Article in Smart Money on P/E and stock prices

[CARLHAYDEN]

A lot of trenchant articles in the field of economics are too long to fairly synopsize in a panel on this forum, so, here's the url:

http://www.smartmoney.com/investing/stocks/why-stocks-are-way-too-pricey/

[Beet]

Something just doesn't seem right about Dow 9000. The last time the Dow was at 9000, in 2003, the unemployment rate was way lower, industrial production was higher, the country's growth prospects were way higher, the fiscal situation of the government was far better, no one was talking about a crisis. Before that, the Dow was at 9000 in 1998. Back then, the unemployment rate was even lower, industrial production was about the same as today if not higher, capacity utilization was way higher, the country's growth prospects were even better, and the fiscal situation of the government was even better than 2003.

In other words, in all historical periods where the Dow was at 9000--- 1998,1999,2003-- the economy was in much better shape than it is today. Heck, the economy was in better shape in 1996 when the Dow was only at 6000.

[Swing low, sweet chariot. Comin' for to carry me home.]

[clearing throat] hmmmmm....hmmmm...

would you consider it out of line for me to suggest you two are using your negativity as a basis for the selection of the material you post? 

especially in the case of Carl, who goes from one negative fashion to another, e.g. from Illegal Immigration, to Economic Depression.  At least attempt to bind the two together so that Negativity is not the only common thread.

[TeePee4Prez]

Something just doesn't seem right about Dow 9000. The last time the Dow was at 9000, in 2003, the unemployment rate was way lower, industrial production was higher, the country's growth prospects were way higher, the fiscal situation of the government was far better, no one was talking about a crisis. Before that, the Dow was at 9000 in 1998. Back then, the unemployment rate was even lower, industrial production was about the same as today if not higher, capacity utilization was way higher, the country's growth prospects were even better, and the fiscal situation of the government was even better than 2003.

In other words, in all historical periods where the Dow was at 9000--- 1998,1999,2003-- the economy was in much better shape than it is today. Heck, the economy was in better shape in 1996 when the Dow was only at 6000.

Did you adjust for inflation, historical P/E ratios, etc.?  I'm surprised no one in this mess has looked at the PEG(rowth) ratios.  Is the market expecting future growth we don't know about yet?

[CARLHAYDEN]

[clearing throat] hmmmmm....hmmmm...

would you consider it out of line for me to suggest you two are using your negativity as a basis for the selection of the material you post? 

especially in the case of Carl, who goes from one negative fashion to another, e.g. from Illegal Immigration, to Economic Depression.  At least attempt to bind the two together so that Negativity is not the only common thread.

Dude,

Price to earning ratios have been used by rational investor for decades.  I realize this may be news to you.

[Fmr. Pres. Duke]

I agree that this market seems overbought in the short term. The S&P is already back at 1000 and we are still in a recession. I guess we could be expected a much larger run in the DOW in the future , but it still puzzles me. I was looking at stocks like AAPL and GS today, and they are near the levels they were at in 2007 when the DOW was at 14000 and the economy was growing each quarter.

Then, we have large cap stocks like CAT, GE, BAC, and the like that are a fourth of the value they were in 2007. It doesn't make much sense to me. I'm waiting for another big correction. 

[Swing low, sweet chariot. Comin' for to carry me home.]

[clearing throat] hmmmmm....hmmmm...

would you consider it out of line for me to suggest you two are using your negativity as a basis for the selection of the material you post? 

especially in the case of Carl, who goes from one negative fashion to another, e.g. from Illegal Immigration, to Economic Depression.  At least attempt to bind the two together so that Negativity is not the only common thread.

Dude,

Price to earning ratios have been used by rational investor for decades.  I realize this may be news to you.

thanks for the news flash...but the article starts off comparing P/E to the last four months when we came very close to a full meltdown.  Anyone and their dog knows the market is pricing in a recovery.  The author gets around to that, but he has already set the stigma of it being over valued.

He admits that when looking forward stocks prices are roughly in line, but since that bit of data goes against his thesis tha the market is way over priced, he then attempts to take the huge bank loses and spread them across the market, thus reaffirming his take that the market is over priced.  But Citi's loses are NOT CompanyXYZ's loses, which is why Citi's stock is trading at a fraction of its former price while the broader market is has done comparatively much better over the last 12 months.

