prepare for the eventual Spring a few years from now).
If they bought 'em cheap enough & slashed ops to conserve cash instead of build out at all cost - they might actually survive. But we know no public company would be allowed to do that 'cause it would hurt 'growth'.
Any thing you can share? Not looking for names or investment inside info - could care less really - just curious on the machinations going on. Its the 'ops' side of my brain asking.
TIA.
"MA - any of the folks you know considering taking their companies private?"
Why? Go CH11, shaft common to zero, reorg debt, and emerge to try to run a recession builder, rather than the boom builders as they are structured now.
OT: very strong durable goods report. Strong upward revisions. This looks indeed more like the beginning of an upturn than the end of it. This is like 2003-2004 or 1993.
O-Joe
This is like 2003-2004 or 1993.
Sorry I meant 2002-2003 or 1991-1992.
O-Joe
AN even more up-to-date chart of interest rates is on the home page
(Google is your friend, but bit scatter-brained sometimes).
Oops, sorry, wrong thread.
Durable goods are a volatile indicator, no?
PCE/Personal Income on Thursday will be big for me. Strong numbers there and I may scale back and start nibbling on the long side a little.
I don't see it happening - sales #s have been too poor, but who knows.
Japan's Long-Awaited Inflation Saps Spending, Growth
Japan's Long-Awaited Inflation Saps Spending, Growth (Update2) - Bloomberg.com
Note the $1.8B in debt. If their creditors want to recover some of that, they better start dumping those Florida properties before prices drop more.
I bet number one will probably go down too because we just started in a recession. so diversification is so important guys here is a video that will show the importance of it since we had to many investors in the housing industry Lively Money: Why money should be in same place ;The art of diversification!!!
barely:
Industry could get fattened tax refunds under plan
My tax lawyer friends don't think it will make it into the "stimulus package", because it's too controversial. That's not to say it's entirely dead.
There is talk among the rank and file of taking at least one of the companies private - I've heard nothing from management (although, I suspect they have looked at every option).
Again, if the company goes private, the second-class shareholder stands to loose everything, while the voting class (not always the preferred stock, BTW) is left with a skeletal, but functional business concern.
Also, "THEN run the company like it ought to have been run the last year and a half" isn't really applicable. These guys want money, and money only, and will not run a company for less than big bucks. In a private (and I mean dinner table private) conversation with one of the CEOs in '05, I warned of the coming crash and was rebuffed for even thinking such a thing. That fellow predicted 20% appreciation in house prices for the foreseeable future. We parted ways shortly thereafter (on a related note, I was recently told by this fellow's wife, that he said that he wished he had listened to me).
Anyway, these guys got rich on a bubble. I don't think they're such great businessmen outside a bubble environment. I think they're taking a cue from Bush and taking what they can, while they can. Why work hard when you can retire comfortably. We'll see.
Finally, in 2004 (or thereabouts) one of the first names on the list purchased an estate in FL (with no previous connection to the state) for upwards of $70 million (look it up - I don't want to drop names). This was the first confirmation that the numbers I was seeing were foreshadowing a crash - FL has the homestead exemption.
Get out while you can.
About HB stocks rallying - Could it be the proposed senate version of the stimulus package?
I still suspect it's just hedgies unwinding and taking down profitable long-short bets to pay margin calls.
It's ironic that a deleveraging event could send bad stocks higher and higher, but that's precisely what you'd expect conceptually.
Maybe the same advice applies for permabears as well as permabulls:
Diversifly, diversifly, diversifly.
Why? Go CH11, shaft common to zero, reorg debt, and emerge to try to run a recession builder, rather than the boom builders as they are structured now.
If they let it go CH11 anyone can make a bid on reorg - if they buy just PRIOR to CH11 they get the company for pennies and hold control. In CH11 who knows who comes out in control?
If it goes CH11 the insiders frequently get tossed unless it is a prepackaged BK - they get tossed because they were the reason it goes CH11 in the first place.
The key question is how much liability comes along with the zero price if buying prior to debt scrub in CH11... if a lot of debt than zero is too much to pay for these firms. Insiders know all that - more than is reported usually, where the bodies are really buried - that's why I ask.
Washington Post on Jim Cramer!
The Fed In The Echo Chamber
"Call this the rise of financial populism. Cramer is its biggest star, and, in some ways, it has fundamentally altered the climate in which the Federal Reserve makes economic policy."
Robert J. Samuelson - The Fed In the Echo Chamber - washingtonpost.com
would counties end up having to unload mc mansions in tax sales? offering "no property tax for 10 years" or so in order to stop spending money on upkeeping?
or am i dreaming too far?
Going back to the SP Case-Shiller numbers release today, heres a comparison of the LA numbers from the last cycle and our current one.
During the last cycle prices peaked June 1990 at 100.24 and bottomed March 1996 at 73.07 (5 year and 9 months). Total drop in prices was 27%.
Year-over-year price appreciation peaked May 1989 at 30% and reached a bottom August 1993 at -10% (4 years and 3 months). Year-over-year price appreciation was negative from November 1990 until September 1996 (5 years and 10 months).
Current cycle:
Prices peaked September 2006 at 273.94, and were now at 240.43 for November 2007 (1 year and 2 months later). Drop in prices so far is 12%.
Price appreciation peaked at 31% in August 2004, and were now at -12% (3 years and 3 months later).
Key Points:
Either weve still got a long way to go on the down side, or its different this time.
great job picasso!
it's different this time, it's a bigger bubble deflating. hence there is more room to fall. (my take)
CR - we were a day early this year. Hahaha. Let the parade of BKs begin!
