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  • The Black Hole of Financialization: Zero-Sum Profits vs. Beneficial Wealth Creation [View article]
    I must agree, the banks have definitely been successful at "risk-shifting." Last time I looked (July 7), the US Federal Reserve had "assets" of $2.87 trillion and capital of $51.7 billion, resulting in a leverage ratio of 55.6 to 1. The too-big-to-fail (and now we've even got many too-small-to-fail) banks have taken their TARP funds and shifted the risk they couldn't manage onto the US public. Re: M&A, read the literature. The vast majority of studies into the gains from mergers show that the gains accrue to target company shareholders, with proportional losses to the shareholders of acquiring firms. That's not positive NPV, that's a wealth transfer from acquiring to target companies. Even though most M&A does not create value for society (Adam Smith-style positive NPV economic profit), the executives of both target and acquiring firms always manage to come out ahead.
    Jul 11, 2011. 09:36 AM | Likes Like |Link to Comment
  • Dominant and Cheap: Cisco Systems [View article]
    Enjoyed the analysis -- can you provide more detail on exactly how you adjusted CSCO's P/E based on their cash holdings? Right now I've got CSCO trading at a trailing P/E of right around 14, and wondered how you rationalize that it's really 10. Thanks.
    Nov 30, 2010. 04:54 PM | Likes Like |Link to Comment
  • U.S. Market Returns: What's in Store? [View article]
    Overall, a pretty solid analysis, but in your next to last paragraph you might want to revise your ". . . PE of 19.3% . . . " statement. Price-to-Earnings ratios are not percentages, they are multiples. Price is in the numerator, earnings in the denominator. When it's the other way around, the E/P ratio = earnings yield and then the number becomes a percentage (earnings as a percentage of price). A P/E ratio measures how many times larger a stock price (or stock price index) is compared to company (or aggregate) earnings, so referring to the P/E as a percentage is inaccurate.
    Aug 27, 2010. 06:16 PM | Likes Like |Link to Comment
  • Running the Market Marathon: Why Stocks Are Cheap [View article]
    The logic is faulty. Just because a $3000 suit at Neiman Marcus gets discounted 50 percent, there's still a chance it's overpriced at $1500. You have to be able to make the case that companies will grow their fundamentals -- revenues, profits, free cash flows and dividends -- faster than the rates currently implied by P/Es and other relative valuation ratios. You may have a hunch this will happen, and you may be right, but you do not present an analysis to convince the reader this will happen.
    Jun 19, 2010. 08:54 AM | 7 Likes Like |Link to Comment
  • Inaugural Contributor Event in Manhattan: See the Photos! [View instapost]
    I was in Manhattan the week before -- I wish I could have attended! Maybe I'll make the next one.
    May 29, 2010. 08:40 AM | 2 Likes Like |Link to Comment
  • How Much Longer Will S&P Rally Go? [View article]
    Does one significant up day constitute an official "rally?"
    May 27, 2010. 08:56 PM | 1 Like Like |Link to Comment
  • Weekly Market Outlook: Credit Crisis Part Deux [View article]
    Enjoyed the article. One small point to be corrected. The adjustments to the inflation data (which I also disagree with) are "hedonic" -- related to the economic concept of utility -- and not "hedonistic," a word which describes the pursuit of pleasure.
    May 24, 2010. 07:57 AM | 1 Like Like |Link to Comment
  • Alpha vs. Beta [View article]
    I'd like to request a clarification regarding the following statement, made by the author: "It's been a great decade for the S&P500. No beta, but every day had an opportunity set of 500 fluctuating securities to capture alpha. It was an even better 25 years for the Nikkei. Again no beta, but vast alpha was generated from security selection and timing by those with skill."

    When you say "vast alpha" was generated by active management, are you saying that some entities earned large positive alphas, which I believe no reasonable person would dispute, or are your rather asserting that the alpha earned overall by the active money management industry was positive in the aggregate? And is the alpha to which you're referring is measured net of all fees and costs?

    The reason I ask is that Ken French's study The Cost of Active Management (working paper version available at shows that active management, in the aggregate, charges more in fees and costs than it returns to investors in the form of active returns.

    Moreover, it should be obvious that if active management generates any costs whatsoever (research, trading, higher compensation than that earned by passive managers, etc.), then the sum of all (net) active returns must be less than the sum of all returns to passive strategies.
    Dec 16, 2009. 09:31 AM | Likes Like |Link to Comment
  • How Buying a Home Is Gambling [View article]
    I appreciate Ankit's reply, and just to add one additional observation in the form of a question, what is a "certain" investment? All investing involves risk, and as noted, with the usual amount of leverage and potential illiquidity of real estate, a stock yielding 5% (e.g., BMY) to 6% (e.g., VZ) entails less risk exposure than virtually any real estate investment. With stocks you can use simple option and stop-loss orders to manage risk more effectively. Unless you plan to also extract enjoyment from real estate by living in the house, there's generally more potential downside with real estate. Moreover, many states make it difficult to evict troublesome renters, so you can experience serious cash flow timing interruptions, which is an additional risk that should be considered for all you would-be rental property moguls out there.