If we get 4% GDP growth over the next year, which I think we will, this market is way UNDER valued.  that doesn't mean we wont have 5%-10% corrections along the way, but it does mean we are headed higher over the next 12 months.

In total, the article does give us interesting facts about the different ways to calculate historical P/E ratios, but is geared to price the market based on the last 12 months of economic performance and to attempt to spread the banking loses to the average company.  It totally ignores the fact that most american companies are lean and mean with extremely high productivity and improving earnings, and are sitting on edge of a recovery whose leading indicators are more positive than the market’s perception.

That doesn’t mean I recommend buying everything in sight at the present time and hold it forever, but I do recommend buying on dips in order to scale into this new bull market while paying close attention to the leading indicators.   

[CARLHAYDEN]

Well jmfcst,

Yes, most American companies have sharply curtailed their expenses to produce a profit, but, the question remains as to sales volume of their services/products, as to the sustainability of such profits.

One thing which is missing in the unemployment numbers is the proclivity of such companies to load their "exempt" employees with a sharply increased volume of work, which is part of the explanation for increased productivity (terminating the least productive nonexempt personnel being another part).  This can only go on for so long. 

Now, there are a lot of "shoes" hanging out there which have yet to drop, but which are likely to impact the economy in the near future.

Loans on commercial real estate is one of those "shoes."

It seems to me that much of the run-up in stock prices is the result of 'animal exuberance' by unsophisticated investors.

Since much of stock market prices are the result of 'sentiment,' rather than careful analysis, if the bad news I am anticipating hits, I believe many of the emotional investors will panic when the market experiences a needed correction, and will engage in panic selling.

Personally, I am investing in selected residential real estate in jurisdictions which have "prop 13" type laws restricting property tax increases.  To make sure that the properties will be generating income, I am renting them to active duty military personnel at prices commensurate with housing allowances (which I can do by purchasing the properties at a low price).  Thus I have a good assurance of payment (and low rate of damage to property) and am also performing a service for such personnel (primarily officers with families).

I must say that your anticipating of a 4% growth rate in GDP over the next year appears to me to be wildly optimistic.

[Swing low, sweet chariot. Comin' for to carry me home.]

Well jmfcst,

Yes, most American companies have sharply curtailed their expenses to produce a profit, but, the question remains as to sales volume of their services/products, as to the sustainability of such profits.

One thing which is missing in the unemployment numbers is the proclivity of such companies to load their "exempt" employees with a sharply increased volume of work, which is part of the explanation for increased productivity (terminating the least productive nonexempt personnel being another part).  This can only go on for so long. 

Now, there are a lot of "shoes" hanging out there which have yet to drop, but which are likely to impact the economy in the near future.

Loans on commercial real estate is one of those "shoes."

It seems to me that much of the run-up in stock prices is the result of 'animal exuberance' by unsophisticated investors.

Since much of stock market prices are the result of 'sentiment,' rather than careful analysis, if the bad news I am anticipating hits, I believe many of the emotional investors will panic when the market experiences a needed correction, and will engage in panic selling.

Personally, I am investing in selected residential real estate in jurisdictions which have "prop 13" type laws restricting property tax increases.  To make sure that the properties will be generating income, I am renting them to active duty military personnel at prices commensurate with housing allowances (which I can do by purchasing the properties at a low price).  Thus I have a good assurance of payment (and low rate of damage to property) and am also performing a service for such personnel (primarily officers with families).

I must say that your anticipating of a 4% growth rate in GDP over the next year appears to me to be wildly optimistic.

I used to be very worried about commerical real estate taking down 2000-3000 regional banks:

the only way i could support a bailout of any of these companies is if there were no golden parachutes and the payscale of the company was set so the top executives only got 90k a year

but since that is not happening, what are you going to do, stand in a soup line wearing a Tshirt listing your principles?

here is great and sobering interview:

http://www.cnbc.com/id/15840232?video=937772691&play=1

But, the CMBX has stabilized, and the 2000-3000 bank forecast was under the scenario of continued economic meltdown, not a recovery.