The tax loss carryback usually allows for 3 years back. This expands the carryback to 5 years. Most of these homebuilders made so much money in the last 3, I'm not sure expanding it to 5 makes much difference.
From the Cramer article:
From 1980 to 2005, the share of U.S. households owning stocks or mutual funds went from less than 19 percent to 50 percent.
We should think about the demographics of stocks the same way we think of the now declining homeownership rate.
If the rise in owner-occupied stocks reverses also, it could lead to a long generational bear market like 1966-1982.
Marcus, I know who you are talking about - NVR's Schar. If his management of NVR in any way reflects the sorry goings on of the Washington Redskins (he's a minority owner) then that company is in for a world of hurt.
Like I said, things are different outside the bubble.
From 1980 to 2005, the share of U.S. households owning stocks or mutual funds went from less than 19 percent to 50 percent.
Also, this explains why a stockmarket collapse could be far more damaging today than in 1987, contrary to Bernanke's assertion that rate cuts were the reason the 1987 crash didn't take down the economy.
Maybe, instead, it was because most consumers weren't dependent on stocks for their wealth.
dunham,
If this is the way you invest after reading all the wisdom here, I feel sorry for you.
This is going to be a long, deep bear market, and the climb back won't be quick or smooth. It doesn't matter what any little piece of data says. The big picture has spoken, and the die is cast.
ac,
I don't think that means very much. It's largely due to the decline in popularity of pensions and the proliferation of IRAs and 401k plans.
MDC went BK many years ago. Now, one of the better run public builders with a conservative game plan. Top officers and stockholders same as prior company. So, BK not necessarily bad for executive officers.
The amazing thing is, Wall Street talked so many Mom and Pops into stocks while two trends were going on that don't help Mom and Pop at all: 1) lesser stock dividends; and 2) institutional domination of the markets on both long and short sides.
When you buy stocks that don't pay dividends only for the possibility of future appreciation, you're setting yourself up to be eaten by the sharks.
Are you really sure you'll get your money out before the sharks eat it? The great stock con job is just amazing.
Rich,
It would not be wise to invest on the basis of commentary found on a blog either, even on as prescient as this one has shown to be. It is also important to react when the facts change.
I certainly feel like a crash is imminent - so far, this bear market has performed as advertised and expected - big move down, bear rally hitting former support areas, MSM telling us the bottom is in and we are onward and upward, etc. Market is being set up for a HUGE selloff right now.
That said, if people are still making money and spending money, we may get out of this yet, and I'm keeping my options open. It can't hurt to hedge myself to the long side in good companies with good fundamentals. We'll see.
Full disclosure: Own OTM SPY Puts w/ Feb/Mar/Apr expirations.
I don't think that means very much. It's largely due to the decline in popularity of pensions and the proliferation of IRAs and 401k plans
I dunno, why were stocks so popular in 1970s then?
The problem is not merely that there are 7 million fewer shareholders
than there were in 1970. Younger investors [Baby Boomers?], in
particular, are avoiding stocks. Between 1970 and 1975, the number of
investors declined in every age group but one: individuals 65 and
older. While the number of investors under 65 dropped by about 25%,
the number of investors over 65 jumped by more than 30%. Only the
elderly who have not understood the changes in the nation's financial
markets, or who are unable to adjust to them, are sticking with
stocks. [From "The Death of Equities" ca. 1979.]
Let's abandon Social Security and force people to put their retirement nest-egg into the Stock Market!
Y'all should elect me President and Chief Deciderer.
Strategery.
BTW, the way the Q is performing this week is VERY bearish IMHO.
ac,
Does that quote really say stocks were popular in the 1970s? It tells you the percentage change, but it doesn't tell you where things started.
I'd be surprised if considerably more than 19% of the population owned stocks in the 1970s. It may be a little more, since 1980 is when equities were at their low point, but I don't think they were significantly more popular prior to 1980.
larryk, Thanks for the link. I saw a summary. If it goes through IBs, Mortgage banks, HBs... all the losers should rake in a ton of cash. I wonder what it does to the size of the package. Should mushroom it to $300B.
ac,
To clarify, I don't think that article is suggesting that stocks were as popular in the 1970s as they are today.
HB performance has been out-of-control for the last two weeks.
I honestly can't understand how any of these companies make any money in the next two years.
It would not be unthinkable to suggest that the whole model that HBs are based on - suburban subdivisions - is nearing extinction as a viable growth model.
The HBs that are positioned to compete in urban, infill areas should make it out a live, but the PHMs, the CTXs, the BZHs - don't understand how they ever get back to profitability.
For what its worth, TOL has an urban division (building some awful glass condos in Brooklyn, Queens and Manhattan), but I don't know if it will be enough.
Wanna' see the future of housing in the US? Look at Europe and Asia.
Does that quote really say stocks were popular in the 1970s? It tells you the percentage change, but it doesn't tell you where things started.
Well, I meant the 1960s, but you're right -- the exact ownership rates are necessary to get a clear picture, but the overall article suggests a large widespread migration out of stocks during the 1970s.
Take a look at this link, more data may actually be in there:
Business Week's "The Death of Equities" Revisted
Speaking of Demographic Changes in the Stock Market:
--401k's/457/Roth's weren't available en mass prior to the late 80's.
--Contribution limits meant that most households didn't have a meaningful amount of stocks ($ value wise) until years later (2000?).
--The previous generation of buyers weren't doing so in the face of a generation of sellers. Never before has a large percentage of the population invested in stocks over a lifetime and then retired on the proceeds. The next (current) generation of long term buyers are doing so in the face of a generation of sellers. Demand in the past may have been artificially high due to a belief in past performance and a oversupply of buyers v.s. a derth of sellers.
