GE Results Validate Theory: Severe Economic Contraction 61 comments
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GE was out this morning with earnings and continues to validate my central thesis: severe economic contraction.
Revenues were down 17% - another double-digit contraction, and this is particularly troublesome in what it says about the global economy, given GE's (GE) global reach.
Again, we continue to see the same sort of theme in industrial and consumer products reporting - Harley Davidson (NYSE: HOG) reported units shipped down 30% year over year yesterday, and now GE out with a 17% year over year revenue decline.
Stocks are, at their core, priced on earnings growth, with the most-common ratio used for such metrics being P/E/G, or Price-to-earnings-growth.
But earnings are not growing, they're contracting - dramatically - in percentage terms over year-ago levels. How can it be otherwise? Even with no inefficiencies due to firms having too many employees for the revenue contraction that is occurring, a 30% reduction in business done should lead to a 30% decline in profits earned. Add to that the fact that firms are nearly always behind the curve and you have profit declines that are much larger - in some cases 100% or even going from a profit to a loss.
This is not a circumstance that will reverse in the immediate future; in order for it to do so, revenue must come back up, and in order for revenue to come back to pre-bust levels, we would have to re-inflate the credit bubble - which simply cannot happen.
Multiples are going to continue to contract. Those analysts and market callers who are all over the momentum trade can in fact make a good buck trading the momentum, but that's all they're trading - they sure aren't trading earnings acceleration or even stabilization.
The move in the market off the 666 levels in March has been driven by a false premise, egged on by CNBC and the other "mainstream media" - that this is a typical recession, it is short-lived, and we will soon go back to previous spending and business patterns.
That is not going to happen, yet it is what everyone in the media and analyst community is looking for and basing their valuation and market timing calls on.
I don't know how long we have to continue to put up numbers like this before people wake up, but wake up they eventually will. When Harley Davidson ships 30% fewer motorcycles, when GE sells 17% less "stuff" (including their financial cooking) and when company after company, including Intel, IBM and others come out with revenue numbers that are down double-digit percentages on an annualized basis, there is no possible way you can justify the multiples that these firms are selling at.
When The Port of Long Beach shows container shipments down nearly 30%, when freight carloadings are down nearly 25% year over year, when sales tax receipts are down in the double digits and when income tax collections, both personal and corporate have effectively collapsed there is simply no argument that "the recession is over" or that "trend growth is around the corner."
The fact of the matter is that port, rail and tax receipts are not subject to being "gamed" by government number-crunchers, they do not play "seasonal adjustments" (since they're year-over-year numbers), they do not represent wishes, dreams, or desires.
They represent real-time, high-frequency, "right now and in your face" economic performance metrics and are impossible to argue with.
If you, as an investor, are trying to use the market as a "forward indicator" of economic conditions, you need to look at these numbers to see whether or not what the stock market is telling you can be validated with actual economic performance - not in quarterly reports to be published in a few months (the typical economic lead-time cited for the market) but in the "right here and now" reality of economic activity.
What those high-frequency data sources are telling us, here and now, today, is that we are in the middle of a 25-30% economic contraction - exactly as I predicted would occur in 2007.
The problem with this level of indicated weakness in the economy is that we have shielded firms, especially banks, from taking the losses that should have come last year and in 2007 related to their over-extension of credit. Now those institutions are going to have to live with the reality of a much smaller economy, meaning that they will be forced to turn to dramatically increasing credit costs to customers to avoid drowning (e.g. increasing credit card rates and spreads), which is exactly what they're doing. This in turn will suck even more money out of consumers pockets, dragging consumption down even further and will force even more defaults.
This is a vicious cycle that can only be broken when the defaults that are being hidden behind the curtain of our financial institutions are forced into the open and disposed of. Yes, this will likely cause those firms to go bust. But the economic penalty we are and will continue to pay for allowing The Bezzle to continue in these firms will, if not stopped, soon choke off any hope of recovery, just as it did in 1930, and lead to precisely the same sort of economic result.
Everyone seems to be hollering about the "wonderful performance" of the banks that have reported thus far, but let's be honest - if you can borrow for nothing and charge 30% interest on plastic, you make a fortune, right? Well, for a while - until the squeeze of contracting incomes and increasing interest charges force your customers to default, at which point the charge-offs and defaults this forces in the rest of your portfolio (e.g. mortgages) kill you dead.
I see exactly nothing in any of the reported numbers thus far this quarter suggesting that we've turned an economic corner or that there will be a recovery this year or even next.
We could be near or at the bottom, but we're not, and it is precisely because we have protected the financial institutions from the consequences of their own folly in preference to the borrower (to a large degree the consumer) that this has happened. I have warned repeatedly that the actions of our regulators and government, on the path they are on, will make durable economic recovery impossible.
The anvil of these bad loans, being carried far above actual fair-market value, will remain as a millstone around the neck until we either earn them out or default them.