    On Dec 11 12:43 PM Ankit Gupta wrote:

    Repeat after me: A home is not an investment, a home is not an investment, a home is not an investment.
    Dec 12, 2009. 09:33 AM | 3 Likes Like |Link to Comment
  • The 10 Most Valuable U.S. Companies vs. Treasury Yields [View article]
    Good article -- this is how intelligent buy and hold value investors win in the long run. Two suggestions -- first, next time you write on this topic, it would be helpful to show the actual earnings yield number for each stock in your first table. Second, it's worth pointing out that a stock's earnings yield is the reciprocal of its P/E ratio, and that your approach to stock selection is essentially the same as buying lower P/E (higher earnings yield) stocks that have good fundamental stories, i.e., strong earnings and free cash flow production with no concerns of financial distress or other impending disasters.
    Dec 3, 2009. 10:18 AM | 1 Like Like |Link to Comment
  • Essay on Macroeconomics: Where Krugman Fails [View article]
    Sounds like more of the same: Many words devoted to attacking Krugman and Keynes; few words devoted to proposing an alternative path to economic recovery. Are you implying that we should cut taxes and . . . then what? Your comparative intellecutal advantage is supposed to be providing insights into the connection between economics and politics. Reaganomics blew up because, even when Republicans controlled Congress, no one could get them to reduce of even slow federal spending. Thus the $14 trillion deficit. Now that the Dems are in charge (thanks to a huge anti-Bush turnout at the polls) . . . they're not going to cut spending, either -- tax cuts are therefore out of the question. That leaves Keynesian solutions. Lets just hope the fiscal stimulus works and we don't wind up stuck in a Japanese-style liquidity trap, or slow-growth stagflation scenario. Additionally, the reaction from European and Asian financial markets today was telling. Their governments announced continuation of the stimulus programs and stocks rose on the news. So the market obviously likes stimuli.
    Sep 7, 2009. 08:27 PM | Likes Like |Link to Comment
  • 5 Dividend Stocks for Those that Missed the Rally [View article]
    I would enjoy an explanation of how indicators like an average market P/E based on 1-year earnings of 53 and P/E based on 10-year average earnings (the Graham & Dodd and/or Shiller P/E) of 20+ imply a "fairly valued" stock market. Please provide your readers with greater specifics, because to fundamentalist, it's 2003 all over again -- the start of another "faux" bull market beginning from super-high P/E ratios, where it will take years for the average market P/E ratio to compress back to average, and immediately thereafter half a decade worth of gains will be erased in the blink of an eye. Enlighten us, please.
    Aug 21, 2009. 06:57 PM | 1 Like Like |Link to Comment
  • Sentiment Driving Prices Higher: Bull Is in Full Stampede Mode [View article]
    Hi David: I think that's an excellent question. Honestly, I hadn't thought of a specific answer until you prompted me to do so. Technically, there is no widely-accepted way to measure the legitimacy of a bull market. To jump-start the dialogue, I would propose that a bull market is legitimate when buy-and-hold investors earn real stock returns that exceed the real return on bonds. The Mar-09 low of approximately Dow 6,500 took us back to 1996 levels (nominally), indicating a tremendous loss of real wealth for equity investors. When investors are better off in bonds for more than a decade, I'd say that's a "faux" bull. Rob Arnott's paper in the Journal of Indexes discusses this in depth; it's a great read (the link is long, hopefully it will reproduce):

    On Aug 05 08:39 AM David Van Knapp wrote:

    With all respect, by what definition is a 5-year, 101% increase in
    the SandP 500 a "bull market that wasn't"? Please be specific: How long, or by how much, does a market have to rise in order for it to be considered a bull market? Does it have to last 10+, or 14, or 16 years, or "a generation"? I'd really like to know.
    Aug 5, 2009. 09:00 AM | 3 Likes Like |Link to Comment
  • Sentiment Driving Prices Higher: Bull Is in Full Stampede Mode [View article]
    Nice article, right to the point. If the first and second factors are weak (economic growth and valuations relative to earnings, respectively), stocks are rising solely on the basis of the third factor (emotion, a.k.a. Kenysian Animal Spirits). As the economy matures into an extended period of de-leveraging and subdued consumerism, what will drive the future growth in revenues and earnings necessary to support the P/E expansion documented by the author? At best, stocks appear priced for average to below-average returns in a period of unusually high risk. Historically, coming off of market bottoms such as Mar-09, relative valuations were much lower (as in Aug-82). Low relative valuations, disinflation and lower marginal tax rates drove the bull market 1982-1999. None of those factors appear to be in place now, so we may just be setting up a repeat of the heartbreaking high-P/E bull-market-that-wasn't of 2003-07. As the old sergeant on Hill St. Blues used to say, "Let's be careful out there."
    Aug 5, 2009. 08:25 AM | 3 Likes Like |Link to Comment
  • No One Saw This Economic Crisis Coming? [View article]
    For the record, I attended a talk given by UCLA's Ed Leamer ( in Spring 2007, and Professor Leamer laid out the impending economic crisis on a silver platter to an audience of approximately 200 top money managers. Ed explained why macroeconomic conditions were unsustainable, and how the unwinding would proceed. He really nailed it. Ed is the director of the UCLA Anderson Forecast. You might want to bookmark the link, it's updated regularly and has been accurate for quite a while ( In my opinion, it's a good "smart money" resource.
    Jul 12, 2009. 05:23 PM | 4 Likes Like |Link to Comment