--Current demand is based upon the absolute universal belief that stocks go up over the long run. That is coming into question. (old axioms like House prices always rise falling by the wayside). The S&P has underperformed money markets over the last decade (3.1%).
--Those who invest for retirment in Japan know that stocks are not the place to be. What is different there about the inherent nature in investing in companies, that means stocks don't rise over time? Is the only difference one of sentiment? Is the sentiment here due for a change?
I remember people pulling what was left of their portfolio out of the stock market at exactly the wrong time in the 70's downturn. Same old story; timing seems to be only accurate at the wrong times!
lama, according to what I read the carryback goes 5yrs from 2yrs. Big difference. It's enough to drive some speculative interest and since these stocks are so heavily shorted massive short squeeze and hedgie unwinding.
Cut the interest all they want, it will help the
. fraudulent markets and mortgage companies in the very short run but the banks and corporations have cut the heart out of the middle class and made homes unfordable. If people were having a hard time with mortgage rates before, now those that lost homes have ruined credit for the next 7 to 10 years, if not for life. New lending standards require a 20% down for a decent and fair interest rate. Guess what, Americans have blown through their pitiful little savings. Also consider that good paying jobs are still being outsourced along with whole business that generates them. The government continues to reward companies with tax advantage for taking the jobs and manufacturing abroad. When you put all these facts together, you have a housing market that will continue to spiral downward, with prices dropping and a limited number of qualified buyers. Those that had the money to buy or hold on to their house will have to tighten their belts and thus less consumer spending. We have a perfect storm and catch 22 situation. Short version is that the economy will continue to decline. The billions being spent in Iraq for destruction and war does not help. The US debt is massive and foreign investment is growing along with the influence that they can exert on our markets and National Security. Additionally the interest on the US debt is growing exacerbating our ability to barrow or pay down our debt. This only leads to higher interest rates and a lack of confidence n the markets. These problems will wash through the markets like a tidal wave leaving a lot of destruction. The pitiful stimulus package may be just enough short term, to stop the bleeding until Bush can safely escape the mess he has made. Pity the poor SOB that has to clean up all the shit he has left behind. He or she may end up with lower approval ratings than Bush and it is doubtful they can win a second term. Home prices will have to drop to the level of buying power left in the middle class. At the same time those wanting homes will have to save 20,000 or more for a home or pay a punitive interest rate. That will put one hell of a strain on consumer spending. With more homes for rent, the rental rates are dropping. That will stress those speculators that had a good enough cushion to survive the first round of foreclosures. They will have to make up the difference between the mortgage payment and the amount they receive in rent. If they have several rentals , it can get costly and we can expect more of those to go under bringing even more losses to the banks and more homes on the market.
We've come to one of the all-time inflection points in financial markets. The danger at inflection points is to believe what has always worked will continue to work.
For many years running, probably the most successful mutual fund manager was Bill Miller of Legg Mason Value Trust. He beat the S&P 500 Index for something like 15 straight years.
In 2005, he did okay but failed to beat the index for the first time. In 2006, his performance was even worse, and last year he trailed the index by 12.8%. So far this year, he trails by 2%.
What happened? Things changed. The old formulas no longer worked. Last year, he went down with such stocks as Citigroup, Pulte Homes, Morgan Stanley and Sears Holdings. Oh yeah, and in a "value fund," his #1 holding today is Amazon, with a P/E of over 100. Quite simply, he's lost.
The point is -- most people on this board were smarter about money than Bill Miller was last year. Trust your knowledge and instincts. Especially at inflection points.
--401k's/457/Roth's weren't available en mass prior to the late 80's.
--Contribution limits meant that most households didn't have a meaningful amount of stocks ($ value wise) until years later (2000?).
--The previous generation of buyers weren't doing so in the face of a generation of sellers. Never before has a large percentage of the population invested in stocks over a lifetime and then retired on the proceeds.
I think maybe you're getting at this -- the fact that it's easier to buy stocks doesn't make them intrinsically more valuable.
In fact, I would argue that the sort of blind shot-gun method of stock buying we've advocated (e.g. using index funds) may make investors less aware of their real value than less diversified investors.
This could have a negative effect on business if suddenly businessmen are being rewarded for issuing stock instead of creating wealth -- industry could become too focused on merely creating the appearance of wealth.
You could get a bubble economy that way!
Theoretically, anyhow.
Last year, Mom and Pop just loaded up on emerging market mutual funds, especially in the latter half of the year. What does that tell you?
My small mind is impressed that Habitat for Humanity is sweet 16 with more than a mile (5820) of homes built in 2006. Who would have thought that building for the poorest of the poor (US standards, not third world) could result in a viable, respected company?
Building for the poorest of the poor in the US is an emerging market.
Barely,
The author has that detail incorrect. It is 3 years.
http://www.irs.gov/pub/irs-pdf/f1120x.pdf
See page 3, bottom of left column, "When to File".
I agree that any good news will have a profound impact on the prices as the activity (shorting) on these stocks seems to price in a likely bankruptcy or 2 or 10.
--I am beginning to think we may avoid a technical recession for a variety of reasons. But I think the alternative is worse.
The only reason I was positive in my retirement stock accounts over the last 10 years (although CD's beat me), was the huge stock price drop after the bubble crash. Without that ability through dollar-cost-averaging, I would have spent the entire decade purchasing overpriced stock (as opposed to only half the decade).
If we have a system dead set against stock price adjustment, this means that it will be years before we as a nation of saver/investors in stock will look back and see negative longterm returns to inflation. Rather than get the opportunity to buy on the dips, We'll have one huge slow convex, turtle shell shaped stock price growth, forcing us to buy above the trend line for longer and longer periods.