Our government and regulators have chosen "earn them out". The problem is that this path cannot succeed because "earn them out" requires that the economy return to trend growth - that is, 3-4% GDP - before next year. That is not going to happen; the government backstop and artificial support only work so long as they continue, and we cannot continue to borrow two trillion a year for the purpose of propping up these institutions in excess of their natural earnings power in the economy.
Yet without defaulting the bad debt that's exactly what has to happen.
If Roubini's prediction of sub-1% growth (if that) for the next couple of years is correct the squeeze between available revenue and required cash-flow from operations to keep the numbers black at the bottom of the page will become python-like over the next 12-18 months, and as the grip tightens reportable earnings will continue to contract, ultimately leading to a collapse when cash flow is exceeded by expenses.
This is the dreaded "double dip", except that it won't be a "W" as Roubini has postulated - it will look like the first three legs, but the right side "/" will instead be a flat line as credit capacity on the borrowing side collapses, destroying the banks ability to profit - without borrowers there is no interest to charge and no money to make!
Bottom line: Those who bet on the market "going much higher" from here are going to find themselves once again holding a bag handed to them by the media and market callers, just like they did in 2000 when it was said "this is just a small correction in the market" as the Nasdaq came off 5,000.
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This article has 61 comments:
Given the amount of debt overhang we have, if we lose the economic high ground our economy will soon look like Mexico's.
Can't happen here? The three previously mentioned world economic transitions were caused by the same two conditions: The losing country had accumulated more debt than their economy could support and the losing country had such incredible hubris they were unable to see it and attempted to fix it by borrowing their way out of debt. I'm afraid that the debt funded spending spree is over and we're going to pay the price!
The political predators thrive by dividing and conquering the people: anxiety and fear are their allies since it sets group against, region against region and class against class. So, Govt, grows bigger and more coercive and the political bosses more entrenched.
The economic predators thrive by pillaging and looting the confused and distressed people , with the massively bribed consent, even complicity, of the political rulers. So, the big banks thrive.
It is a mistake to believe that what is bad for America is bad for those very few who have great power and great wealth.
Yet this market is testing one's patiance with another rally every time a financial institution releases strong qarterly earnings. Where are all these bulls coming from and which scenario are they counting on?
1) Poor change management. Researchers have long known that change, even positive, introduces fear and stress. Obama's "Change" prescription is in fact years old, introduced during different financial times. The White House is creating more FUD (fear, uncertainty, doubt) rather than mitigating or managing change successfully. Result - consumers are holding tight.
2) People realize they are frozen in their homes, cities, and perhaps jobs as their assets deflate. Result - same as #1.
3) Gross denial, and arrogance, in government bodies at all levels. Illinois, with $11B in operating deficit, proposes huge tax increases and $30B in increased capital spending! What part of, "there is no money," don't they understand?
4) Manufacturing resources, both labor and assets, have disappeared from the US, along with intellectual and managerial talent, as the US switched to a service economy. The service economy was built on health care, financial and easily switched industries such as restaurants, etc. Goodbye financial and goodbye health care as we attempt to nationalize that segment. What will drive the recovery? Short of some quantum technology leap, little appears ready to drive a sustainable, long-lived recovery.
I am lifelong optimist. However, I do love to challenge mythical certainties such as, "America has always recovered," which will only continue to be true if it happens yet one more time. And if so, the time frame?
PPT go team go!
On Jul 17 12:06 PM The Geoffster wrote:
> GE is a good proxy for the economy. I nearly doubled my investment
> from the March lows but didn't want to be too greedy. I'll get back
> in between 7 and 8. If health care and cap and trade fail, we'll
> come out of recession sooner, but I agree we are looking at sluggish
> growth. I'm hedged against the chance of war with Iran and researching
> tax shelters. Interesting times.
In my non-favored self-employment I've only seen skyrocketing taxes, costs, rules and regulations and diminishing returns to my labor relative to the increasing burdens. We've financed the burdens of misallocation and either the bet "pays off" in a long shot that gives us more of the same gradual decline, or we fall into an abyss that requires a true reality check by Americans or lose our remaining freedom in bondage to the fascist state.
Rarely have I seen such a collection of sane and reasoned arguements in one place as to why we are not just still in big trouble, but likely to get even more mired in the mess, yet the markets seem to be able to ignore it all and go on rising.
And the biggest risers, the banks, are likely the biggest losers going forward. So true that they only make money now because they've got cheap money they can lend out at high rates, and that banks only ever make money when people pay them back with interest.
This isn't going to happen: bad debts will get worse, and the bad debts we still don't know about are still to come into the reckoning.
The politicians, bank and financial leaders and other members of this self-glorifying clique are bringing us all down, and don't worry so long as they stay on top of the pile, no matter how much it smells.
Oh, so now you are smarter than Roubini?
It is alway interesting to observe on SA that every dude who writes a column here thinks he (and his ideology) is right and the others are wrong. Do you guys ever compare your portfolios and weed out the nonsense?
