Discounting Artificially High Earnings

Includes: AGG, DIA, QQQ, SPY
by: Russ Winter

Calafia Beach on Seeking Alpha put up a post asking why the market seems to be starting to discount superficially good corporate earnings. He provides charts that tell this story up to this point.

Before you consider buying or holding these supposed mouth watering valuations, investors and speculators should ask themselves the following question: can the corporatists who have used the government and the system to create and perpetuate this arrangement keep up appearances? There is little question that corporatists have executed a complete capture of the U.S. government as well as the Troika in Europe. Chinese apparatchiks also have worked that system to death. That said, I am giving a list of some of the risks (beyond an economic slowdown) to this corrupt corporatist system.

  • The market may be (correctly) discounting the fact that near zero interest rates on bills and most T-notes issued by a nation whose Treasury debt is spiking to over 100% of GDP is a bubble, and are not sustainable. When rates normalize money in longer duration notes and bonds will be marked down severely.
  • The market may be viewing as unsustainable the huge involvement of the government to the tune of 25% of GDP (7% above the norm), that has benefited corporations. The market may be looking at corporate taxes collected running 1.3% of GDP or half the norm, as unsustainable. [Corporate Tax Avoidance].
  • The market may start looking at the inflation, the trashing of and wealth transfer from the lower and middle class as killing the golden goose. This scheme can only rely on the wealthy and government largess for profits for so long. Worse still, the increasing ranks of desperately poor and hungry can use flash mob tactics, guns, baseball bats and matches. Those uses don't involve high skill sets.
  • The market may be viewing the benefits from currency devaluation as unsustainable, as it ties into #4: trashing the standard of living of 95% of Americans.
  • The market may be viewing the benefits of the China and emerging market play as unsustainable either on a cyclical or structural, resource, or environmental basis.
  • The modern slash and burn economic system uses a large input of accelerated negative externalities. This would include environmental degradation and overuse of water and soil [Water Roulette], air pollution, global warming, and waste of fossil fuels. These generate high profit margins to the perpetrators. Even for those who could care less about polar bears, oceanic fish populations, biodiversity, or the concept of Gaia, it still piles on significant costs for billion of normal people and future generations.

Investors who buy the earnings sustainability and stocks are cheap story should be continually asking questions about each of these points. The bottom line is that without all the artificial supports, the heavy subsidies, the tax breaks, the socializing of losses on the public, the scams, and dumping of negative externalities on the climate and environment, corporations would experience a major swoon in earnings perhaps taking corporate profits down to a norm of 6% of GDP. If the worm really turns and the politics radicalizes, it could go even lower than 6%.

It might be useful to just shave a third or more off the estimated earnings and then ask if you would still like to hold the security. If you must invest and can stomach the rancid smell, you might be best served by looking for the latest privatize gain, socialize loss scam to come down the pike. One potential play here might be the bundling of government held foreclosures to sell on the cheap to vulture funds and other bankster types [A Huge Housing Bargain, but Not for You].

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.