This is worse.
lama, thanks for the accounting clarification. Still gives access to plenty of already gone cash for these cash strapped entities. My hope is the TRUE costs get exposed & it doesn't go through because the Dems block it.
other Jim,
I wonder if Habitat for Humanity will stay that high. A young guy I know volunteered for a couple years--until he realized that the recipients were better off than he is.
Volunteering is something you do when you have enough money. In a protracted recession I suspect people will have to focus on earning a living instead.
"Pity the poor SOB that has to clean up all the shit he has left behind. He or she may end up with lower approval ratings than Bush and it is doubtful they can win a second term."
If the situation gets bad enough, it's always possible that the new pres could go populist and roll over the entrenched interest groups -- financial, corporate, regulatory -- and put the start of a new system in place.
That assumes that we elect somebody with FDR potential. It's not clear that any of those exist.
Which would simply mean that the next guy gets to be Hoover, and things get even worse, and the next guy is the system-changer.
The only reason I was positive in my retirement stock accounts over the last 10 years (although CD's beat me), was the huge stock price drop after the bubble crash. Without that ability through dollar-cost-averaging, I would have spent the entire decade purchasing overpriced stock (as opposed to only half the decade).
I used to think the exact same thing. I did a lot of buying with the S&P was around 800 after 9/11, but after reading Robert Shiller's work and taking some more time trying to understand stock values myself I realized I was probably lucky -- stocks appear to have been overpriced since the mid 90s and have never been fairly priced since then.
When I was buying with the S&P 500 at 800 points I now think it easily could have gone to 350 if it weren't for Greenspan's unprecedented monetary stimulus.
At least in that case ignorance was bliss.
Zero, I wonder if Habitat will be able to pick up building lots for cheap when the other builders go BK?
I don't think the demand for affordable housing will go away. Especially when the economy is as weak as it is.
I read years ago, one of the ways to find a job in a weak economy is to volunteer in addition to the job search; it keeps your mind off the depression of no job, and helps build contacts.
My neck of the woods, northern Utah, is doing relatively well but the local food bank is still pretty busy. Always looking for more volunteers.
Marcus Aurelius writes:
Building for the poorest of the poor in the US is an emerging market.
Marcus Aurelius | 01.29.08 - 1:34 pm | #
High growth potential - unfortunately.
Ever see these?
Ever see these?
dryfly | 01.29.08 - 2:13 pm
Probably better built than the McMansions of late...
dryfly,
Yes. Those and others. I'm becoming an expert in 3rd-world construction techniques.
"Zero, I wonder if Habitat will be able to pick up building lots for cheap when the other builders go BK?
I don't think the demand for affordable housing will go away. Especially when the economy is as weak as it is."
In my local Habitat group -- I know some of the volunteers -- free land is exactly what they want. Sometimes a piece is donated by an individual; sometimes they get several lots from a developer as his way of discharging his "affordable housing" obligation to the county.
HFH in some areas also do multi-unit housing. If somebody wanted to donate a smallish quarter-built condo complex, they'd probably be all over it.
"I read years ago, one of the ways to find a job in a weak economy is to volunteer in addition to the job search; it keeps your mind off the depression of no job, and helps build contacts."
This is a good strategy; though in my area, most of the Habitat guys are retired, so I'm not sure how many hot contacts they could give you.
Volunteering is something you do when you have enough money. In a protracted recession I suspect people will have to focus on earning a living instead.
Zero | 01.29.08 - 1:50 pm | #
That is where 'co-ops' can be effective. I help make house for you if you help make house for me. I knew folks who started business co-ops in the 70s rust belt on a similar theme... I asked them what was the difference between a co-op and a small privately owned business... I was told a co-op starts out bankrupt whereas small businesses end up there. Oh - I get it (LOL).
Anyway they pulled salaries out for the better part of two decades before closing it up. They all got experience, survived stagflation and made enough to eat, live and raise families. Nothing wrong with that.
Yes. Those and others. I'm becoming an expert in 3rd-world construction techniques.
Marcus Aurelius | 01.29.08 - 2:20 pm | #
I was a mentor at a small local private college with an engineering program - tried to get students involved in those kinds of things. Brown water recycle/reuse. Local material utilization (straw bale & such). Passive solar... on and on.
They were mostly upper middle class kids from the burbs and thought I was nutz. They are probably right.
Habitat just finished a duplex around the corner from me. The lot was a tax repo with a teardown on it (I live in the only "ghetto" in Vermont, and there are few abandoned buildings floating around). Most of the work from the foundation up was done by older folk associated with the Lutheran Church. It used to be the case that owners had to put some sweat equity into their units, but I don't know if that was the case for these two units.
ac said: "...I did a lot of buying with the S&P was around 800 after 9/11, but after reading Robert Shiller's work and taking some more time trying to understand stock values myself I realized I was probably lucky -- stocks appear to have been overpriced since the mid 90s and have never been fairly priced since then...."
I not only read Shiller's work, but got all the Cowles historical data from his website and conducted my own research. By comparison with the 1960s, 70s and 80s inflation in the 1990s and 00s is persistently lower, so it's logical and reasonable for valuations (PEs) to be higher.
Naturally, in the bubble they got too high even for a lower inflation environment, but stocks (SP500 as proxy) are an excellent long-run value today, about what they were like back in 2002- when the SP500 was below 900.
S.
ac,
I think you're right on. I think Greenspan's Irrational Exuberance speech in 1996 was accurate, just ignored.
The dynamics we noted in earlier posts (increasing stock market participation, tax incentives to do so, ease of contribution through employement, paycheck deductions to ensure consistant purchasing, derth of retiring sellers..so far..) has meant stock prices remain elevated, feeding positive sentiment.