Deninger is 100% correct. Please read some of Tyler Durnan's articles and you will understand why this absurd market keeps trying to push higher in spite of the fact that as Deninger points out, it should be much lower. Durnan's last article points out that less than 2% of the traders (high frequency traders) are now accounting for over 70% of all US market volume. It is obvious that massive manipulation is the norm in the US markets today. Why? The most logical answers are: 1) the biggest players including GS, JPM, MS, etc are attemping to "earn" their way out of the massive debt losses they are incurring. Not that hard to do when you effectively control the markets and can move them wherever you want to make money. Notice the massive trading profits that are "rescuing" the big banks for the last few quarters. 2) the government including Treasury and Fed are obviously turning a blind eye to this massive volume/manipulation as clearly they want the perception of better conditions to be reinforced. In fact it has been noted in other articles that perhaps even the Treasury has set up direct secret trading accounts with one of the large banks. Thus it just plain dangerous to play this manipulated market no matter how you try to do it, because there is simply no way to guesstimate how long the big boys will continue to manipulate the market nor which direction they will try to manipute it towards. It is extremely dangerous to take either long or short postions in such a clearly manipulated market. The only thing that makes sense to me is to sell puts, collect the premiums, and only be forced to buy at much lower strike prices if they ever let the market correct to levels that are more reasonable. Alternativley if you have long positions, then sell covered calls, collect the premiums, and only get called out at much higher strike prices. Under both of those senarios you don't have to worry as much about the market being manipulated and you can still make some reasonable returns. My guess would be that eventually the interest/yields will be forced up in the bond market and then most of the smart money will flee the manipulated stock market for bonds and stock prices will crash as fewer and fewer folks will be willing to risk playing the manipulated stock market and thus the 2% of the big volume manipulators will only be trading against themselves. Because unless stock market values get back down to reasonable valuation levels, for the economic conditions, the vast majority of the smart money will just stay away from US stocks. One would have to blind, deaf, and dumb not to at least question how the massive trading volumes of a few connected large players are distorting the US stock markets.
On Jul 17 12:29 PM TheFounder wrote:
> I think you are right on. ndeed I kept all my short positions and
> event increased recently thinking were could the market go post a
> 40% rally in this economy?
>
> Yet this market is testing one's patiance with another rally every
> time a financial institution releases strong qarterly earnings. Where
> are all these bulls coming from and which scenario are they counting
> on?
1) GE's double digit decline should come as no surprise. The author should have focused on interim quarterly decline trends not YOY figures. There will be no YOY gain until the YOY figures have "lapped" the big drop off in 4Q08.
2) "Stocks are, at their core, priced on earnings growth, with the most-common ratio used for such metrics being P/E/G, or Price-to-earnings-growth. But earnings are not growing, they're contracting...."
Stocks are discounters of expectations of future earnings growth (really the present value of future cash flows). If the author were correct, companies without current earnings would be priced at zero. We would have no drug industry.
3) "a 30% reduction in business done should lead to a 30% decline in profits earned"
False! This could only be true if a business had zero fixed costs.
4)"Multiples are going to continue to contract...."
If the market is flattish for the year and earnings estimates have fallen, multiples have increased.
5) "in order for revenue to come back to pre-bust levels, we would have to re-inflate the credit bubble "
This falsely presupposes re-inflation of credit is the only driver of revenue. Easy money is a good one and Obamanomics are providing crazy money supply growth, but there are many others.
6) "The move in the market off the 666 levels in March has been driven by a false premise, egged on by CNBC and the other "mainstream media" - that this is a typical recession, it is short-lived, and we will soon go back to previous spending and business patterns. That is not going to happen"
The 666 comment indicates the author is nothing more than a technician trying to masquerade as a fundamental analyst. The media and everyone is "false," yet, we should believe this pundit because he says "that is not going to happen" without any data or real analysis to support his position. Pathetic.
I could go on (and on) but you get the point. It is quite fashionable to be negative so we cheer-lead poor research like this. He may be 100% right but it would be nice to have a cogent piece to back up his position.
Comment about "revs down 30%, profits down 30%." Try reading the next sentence. We really do live in "American Idol", don't we? 10 second attention spans? Psst: I ran a fairly large business for 15 years and am well-aware of fixed costs - that's why the next sentence said that 30% off in revs often means NEGATIVE earnings.
"credit is the only driver of revenue, but Obama will print money." Money is credit (debt); how do you think money comes into existence at the government level? "What is a T-Bill, Alex."
"the move off the 666 levels". You can trade or you can invest. I do both. 70% of NYSE volume is being generated by computers passing shares to one another in milliseconds. You get in the middle of this manipulated order flow, you not only are risking them deciding to push it the other way, you're going to get a disadvantaged fill - intentionally. This SHOULD be criminal and indeed market manipulation is supposed to be. Thursday it was blatantly obvious in the NDX; I talked about it real-time when it was happening in TICKS on the forum, as I could see blocks of money moving BETWEEN NDX stocks in literal milliseconds, back and forth, all cranking the price a penny here, a penny there, oops there's a retail sucker guess what - the price moved 50 cents and we got 49 of it! Hahaha - computers win, investors lose. Learn about what's going on.