The main thing that concerns me is how does the Fed end QE without rates going through the roof, which is why the current health care bill must be defeated

[Swing low, sweet chariot. Comin' for to carry me home.]

Well jmfcst,

Yes, most American companies have sharply curtailed their expenses to produce a profit, but, the question remains as to sales volume of their services/products, as to the sustainability of such profits.

One thing which is missing in the unemployment numbers is the proclivity of such companies to load their "exempt" employees with a sharply increased volume of work, which is part of the explanation for increased productivity (terminating the least productive nonexempt personnel being another part).  This can only go on for so long. 

Now, there are a lot of "shoes" hanging out there which have yet to drop, but which are likely to impact the economy in the near future.

Loans on commercial real estate is one of those "shoes."

It seems to me that much of the run-up in stock prices is the result of 'animal exuberance' by unsophisticated investors.

Since much of stock market prices are the result of 'sentiment,' rather than careful analysis, if the bad news I am anticipating hits, I believe many of the emotional investors will panic when the market experiences a needed correction, and will engage in panic selling.

Personally, I am investing in selected residential real estate in jurisdictions which have "prop 13" type laws restricting property tax increases.  To make sure that the properties will be generating income, I am renting them to active duty military personnel at prices commensurate with housing allowances (which I can do by purchasing the properties at a low price).  Thus I have a good assurance of payment (and low rate of damage to property) and am also performing a service for such personnel (primarily officers with families).

I must say that your anticipating of a 4% growth rate in GDP over the next year appears to me to be wildly optimistic.

Carl, since commercial real estate is no longer seen as the next shoe to drop but rather a huge buying opportunity producing bidding wars for REITs, and since 4% GDP growth is what we've actually had....the rumors that you really suck as an economic pundit are starting to be widely believed.

[CARLHAYDEN]

Regulators shut 7 banks in 5 states; 37 in 2010

Regulators shut banks in Alabama, Georgia, Minnesota, Ohio and Utah; makes 37 this year
Friday March 19, 2010, 8:30 pm EDT

WASHINGTON (AP) -- Regulators on Friday shut down seven banks in five states, bringing to 37 the number of bank failures in the U.S. so far this year.

The closings follow the 140 that succumbed in 2009 to mounting loan defaults and the recession.

The Federal Deposit Insurance Corp. took over First Lowndes Bank, in Fort Deposit, Ala.; Appalachian Community Bank in Ellijay, Ga.; Bank of Hiawassee, in Hiawassee, Ga.; and Century Security Bank in Duluth, Ga.

The agency also closed down State Bank of Aurora, in Aurora, Minn.; Advanta Bank Corp., based in Draper, Utah; and American National Bank of Parma, Ohio.

The FDIC was unable to find a buyer for Advanta Bank, which had $1.6 billion in assets and $1.5 billion in deposits. The regulatory agency approved the payout of the bank's insured deposits and it said checks to depositors for their insured funds will be mailed on Monday.

The failure of Advanta Bank is expected to cost the federal deposit insurance fund $635.6 million.

For the other banks:

-- First Citizens Bank of Luverne, Ala., agreed to assume the deposits and assets of First Lowndes Bank. First Lowndes had $137.2 million in assets and $131.1 million in deposits. The FDIC expects that the cost to its insurance fund will be $38.3 million.

-- Community & Southern Bank of Carrollton, Ga., agreed to assume the deposits and assets of Appalachian Community Bank. The bank had $1 billion in assets and about $917.6 million in deposits. The cost to the insurance fund is expected to be $419.3 million.

-- Citizens South Bank of Gastonia, N.C., will assume the deposits and assets of Bank of Hiawassee. Bank of Hiawassee had about $377.8 million in assets and $339.6 million in deposits. The failure is expected to cost the insurance fund $137.7 million.

-- Bank of Upson, based in Thomaston, Ga., agreed to assume the assets and deposits of Century Security Bank, which had $96.5 million in assets and $94 million in deposits. It is expected to cost the insurance fund $29.9 million.