Those dynamics are changing or slowing significantly. So will sentiment in my opinion.
And the real pain won't be caused by a crash, but a slow and financialy painful underperformance.
"It used to be the case that owners had to put some sweat equity into their units, but I don't know if that was the case for these two units."
Still supposed to be the case, but if the new tenants don't have the ability it can be difficult. I remember one house my friend helped build where two of the four occupants were disabled; the father was a paraplegic. They found something for him to do, but I think it was symbolic.
AVERAGE JOE: "Those who invest for retirment in Japan know that stocks are not the place to be. What is different there about the inherent nature in investing in companies, that means stocks don't rise over time? Is the only difference one of sentiment? Is the sentiment here due for a change?"
The big differences between Japan and USA are that: (i) US stocks are not as overvalued as Japanese stocks were in the late 80's or early 90's (even after the bubble burst in 1990, Japanese stocks were severely overvalued), (ii) Japanese stocks have very low ROE (as long as American stock have high ROE, they will be more attractive than many other competing assets).
My opinion is that the US stock market will likely not post returns in the 2000's like the 80's or 90's. The big reason stocks did well in the 80's and 90's is because interest rates were on a major long-term downtrend. Without interest rate declines, US stocks won't do as well as the 80's or 90's. But that doesn't mean that they won't post returns between 5% and 10% (versus 10%+ in the 80's and 90's). Such a return should still beat nearly all other assets.
It used to be the case that owners had to put some sweat equity into their units, but I don't know if that was the case for these two units.
I have H4H homes around me too - just up the block - usually they have more potential recipients than homes so typically future recipients work on homes even prior to their own build... at least that is how it is done around here. I know folks who got a home that way and they worked on 3-4 builds before they even got one for them self (and worked on it too).
With the glut of buildings out there and home ownership not perceived of as being the end all it was a decade ago - maybe the pool of potential recipients (and available labor) has dried up somewhat. I don't know. Love to hear from others in the know.
Naturally, in the bubble they got too high even for a lower inflation environment, but stocks (SP500 as proxy) are an excellent long-run value today, about what they were like back in 2002- when the SP500 was below 900.
Over the long-term why should stocks prices increase much more rapidly than the nominal GDP when corporate earnings increase at that rate and earnings per share at a lower rate?
Surely the historical GDP growth trend is already discounted, isn't it?
Sebastian,
why have Japanese stocks, which hit 40,000 in 1990, 16000 in 1998 and are at 13,000 now, such a poor place to put money. Presumably inflation has been low, rates are low, and their companies are run every bit as good and effeciently as ours. What's the difference? Why is it smart to own stocks (pieces of a company) here but a financial disaster there?
"With the glut of buildings out there and home ownership not perceived of as being the end all it was a decade ago - maybe the pool of potential recipients (and available labor) has dried up somewhat. I don't know. Love to hear from others in the know."
No shortage in Santa Cruz County; ag is the biggest business here, but rents are high because of development restrictions and because we're a Silicon Valley bedroom area. So there are a lot of low-paid farmworkers who can't find a good place. Some of the families on the Habitat list are living in illegal garage conversions -- five or more people, dangerous wiring and heating, and they still can still pay $7-800 a month.
Barely,
One thing I could say in defense of some of the home builders is that they had to follow the crowd as a necessity to do business. They wouldn't sell many houses if they had insisted on financing them with 20% down if the development down the street is giving money away. Same with the banks...maybe many of them knew their actions were long-term folly, but had to compete short-term.
Maybe their would have been shareholder suits if they hadn't gone along with the crowd?
Now they all want Congress to have you and I pay for it all. No harm in asking for a bailout. When do I get mine?
"The big differences between Japan and USA are that: (i) US stocks are not as overvalued as Japanese stocks were in the late 80's or early 90's"
Boy that sure is an easy call now with 20/20 hindsight.
How do we know we're (the S&P)not overvalued now? I guess we'll just look at where we are in 20 years and then decide...and oh, by the way...stocks were overvalued in 2000. So don't buy stocks during that years.
Comstock next?
It depends on what discount rate you use. Currently, the yield on high-yield corporate bonds is a little over 10%. This is a surrogate for the cost of capital for mid-tier, mid-size U.S. companies. It's quite a bit higher than the same cost six months ago.
If you discounted a 5% annual growth in earnings by a 10% cost of capital (discount rate), you would arrive at a fair P/E ratio of about 12-14.
The problem is...
it doesn't look like mid-tier or small U.S. companies can grow earnings by 5% over the next few years. Earnings may contract by at least 5-10% per year over the next 2-3 years.
with more debt defaults, the cost of capital could go even higher than 10%, which could bring P/Es below 10.
The Russell 2000 currently has a TTM P/E of over 40.
I just boughtmore TWM. I now expect the Russell 2000 to decline by about 40-50% from current levels, based on speed and direction of trends, CDS spreads, and growing corporate default risk.
Here are the returns of some big home builder stocks since their Jan. 8, 2008 closing price through yesterday. (most are up again today)
HOV 72%
BZH 68%
PHM 59%
DHI 54%
KBH 53%
RYL 48% (the company reported over a $1 Billion loss last week...no matter)
CTX 47%
TOL 40%
MDC 32%
not bad for 20 days huh?
squeeze of the decade!
AVERAGE JOE: "How do we know we're (the S&P)not overvalued now? I guess we'll just look at where we are in 20 years and then decide..."
Well, it all comes down to an individual call. Of course no one knows for sure. All we can do is to look at metrics that we think are useful. The US stock market will likely drop due to the slowing economy/recession but looking out 5 years, I think it will perform better than most.