This crisis was driven by:
1. Massive deflation of labor value (not necessarily price) as globalization brought billions of new entrants to the labor market;
2. Massive deflation of assets as a huge "sell signal" was transmitted to US home and business owners when the Fed inverted the yield curve in 2006;
3. Massive contraction of private sector credit as asset values plummeted.
Resumed growth can only happen when:
1. Labor prices match labor values;
2. Asset prices stabilize and resume growth;
3. Private sector credit stabilizes.
The best way in my view to accomplish this is to reflate the economy by reducing price controls on labor, create inflationary pressure, and minimize public sector debt. Printing money would help with this, as inflation and dollar devaluation would mitigate minimum wage and other wage price controls, and it would also create inflationary pressure.
The alternative view- let everything fail and then let dollar holders buy up the assets and start over- would position the Chinese to buy up assets for pennies on the dollar, and then in addition to losing our labor competitiveness we'd also lose our automated industrial base competitiveness as well. While providing relatively more goods and services to the 90% of the world living below US living standards is a worthwhile goal, doing it by gutting our productive capacity is not the way to go.
And don't accuse me of being a Keynesian- print more money, but for goodness sake, don't let our government spend it!
Your claim, "and in order for revenue to come back to pre-bust levels, we would have to re-inflate the credit bubble - which simply cannot happen." Is not based on facts, just your attempt to apply the past to the future, always a fool's game.
I think there are a lot on new jobs in the works, alternative energy, new car companies, commerce that is not tied to huge, inefficient platforms like malls.
Once healthcare is reigned in small business people like myself can start hiring and giving raises and the money that we have been dumping into the Middle East, along with the productivity losses from Americans having to be soldiers instead of wage earners will make a difference.
I like your wall of worry though, up nicely this year and see 2010 as a very good year for real business, not phony banking profits/
Having worked for GE and followed the business since departing, their current posture should be of prime interest going forward. Clearly very “industrial”, GE’s market was set up to be dominate in the respective segments; no more being #2 Avis for them. Aside from the all-important and singularly the largest business known as GE Capital, each of the hard good producers deserves study in light of this article. In essence, where will the recovery and subsequent growth come from?
GE medical, while technically robust particularly through important pseudo partnerships in Japan and France, will face greatly diminished hospital and lab testing CapEx. In striving for growth, technology improvements fueled sales now no longer sustainable.
Turbines face declining airframe business but growing large-scale power demands. Competition among wind turbine and nuclear power is worse than stiff. GE is almost off the table in both arenas.
Locomotives, appliances, etc. may go the way of toasters. This adding to the problem all US based companies face; namely, insufficient numbers of technically trained prospective employees. Coupled with anti-terrorist driven quota cutbacks, industrial innovation is moving off shore. Along with any hope for business recovery.
Does this scenario mirror US business? All taxes, budget deficit, and universal medical issues aside, perhaps the road ahead is much steeper than even this article suggests. What do you think?
Dream on my friend. If you think Comrade Obama and Commissar Biden can control healthcare costs I have a bridge I want to sell you. Go back to the history books. FDR tried to spend his way out of a depression and it took a World War to finally end it. There is no successful example of a country ANYWHERE spending its way out of a severe contraction (i.e. Japan in the 1990s). I was trained as a hospital administrator and the health care "reform" policies being pushed by Obama are rubbish.
On Jul 18 10:35 AM joes wrote:
> I'm not so sure that you haven't fallen into the oldest bias in the
> book, once something is moving in a direction it will keep moving
> that way.
>
> Your claim, "and in order for revenue to come back to pre-bust levels,
> we would have to re-inflate the credit bubble - which simply cannot
> happen." Is not based on facts, just your attempt to apply the past
> to the future, always a fool's game.
>
> I think there are a lot on new jobs in the works, alternative energy,
> new car companies, commerce that is not tied to huge, inefficient
> platforms like malls.
>
> Once healthcare is reigned in small business people like myself can
> start hiring and giving raises and the money that we have been dumping
> into the Middle East, along with the productivity losses from Americans
> having to be soldiers instead of wage earners will make a difference.
>
>
> I like your wall of worry though, up nicely this year and see 2010
> as a very good year for real business, not phony banking profits/
Capital and equity is now unrealistic in its earnings expectations. I see it every day. Anyone with any cash expects fantastic returns and is willing to overlook any risk in pursuit of these unrealistic expectations. I call this the second wave of capital devastation. I will hit as surely as the first one hit in 2007. Sometimes all you can do is preserve capital and sometimes even not that. These are those times. One thing’s for sure, the market is efficient, efficient at extracting money from the foolish and unaware.