-- Northern State Bank in Ashland, Wisc., agreed to assume the deposits and assets of State Bank of Aurora. The bank had about $28.2 million in assets and $27.8 million in deposits. The FDIC expects the move will cost the insurance fund $4.2 million.

-- National Bank and Trust Co., based in Wilmington, Ohio, agreed to assume the assets and deposits of American National Bank, which had $70.3 million in assets and $66.8 million in deposits. The cost to the insurance fund is expected to total $17.1 million.

The pace of bank seizures this year is likely to accelerate in coming months, regulators have said, as losses mount on loans made for commercial property and development.The bank failures -- the 140 last year was the highest annual tally since the height of the savings and loan crisis in 1992 -- have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, hitting a $20.9 billion deficit as of Dec. 31.

Depositors' money -- insured up to $250,000 per account -- is not at risk, with the FDIC backed by the government. Apart from the fund, the FDIC has about $66 billion in cash and securities available in reserve to cover losses at failed banks.

Banks, meanwhile, have tightened their lending standards. U.S. bank lending last year posted its steepest drop since World War II, with the volume of loans falling $587.3 billion, or 7.5 percent, from 2008, the FDIC reported recently.

New Senate legislation was unveiled this week that is a blueprint for the biggest overhaul of financial regulations since the 1930s, giving the government unprecedented powers to split up large complex firms if they pose a threat to the nation's financial system. It would also create an independent consumer watchdog.

The bill crafted by Sen. Banking Committee Chairman Christopher Dodd, D-Conn., would force big, complex financial firms to pay insurance premiums in advance for a $50 billion fund to cover possible failures in their ranks. The fees levied up front would give the FDIC an immediate source of funds to resolve big failed institutions, so that taxpayer money wouldn't be used.

The costs of resolving smaller banks that fail would continue to be covered by the FDIC.

The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years.

AP Business Writer Tim Paradis in New York contributed to this report.

[Swing low, sweet chariot. Comin' for to carry me home.]

140 bank failures in 2009 and 37 banks so far in 2010 is NOT "another shoe dropping"

[Free Trade is managed by the invisible hand.]

maybe other indicators are just lagging behind like they normally do in the aftermath of a financial crisis. The only thing i know about the stock market is that their is some ratio between stocks and new machine orders. Other than that I know very little of how the stock market effects the "real" economy.


(yes i know i shouldn't have used the word real but whatever)

[CARLHAYDEN]

140 bank failures in 2009 and 37 banks so far in 2010 is NOT "another shoe dropping"

I boldfaced the relevant portion of the article.

Did you not see the it?

[CARLHAYDEN]

Half of commercial real estate mortgages to be underwater by year’s end
By: Mark Hemingway

03/30/10 3:33 PM EDT

We’ve been dealing with a residential real estate crisis for some time now, but it looks like things are about to go from bad to worse in the commercial sector as well:

By the end of 2010, about half of all commercial real estate mortgages will be underwater, said Elizabeth Warren, chairperson of the TARP Congressional Oversight Panel, in a wide-ranging interview on Monday.

“They are [mostly] concentrated in the mid-sized banks,” Warren told CNBC. “We now have 2,988 banks—mostly midsized, that have these dangerous concentrations in commercial real estate lending.”

As a result, the economy will face another “very serious problem” that will have to be resolved over the next three years, she said, adding that things are unlikely to return to normalcy in 2010.

On the plus side, Warren seems to be aware that Fannie Mae and Freddie Mac are disasters for the taxpayer:

Speaking on troubled mortgage lenders, Warren said it’s time for the government to “pull the plug” on mortgage lenders Fannie Mae and Freddie Mac.

[○∙◄☻¥tπ[╪AV┼cVê└]

Speaking on troubled mortgage lenders, Warren said it’s time for the government to “pull the plug” on mortgage lenders Fannie Mae and Freddie Mac.

"Death panels" meet "too big to fail"? One can only hope.

[CARLHAYDEN]

Speaking on troubled mortgage lenders, Warren said it’s time for the government to “pull the plug” on mortgage lenders Fannie Mae and Freddie Mac.

"Death panels" meet "too big to fail"? One can only hope.

Good one!