How do we know it is not (too) overvalued? Well, the classic measure it the P/E ratio. If you look at that and adjust for peak earnings (say earnings drop 20% more) then the P/E ratio will still be around 21. That's not cheap but it isn't expensive either.
Another measure that some use is to look at earnings yield (i.e. E/P) vs bond yield. If P/E is 21, earnings yield is 4.7% and that's still above bond yield. Given that inflation is not a threat and bond yields are not expected to only go up gradually (except in goldbug circles of course), stocks will still beat bonds.
You can also look at measures like dividend yield or price-to-book-value but I believe structural changes have altered the historical meaning of those (eg. many companies buyback stock, which was an innovation in the 90's; many companies have intangible value (eg. brand, intellectual property, patent, etc) that is not properly captured in book value; etc)...
Anyway, we'll see what happens. I'm just a newbie but I'll be betting in favour of the US and Japanese markets over the next 5 years. Unless you can market time gold or an emerging market or something, this should beat the rest IMO. I see the US market dropping throughout the year and maybe for one more year but then it's off to the races (but returns will not be like they were in the 80's or 90's)...
DenverKen - if the stock price of HBs goes up if a few more go bankrupt, imagine how high they would go if they ALL went bankrupt;-)
Oops - miswrote. Should say
DenverKen - if the stock price of HBs goes up if one goes bankrupt, imagine how high they would go if they ALL went bankrupt;-)
DenverKEN: "squeeze of the decade!"
Most of those rallies are temporary IMO but nevertheless... the problem for the shorts is that it gets very risky the lower the price goes. For example, those who initiated a new short position on Ambac, a monoline, at the bottom near $5 a few weeks ago will have posted around -125% return. Those shorting homebuilders will face even bigger problems. Some beaten down stocks like Beazer have 80% of their float shorted. Some of these companies are going bankrupt but if you pick the wrong one, well...
Having said all that, I think the stock market is going to enter a correction so the shorts will survive for the time being. What I think will kill the shorts is that their hedges are going to collapse along with the broad markets. I notice a lot of bears are long commodities, gold, and emerging markets. My guess is that everything is going to decline (i.e. mini-deflation)...
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Okay, a naive question regarding stocks. Several have mentioned a trend away from dividends and to appreciation. We have baby boomers retiring who will have to sell the stock for cash to live off of, right?
Who are they going to sell to? The younger generation has a terrible savings rate and I even hear discussion of making it easier to borrow from the IRA.
I am a younger saver but recently completely exited the stock market. I think a bad recession is coming and I am appalled at the integrity of our financial leadership right now. I will asses the market again in a year or two.
Seems like demographics, the economy, and general sentiment add up to huge downward pressure.
It's probably a leverage/liquidity unwind, not a squeeze. If it's an unwind, you'll soon hear news about frozen and failing long/short hedge funds.
Squeeze is moderately bullish, unwind is very bearish.
When hedge funds freeze (deny redemptions), they have to unwind to build up cash and avoid more losses. January is the worst performance month in the history of hedge funds, in part thanks to homebuilders.
I believe I saw a news brief recently that Habitat is becoming the beneficiary of abandoned or unwanted lots and homes in a number of places. As this trend will probably increase, I expect that Habitat will need to learn how to manage an embarrassment of riches and sometimes to say "no".
RED PILL: "We have baby boomers retiring who will have to sell the stock for cash to live off of, right?...Who are they going to sell to? The younger generation has a terrible savings rate and I even hear discussion of making it easier to borrow from the IRA."
Borrowing from the IRA would be the dumbest thing since Bush thought ethanol was the future of energy... anyway...
First of all, the boomer selling will be gradual. It's not like as if everyone is going to unload assets at the same time. They will likely liquidate slowly based on their living needs.
As for who will buy it, well, it can be anyone. You don't need to worry about buyers because, at the right price, you will have buyers. As long as the GDP grows, and wealth is created, you will have new entrants (younger citizens, immigrants, etc) who will buy. Then you will have foreign capital, which will buy if the assets are attractive...
Countries like USA and Canada have positive population growth so it won't be a big deal. The problem--a minor problem--will be in Japan and Europe...
"I am a younger saver but recently completely exited the stock market. I think a bad recession is coming and I am appalled at the integrity of our financial leadership right now. I will asses the market again in a year or two."
well done red pill! the young generation is being squeezed with educ, health care and housing costs going up like crazy.
not to mention the fact that we are being taxed for social security and medicare and at the same time we need to save for our own retirement.
it's not that savings rate can go much higher for our generation. disposable income for us is a tiny fraction of what it was for the baby boomers when they were young. international investors might buy from old americans though.
Yes, but when is RYL going BK? That's what I really want to know, LOL!
good point! it's at $32.50, plenty of room to fall ... i'm not shorting them, but i should have!!!
julia, there's still time. PLENTY of meat left on that bone, imho.
will do research on it. the location seems promising
Rich
The Russell 2000 currently has a TTM P/E of over 40.
Where do you see this figure, and what do you have for price/sales?
Here is a listing of P/Es...
Russell 2000 TTM P/E = 37.25
NASDAQ TTM P/E = 35.20
S&P 500 TTM p/e = 17.81
Russell 2000 forward P/E = 22.5
NASDAQ forward P/E = 22.1
S&P 500 forward p/e = 14.17
If you look at that and adjust for peak earnings (say earnings drop 20% more) then the P/E ratio will still be around 21. That's not cheap but it isn't expensive either.
Didn't earnings drop closer to 50% last time around in recession that was so mild that it didn't even qualify as a recession by the common definition?