Thanks for the article.
1. The level of interest rates.
Does the default rate only ever correlate to the interest rate, i.e. it is causal, hence why monetarists believe that monetary policy works? And/or are different interest rates and the supply of money a condition based on the expected real economic growth rate and opportunity costs of holding money instead of investing it, for different qualities of borrower? If all that needed to be done to rescue the economy was to increase debt and reduce interest rates then the implied causal link is that the size of the economy and the levels of default/hgardship faced by its citizens are solely determined by politicians and central banks. How absurd is it that central banks tour the country with the message that quantitative easing is being employed because without it, everyone would suffer?
2. The "right" level of output.
It can be argued that in the last twenty years we have seen two revolutions. One was the Telecom/Media/Technology of the internet bubble and the other the financial derivative bubble (to include swaps and securitizations). There are three measures of GDP output. Income, Expenditure and Production. These are presumably either negative for Income and Production and massively positive for Expenditure, if you include Govt/Fed/State deficit increases as part of expenditure. I agree that an economy that has emerged from a bubble has to return to the state that existed prior to the bubble, except for "normal" growth in unaffected areas. Since the economy did not contract following the bursting of the TMT/.com/Internet bubble, one could assume that the level of the economy operating between 1990 and 1998, is as good a proxy as any for the economic bottom. That leaves around a decade of growth based on the financial derivative bubble. The effect of leverage doesn't matter in this sense, since all we need to do is return to 1998 GDP dollars to find the base that represents the removal of the cancerous growth since then. So, does this mean that where economic growth of around 3% per annum for ten years (and growing) represents an output gap that must be filled? Does this mean that a central bank should provide triage to an economy to recover this output gap by printing money? Depends if you are a communist/socialist or a free marketer I think.
3. Sovereign Default, National Debt, Wasted money and On-going Waste.
The National Debt has a ceiling set by congress that bares little or no relation to the change in size of the debt. The political machinery approves the debt accumulation ex-post, inthe full knwoledge that ex-ante estimates are different and much larger. The US Government will be in full default on its obligations, not when determined by polticians or central banks, but when the interest repayments on this debt exceed possible taxes. Official debt is probably around $12 trillion plus net liabilities of Agencies (such as the Fed, Freddie and Fannie) of a further $10-12 trillion. Total $24 trillion. The Government takes around $1 trillion per annum in taxes, so a key assumption of a nominal 5% interest rate, for an economy returned to normal, points to current default AT THE CURRENT TIME. ($24trillion x 5% = $1.2 trillion per annum). Taxes can be raised of course, but we know that this can reduce the overall tax take in depressed times such as these. Note also that this reflects the fact that the Administration has a rapidly diminishing to zero discretion in taxes collected.
Wasted money and on-going waste. Given than half of all tax dollars goes on the Pentagon and that this is spent on "colonial activities" abroad, this expenditure is an immediate drain on the economy. So this Administration knows that it will take half of tax payers money and give it away to foreeign economies or blow it up. This is waste and is simply not discussed anywhere. The size of the issue facing the derivatives sector is magnified by this waste.
On Jul 18 10:35 AM joes wrote:
> I'm not so sure that you haven't fallen into the oldest bias in the
> book, once something is moving in a direction it will keep moving
> that way.
>
> Your claim, "and in order for revenue to come back to pre-bust levels,
> we would have to re-inflate the credit bubble - which simply cannot
> happen." Is not based on facts, just your attempt to apply the past
> to the future, always a fool's game.
>
> I think there are a lot on new jobs in the works, alternative energy,
> new car companies, commerce that is not tied to huge, inefficient
> platforms like malls.
>
> Once healthcare is reigned in small business people like myself can
> start hiring and giving raises and the money that we have been dumping
> into the Middle East, along with the productivity losses from Americans
> having to be soldiers instead of wage earners will make a difference.
>
>
> I like your wall of worry though, up nicely this year and see 2010
> as a very good year for real business, not phony banking profits/
In constrast, now I hear about how the markets are doomed. The US economy will never rebound. We should expect a prolonged recession, lasting a decade or more. The US will become irrelevant as China asserts itself as the new economic powerhouse. I find the note about firms going bust in large numbers, a la The Next Great Depression 2009 amusing.
The fact is nobody really understands what's going to happen next. We simply don't know or understand the implications of massive liquidity injections, foreign will power to finance increased US debts, confirmed by the fact our government won't sign onto a new stimulus just yet. The only thing certain about the future is that it's uncertain.
However, I feel the government got the first stimulus wrong. It should have focused on three things: 1) Extended unemployment benefits. 2) Various infrastructure projects like roads, bridges, alternative energy investment/smart grid and bringing internet to everyone in the US at a low cost. 3) Job creating tax breaks for small businesses.
Also in 2005, Net World Oil Exports Peaked and have declined 6% since. Net Exports is production minus domestic consumption by exporting nations; it is the amount of energy available to power economies of importing nations.
With oil as the lifeblood of our economy, less oil means contraction. The contraction will continue until the Olduvai Theory comes true or we change the lifeblood of our economy from oil to ingenuity. We can create an economic boom by de-monopolize centrally planned transportation and power generation infrastructure as we de-monopolized communications infrastructure in 1984. Transportation efficiencies can be increased 10-20 times. seekingalpha.com/artic...
On Jul 17 12:06 PM The Geoffster wrote:
> GE is a good proxy for the economy. I nearly doubled my investment
> from the March lows but didn't want to be too greedy. I'll get back
> in between 7 and 8. If health care and cap and trade fail, we'll
> come out of recession sooner, but I agree we are looking at sluggish
> growth. I'm hedged against the chance of war with Iran and researching
> tax shelters. Interesting times.
Remember that GE's 17% decline in the revenue represents one of the recent worst historical economic condition during the March-June, 2009. Beginning July, 2009, the condition has been clearly showing the signs of improvement. I wouldn't be surprised that GE would beat the top-line estimates by just computer-crazy analysts during the remainder of 2009 due primarily to economy and infrastructure growth in countries like China, India, Brazil and other Asian & South American countries. The north American economy (including the U.S.A., canada and Mexico) will certainly start moving up during this period and the TARP monies will start flowing into the economy domestically. To predict continued dire situation for a company like GE for the rest of 2009, simply due to high unemplyment situation represents ignorance of factors affecting GE's business. Besides, GE showed during the last quarter that with a lower revenue it remained more profitable; i.e., with increased revenues coming up in the remainder of 2009 and in the future, GE will report better profits than they did in the years before for similar revenues. Thus, except for those who are shorting the stock and pepole who have some vested interest in bad-mouthing GE, GE shares should be the right place now to invest for the future.
"Stocks are, at their core, priced on earnings growth."
----------------------...
Some are, some aren't. That's why we talk about "growth" stocks and "value" stocks.
People have made lots of money in companies whose markets have zero growth or are shrinking. Companies with little or no growth, but large cash flow, are often targets for LBOs
Author points out that the overall volume of sales are down across the board, and infers that no recovery is possible in such a circumstance-- but that's not right.
Consider, for a moment, vehicle sales, presently running at or below 10 million per year in North America. Given that the US scraps 10 -12 million cars per year, and that the average age of the US vehicle stock is nearly 8 years, one may conclude that today's low sales are tomorrow's excess demand.
In short, the tremendous drop in consumption, and extraordinary inventory drawdowns together with the destruction of capacity all add up to more profits in the future (for the survivors). GE, for example, has a much sunnier future as CIT exits the specialty finance market .
Parenthetically, author doesn't seem to know what "high frequency" data is . . . its things like FX and Treasuries markets, which trade hundreds of thousands of times a day. "Port, rail, and tax receipts" are useful data, but no econometrician or financial modeler would call them "high frequency" as author does.
How about a link to that 2007 prediction?
On Jul 18 11:43 AM yank wrote:
> "Once healthcare is reigned in"
> Dream on my friend. If you think Comrade Obama and Commissar Biden
> can control healthcare costs I have a bridge I want to sell you.
> Go back to the history books. FDR tried to spend his way out of a
> depression and it took a World War to finally end it. There is no
> successful example of a country ANYWHERE spending its way out of
> a severe contraction (i.e. Japan in the 1990s). I was trained as
> a hospital administrator and the health care "reform" policies being
> pushed by Obama are rubbish.
Karl,
A good assessment!
I agree that the fundamentals are NOT strong and nor will there be any strong recovery, any time soon.
It is a well known phrase, but, "it is different this time".
They are entirely separate issues!
On Jul 17 11:41 AM User 353732 wrote:
> It is a mistake to believe that what is bad for America is bad for
> those very few who have great power and great wealth.
All this page reads like people in search of data that fits their preconceptions. Better luck next time.
I have heard the WWII argument a lot. It goes something like, "We couldn't spend our way out of the depression... It took WWII to do that." But wasn't it the MOBILIZATION of WWII that pulled us out of the depression? In other words, the SPENDING the government did as it ordered battleships, tanks, and jeeps and as it employed millions of men in battle? To the extent that the private sector was involved it was all selling to one customer -- the government. I think the moral to the story is that you can't play at spending your way out of a depression, you have to full court press it. An all hands on deck kind of thing. I can't see us doing that, but if there were a cause great enough to mobilize us, it would essentially be "spending our way out" would it not?
I agree somewhat about the healthcare stuff, though.
On Jul 18 11:43 AM yank wrote:
> "Once healthcare is reigned in"
> Dream on my friend. If you think Comrade Obama and Commissar Biden
> can control healthcare costs I have a bridge I want to sell you.
> Go back to the history books. FDR tried to spend his way out of a
> depression and it took a World War to finally end it. There is no
> successful example of a country ANYWHERE spending its way out of
> a severe contraction (i.e. Japan in the 1990s).