Also, we've seen P/E ratios bottom out around 6 during major recessions in the past.
Whether it's intentional or not, I love how the market rallies heading into the FOMC decision.
That way if Bernanke doesn't cut he looks like the bad guy when stocks drop several hundred points.
PE, shmee eee......
Future PE's are meaningless:
remember:
"CFC will be profitable in the 4th Quarter."
Ford stock the same price as it was in 1984. What was it's forward PE every quarter for the last 25 years?
"Buy what you know...it's not like people will stop buying cars" (Again I give you Ford's stock).
ac: "Also, we've seen P/E ratios bottom out around 6 during major recessions in the past."
I don't think P/Es ever hit 6 since the 80's. I can be wrong but don't think so here...
Part of the problem, to my mind, of using P/E to discuss whether the US market is overvalued, is that the last 5 years have essentially been a value bubble.
If you look at the top 10 industries over the last 5 years, you see coal, steel, heavy construction, nonferrous metals, several flavors of oil services.
8 of the top 10 are traditional deep cyclicals. With cyclicals, you buy them at the trough of their earnings, when the PE is 255 and sell them at the peak, when the PE is 4.
In this case a low PE just means their earnings cycle has peaked.
Redpill,
There are now Debit cards people can use to draw on their 401k's.
I can picture Satan in Hell saying "why didn't I think of that?".
so then use p/e cyclically adjusted (using last 10 years of earnings), which are the only p/e you should use by the way.
check shiller's paper.
HEre is a 50 year P/E ratio for S&P 500... the p/e ratios are 12 month numbers and it looks like they never ever hit 6 (hard to tell from the chart though)... the only time they went below 10 was in the 70's (they also were low during the 30's if I'm not mistaken)...
--
Breaking News...
14 companies under criminal investigation by FBI for sub-prime fraud.
Jas
I don't think P/Es ever hit 6 since the 80's. I can be wrong but don't think so here...
That was the last time we had a major recession. Since the mid-80s we've had a long steady increase in consumer debt-to-income ratios. I think that explains why we haven't had a serious recession since. This is the reason I don't by the "Great Moderation" argument.
The next 15 years for me would be loads of fun if I spent all my retirement savings, but the 15 years after that might be a different story.
See this graph.
Listed TTM at Wall Street Journal by Birinyi Associates.
P/Es & Yields on Major Indexes - Markets Data Center - WSJ.com
Today 37.69
Listed TTM by ProShares at: ProShares ETFs - Short Russell2000 - RWM - Index
Today 40.82
JULIA: "so then use p/e cyclically adjusted (using last 10 years of earnings), which are the only p/e you should use by the way."
Yeah... that's the Graham & Dodd method... not trying to pimp my blog but I made a post about this a while ago...
scary savings rate ac
but then some people say "social security" payments should be counted as savings. i find that hilarious being young...
HEre is a 50 year P/E ratio for S&P 500... the p/e ratios are 12 month numbers and it looks like they never ever hit 6 (hard to tell from the chart though)... the only time they went below 10 was in the 70's (they also were low during the 30's if I'm not mistaken)...
And here's Robert Shiller's "normalized" data (up to about early 2006) based on real earnings for the preceeding 10 years (presumably a less cyclical measure):
S&P 500 PE Ratios
SivaramVelauthapillai, i remember reading that NYT article, i couldn't belive it, a good article!
That long-term P/E chart really tells the story. See the 30-year K wave in there? We're heading back toward 10.
julia said: "so then use p/e cyclically adjusted (using last 10 years of earnings), which are the only p/e you should use by the way."
Except this creates a new problem, a rubber yardstick.
I use peak earnings, myself. (Hussman is as vulnerable to unconscious bias as anyone else which is why I'm not complimentary of him, but he does have some good ideas.)
Hussman Funds - Price to Peak Earnings
S.
"That was the last time we had a major recession. Since the mid-80s we've had a long steady increase in consumer debt-to-income ratios. I think that explains why we haven't had a serious recession since. This is the reason I don't by the "Great Moderation" argument." -ac
I don't buy it either for the same reason. Great graph. Everyone should look at it and think hard.
It is stunning and dismaying to me that most people seem to think 25 years is forever.
I am psychologically preparing for something as severe as the great depression. If it doesn't happen I'll have a big party.
OT yet not. This is why there is a mess. This quote comes from the approval of the "stimulus package."
Americans "expect us to find ways to work together, not reasons to fight with each other," said Rep. John A. Boehner, R-Ohio, who forged the agreement with Pelosi in consultation with Treasury Secretary Henry M. Paulson.
"The sooner we get this relief in the hands of the American people, the sooner they can begin to do their job of being good consumers," Boehner said.
What arrogance!
Wall Street Journal"
"Federal investigators have opened criminal inquiries into 14 companies as part of a wide-ranging investigation of the subprime mortgage crisis, focusing on accounting fraud, securitization of loans and insider trading, among other areas, the Federal Bureau of Investigation said."
Feeding frenzy.
Why are TTM Nasdaq and Russell P/Es so large?? 2007 was not such a bad year. The forward growth projection is huge if you go from 35-40x to 22x, I don't get it
"do their job of being good consumers"
i suck! i will use the relief to start the educational IRA of my newborn.
AC: "Since the mid-80s we've had a long steady increase in consumer debt-to-income ratios. I think that explains why we haven't had a serious recession since."
I don't know if I agree with your definition of a "major recession". Anyway, what does debt/income have to do with anything? I don't think there is a correlation between debt to income and anything else, let alone asset prices. If you have some theories, I would love to hear it. I don't think debt has anything to do with it because look at Japan. Japanese citizens have very high savings rate yet economic growth is anemic and asset price increases are weak.