On Jul 17 12:29 PM TheFounder wrote:
> I think you are right on. ndeed I kept all my short positions and
> event increased recently thinking were could the market go post a
> 40% rally in this economy?
>
> Yet this market is testing one's patiance with another rally every
> time a financial institution releases strong qarterly earnings. Where
> are all these bulls coming from and which scenario are they counting
> on?
seekingalpha.com/artic...
this will give you a much better historical perspective regarding what happens to countries with too much debt.
You will quickly realize that it appears there are really only two alternatives. We continue the short sighted policies we are engaged in now and likely crash the dollar or we endure pain and go for a long term fix. At this point all evidence points to our government working to cause a dollar collapse (despite what they say). One must further understand who owns the fed and why banks (and perhaps our own government) have no problem with dollar collapse and the resulting inflation. At the same time one must understand the secondary knock on effects of allowing goldman to keep the market propped up.
In summary in an effort to bail out wall street and let them make big money we are killing every other aspect of our economy. The shame is that while our government tells you that they are impt in getting our economy going again, they really aren't. That is a fiction they promote because it lines their pockets.
You also have to be a bit skeptical about what happened when Lehman failed. Did the big banks do this on purpose to get what they wanted? Kind of like the market falling when geitner went on TV at first. You just keep dropping things until you get what you want. Now that you have gotten everything you prop things up, rake in huge trading profits so you can say things are working.
I hate to say this, but to understand what is happening you have to be a huge cynic and question everything. It is a miserable way to live and often makes me very depressed, but you will obtain insight. That's why people don't bother to learn. It just makes you unhappy (unless you are part of the gravy train) and why would someone what to do that.
On Jul 18 02:55 PM truthteller wrote:
> Very interesting read. It demonstrates the reasons why stock markets
> have soooo many sharp ups and downs. I remember comments in December
> 2007 about how we were headed for a contraction, which will last
> no longer than 10 months. This commentator speculated that there
> was no way the financial markets would implode and the economy would
> certainly rebound quickly.
>
> In constrast, now I hear about how the markets are doomed. The US
> economy will never rebound. We should expect a prolonged recession,
> lasting a decade or more. The US will become irrelevant as China
> asserts itself as the new economic powerhouse. I find the note about
> firms going bust in large numbers, a la The Next Great Depression
> 2009 amusing.
>
> The fact is nobody really understands what's going to happen next.
> We simply don't know or understand the implications of massive liquidity
> injections, foreign will power to finance increased US debts, confirmed
> by the fact our government won't sign onto a new stimulus just yet.
> The only thing certain about the future is that it's uncertain.
>
>
> However, I feel the government got the first stimulus wrong. It
> should have focused on three things: 1) Extended unemployment benefits.
> 2) Various infrastructure projects like roads, bridges, alternative
> energy investment/smart grid and bringing internet to everyone in
> the US at a low cost. 3) Job creating tax breaks for small businesses.
On Jul 19 11:07 AM dcb wrote:
> I do not have the numbers, but looking at some of James Quinns stuff
> regarding debt and gdp, and household debt. these are huge macro
> figures that will take years to unwind. additionally, may i suggest
> looking at the PBS series the ascent of money:
>
> seekingalpha.com/artic...
>
>
> this will give you a much better historical perspective regarding
> what happens to countries with too much debt.
>
> You will quickly realize that it appears there are really only two
> alternatives. We continue the short sighted policies we are engaged
> in now and likely crash the dollar or we endure pain and go for a
> long term fix. At this point all evidence points to our government
> working to cause a dollar collapse (despite what they say). One
> must further understand who owns the fed and why banks (and perhaps
> our own government) have no problem with dollar collapse and the
> resulting inflation. At the same time one must understand the secondary
> knock on effects of allowing goldman to keep the market propped up.
>
>
> In summary in an effort to bail out wall street and let them make
> big money we are killing every other aspect of our economy. The shame
> is that while our government tells you that they are impt in getting
> our economy going again, they really aren't. That is a fiction they
> promote because it lines their pockets.
>
> You also have to be a bit skeptical about what happened when Lehman
> failed. Did the big banks do this on purpose to get what they wanted?
> Kind of like the market falling when geitner went on TV at first.
> You just keep dropping things until you get what you want. Now
> that you have gotten everything you prop things up, rake in huge
> trading profits so you can say things are working.
>
> I hate to say this, but to understand what is happening you have
> to be a huge cynic and question everything. It is a miserable way
> to live and often makes me very depressed, but you will obtain insight.
> That's why people don't bother to learn. It just makes you unhappy
> (unless you are part of the gravy train) and why would someone what
> to do that.
sorry, but I do not feel like writing an essay on stocks ROA and ROE at this time. Market should move up like ROA, cheap leverage allows inefficent use of capital and higher pay for CEOs. Of course it also blows up. Volker squeezed out leverage in the system, collapsed the markets and since that time the log returns are based on leverage and we had the best stock market period in history.
The numbers around Harley Davidson are very scary. They reported that during the past quarter, their revenue was down 91%!! How can you keep your doors open when your income drops like that.
The thing that astounds me is that the banks have been bailed out by taxpayers and some of the "bailees" are now reporting profits. However, the taxpayer cash infusions are doing nothing to benefit consumers. Banks aren't lending. They're hoarding cash and posting profits. Until the cash starts flowing again, business and consumers won't spend and we'll never dig ourselves out.
I agree with your discussion here - it's not likely to rebound any time soon. I recently read Harry Dent's book and highly recommend it: tiny.cc/nzzuo
On Jul 17 11:24 AM Bjarne Jensen wrote:
> While I agree with your assessment of the economy I think you are
> under valuing the effect: I do not believe our economy will ever
> return. A look at world economic history suggests that we are in
> the process of losing the economic high ground to China and our economy
> is not likely to improve any more than England’s' economy improved
> when they lost the high ground to us or Spain’s' economy when they
> lost the high ground to England.
>
> Given the amount of debt overhang we have, if we lose the economic
> high ground our economy will soon look like Mexico's.
>
> Can't happen here? The three previously mentioned world economic
> transitions were caused by the same two conditions: The losing country
> had accumulated more debt than their economy could support and the
> losing country had such incredible hubris they were unable to see
> it and attempted to fix it by borrowing their way out of debt. I'm
> afraid that the debt funded spending spree is over and we're going
> to pay the price!
On Jul 17 01:25 PM conceptwizard wrote:
> The Government is very effective in manipulating the markets. We
> get good news on GS from Merideth Whitney and the market rallies.
> We get bad news on GE and the market rallies...we get no news and
> the market rallies. They are going to hold this market up no matter
> what. Blow that bubble!
> PPT go team go!
The more the bears screech about how the market should NOT be at this level - the more I think that they are talking their book.
On Jul 18 09:02 AM thegrandibah wrote:
> The article reflects extremely poor fundamental research techniques:
>
>
> 1) GE's double digit decline should come as no surprise. The author
> should have focused on interim quarterly decline trends not YOY figures.
> There will be no YOY gain until the YOY figures have "lapped" the
> big drop off in 4Q08.
>
> 2) "Stocks are, at their core, priced on earnings growth, with the
> most-common ratio used for such metrics being P/E/G, or Price-to-earnings-growth.
> But earnings are not growing, they're contracting...."
> Stocks are discounters of expectations of future earnings growth
> (really the present value of future cash flows). If the author were
> correct, companies without current earnings would be priced at zero.
> We would have no drug industry.
>
> 3) "a 30% reduction in business done should lead to a 30% decline
> in profits earned"
> False! This could only be true if a business had zero fixed costs.
>
>
> 4)"Multiples are going to continue to contract...."
> If the market is flattish for the year and earnings estimates have
> fallen, multiples have increased.
>
> 5) "in order for revenue to come back to pre-bust levels, we would
> have to re-inflate the credit bubble "
> This falsely presupposes re-inflation of credit is the only driver
> of revenue. Easy money is a good one and Obamanomics are providing
> crazy money supply growth, but there are many others.
> 6) "The move in the market off the 666 levels in March has been driven
> by a false premise, egged on by CNBC and the other "mainstream media"
> - that this is a typical recession, it is short-lived, and we will
> soon go back to previous spending and business patterns. That is
> not going to happen"
> The 666 comment indicates the author is nothing more than a technician
> trying to masquerade as a fundamental analyst. The media and everyone
> is "false," yet, we should believe this pundit because he says "that
> is not going to happen" without any data or real analysis to support
> his position. Pathetic.
>
> I could go on (and on) but you get the point. It is quite fashionable
> to be negative so we cheer-lead poor research like this. He may be
> 100% right but it would be nice to have a cogent piece to back up
> his position.
Bottom line: Those who bet on the market "going much higher" from here are going to find themselves once again holding a bag handed to them by the media and market callers, just like they did in 2000 when it was said "this is just a small correction in the market" as the Nasdaq came off 5,000.
market-ticker.denninge...
On Jul 18 08:39 PM Kunst wrote:
> "What those high-frequency data sources are telling us, here and
> now, today, is that we are in the middle of a 25-30% economic contraction
> - exactly as I predicted would occur in 2007."
>
> How about a link to that 2007 prediction?
So, in effect 2/3's goes to lawyers and judges who are lawyers in different costumes. The lawyer hoard conspires to swindle money from the general public and medicine is jut one just one of their fronts.
There are serious flaws in the designs and rolls of governments in the USA. These flaws become more damaging to the USA national wealth as special interests exploit them to there own advantages. One could say that they causes the fall of nations.
They all fall do they not?
Res ipse locquitor, let the facts speak. Law school student counts are exploding and and medical school counts are droping.