As far as I'm concerned, the key factors driving asset prices are (i) inflation or bond yields are proxy for inflation, (ii) valuation.
I don't buy it either for the same reason. Great graph. Everyone should look at it and think hard.
The Great Moderation begins at the same time as the "Great Consumer Borrowing Binge". Too much coincidence IMO.
"The sooner we get this relief in the hands of the American people, the sooner they can begin to do their job of being good consumers," Boehner said.
Ha! I just heard that on NPR and was going to post about it.
I will become optimistic again when the "American people" are referred to as citizens instead of consumers.
Boehner. Wow. What a piece of #$%&.
siv....
The Japanese loaded up on debt prior 1989. A lot of it of the mortgage variety.
inflation or bond yields are proxy for inflation
So with high inflation in China and Zimbabwe we've had these rip-roaring stock markets while Japanese markets languish with borderline deflation.
I think real interest rates are what's more relevant here, not nominal rates.
I don't know if I agree with your definition of a "major recession".
I don't have recession stats on hand right now, but I think I'd say a major recession is about a 3% real GDP decline. Neither 1991 or 2001 qualify IIRC.
Probert,
Since 2002, prices of small-cap stocks and tech stocks have been growing faster than earnings, thus multiple expansion. Now, earnings are starting to contract. It's funny, but if you listen to tech news on CNBC Asia, it is TOTALLY GLOOMY and filled with negative earnings estimates.
REITs and emerging markets also had huge multi-year valuation spirals, and they also face earnings contraction.
Robespierre is coming....
Feds open subprime mortgage probe in 14 companies: report
By Sue Chang
SAN FRANCISCO (MarketWatch) - Federal investigators have opened criminal inquiries into 14 companies as part of a wide-ranging investigation of the subprime mortgage crisis, The Wall Street Journal reported on its Web site Tuesday. None of the 14 companies were named in the repor
ZIGURRAT: "The Japanese loaded up on debt prior 1989. A lot of it of the mortgage variety."
I have to check the numbers but I think the individuals have been mostly clean for at least a decade. The Japanese debt problem mostly lies with businesses and government. It's basically opposite the American situation. Even then, the problem is not necessarily the corporations but the banks. For at least a decade, Japanese corporate balance sheets have been clean. They have very low debt on their balance sheets (that's one reason their ROE is very low)...
probert. Russell P/E's are high because these are "growth" companies, like Chipotle Grill and other consumer dependent entities. When the consumer goes down, they will go down big.
julia: I don't know what baby boomers had a lot of disposible income in the '70s. Not me. And those drugs cost money!
It's based on bottom-up earnings estimates that are pure fantasy.
mbartv, lol. read somewhere that wall street wasn't as concerned about inflation as cocaine prices felt sharply.
mbartv, lol. read somewhere that wall street wasn't as concerned about inflation as cocaine prices felt sharply.
There must be a strong inverse relationship between cocaine prices and stock prices I'd imagine.
ac:
Is There a 'Cocaine Shortage'? - Fact Checker
very complete graph from the 80s.
rich,
exactly, but..that's crazy. I mean if we assume that 2008 will be similar to 2007 (fair enough) Russell 2000 is trading at 40x... well...
So how do we explain the 40x? Easy? your number probably includes unprofitable companies where the negative earnings make the multiple artificially higher (assuming one day they will be profitable). If you were to value these on a P/S metric, you would get a much more logical valuation.
Valuation on a price/sales basis is much more useful because it's normalized for margin variations, the russell 2000 according to some sources is trading at 0.9 - 1.0x
A more normal price/sales is 0.6 - 0.7, meaning the Russell has like 30% to go down further, not 50%. This is why I asked you where you got the P/E from, everyone calculates P/E differently, it's very annoying. I would look at P/S. It's not for nothing that Warren Buffett recommended it as a valuation for overall indeces.
Yhoo getting hit after hours...down 7%
goog down after hours 8+ bucks on yhoo news...
I would look at P/S. It's not for nothing that Warren Buffett recommended it as a valuation for overall indeces.
E-commerce may have killed that as a valuation metric. There are a lot of mid-cap e-commerce companies built on zero-margin business models. Goods are sold with zero margin and earnings are entirely derived from exploiting opportunities of the stream of shoppers passing your way.
Amazon's "prime" accounts are a good example but it's more common than people think (it's my industry).
Even if e-commerce hasn't thrown P/S measurements out-of-whack the fact that we've shifted from a nation of manufacturers to retailers gives me pause on using P/S ratios as historical guides.
Proof that some builders are much smarter than others, Falcone sold out to TOUSA in 8/05 for $850MM!!
cache:Tr57u0-slf8J:www.falconegroup.info/tetousa.htm Tousa falcone - Google Search
Sorry about that link, but it's the cached version, since Falcone isn't bragging about this online anymore (that would be poor form).
And now Falcone has raised another $500MM to buy distressed developments. Smart dude.
Kicker,
I don't know, your point sounds good but what is "alot"? What percentage of the index consists of such companies. Some of them might have lots of operating leverage... some of them are cut-throat like AMZN vs. OSTK. Also, many high ROIC companies get taken over by bigger corporations...
Julia,
(Sorry for the OT, folks but I had to comment)
The political propaganda put out by the "Drug Czar" is lame. He says prices are at $136/gram. I quit snorting cocaine in 1979 at $140/gram.
Lemme see: almost 40 years and hundreds of billions to drop the price 4 bucks since I quit.
Mission Accomplished.
Oops. I mean 30 years. See what it did to me? Bwahahahaha.