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  • Corporate Profit Margins And Investor Consequences [View article]
    NeumeierS - let me tell you how right you are. You are so right. I went and looked, I didn't accept it as conventional wisdom. I will tell you what I did and what I found.

    I went to the FRED II database - St. Louis Fed repository of US macroeconomic series of all kinds. I downloaded the data for the series "corporate profits before taxes" (without any inventory of capital consumption adjustments), and then I downloaded the series for "corporate profits after taxes". Then I took the differences between them term by term to get a new series for corporate taxes paid. I then divided that series by the corporate profits before taxes value for each year, to get a percentage of reported pretax corporate profits that didn't make it through to the after taxes bottom line.

    The data runs from the 1st quarter of 1947 through the 3rd quarter of 2014 (the final quarter of 2014 isn't out yet) - almost 67 years. It is declining. Let me tell you what I mean when I say "it is declining".

    A best fit regression line through the data is that the series starts at 45% and drops 15 basis points per quarter. The latest actual observed value is 9.2%. There was a period *4 years long* from the last quarter of 2007 to the last quarter of 2011 in which the series was negative - corporate profits after tax higher than corporate profits before tax.

    The R squared of that declining trend line is 0.79. The p value for the trend to be a random artifact (no real trend, misled by noise) is 8.8 times 10 to the minus 94th power - 32 standard deviations.

    In detail, the series actually starts out in the low 30%s during the late 1940s and rises to just under 50% during the Korean war. It falls back to 40% in 1954 and stays at or just under that level until the early 1960s, when it starts falling slowly. Which it does - with an uptick or two - until the early 1980s, when it stands at around 20%. It then goes sideways with some noise until 2000, when it falls off a cliff. In the last quarter of 2001 - immediately after 9-11 - it hits minus 5.7%, the first negative figure in the whole series. it then climbs back, rapidly at first and gradually after, to a lower peak around 15% in 2006 before the "great recession". Another cliff, even more dramatic than the previous - in the last quarter of 2008, it hits minus 23%, as corporate losses generate tax credits on a scale of a quarter of all corporate profits pretax. Another violent climb back to - the 10% level recently.

    In other words, corporations paid 30-40% of their pretax profits in the era of Truman and Eisenhower and Kennedy, and they paid 20% of their pretax profits in the era of Reagan and Bush the elder and Clinton. Since then, they have paid less than nothing in recessions and 10-15% in boom years, on diagonal lines upward from each recession trough. Net movement - minus 0.6% per year, highs and lows together.

    I hope this is interesting...
    Mar 25, 2015. 05:50 PM | 3 Likes Like |Link to Comment
  • IMF On Irish Household Debt Crisis [View article]
    "with an average interest rate of 1.05 percent"

    Somehow I doubt that will break anyone's back, even at 177% of disposable income. In the US where the ratio is more like 100% of disposable income, the average rate has to be about 3 times as high. Even adding say 1.5% as the amortization rate / principal, we get around 4.5% of disposable income as debt service for either ratio. In other words, the high capital balance of Irish debt looks like a pretty rational exploitation of a great offer on the interest rate.
    Mar 25, 2015. 02:07 PM | 1 Like Like |Link to Comment
  • Corporate Profit Margins And Investor Consequences [View article]
    Drawing that first horizontal line at 6% through that times series chart will get you a failing grade in stats 101.

    Did you do a test for whether the series is stationary?
    Did you plot a least squares regression that is allowed to have a trend?
    Did you plot the residuals?
    Did you do a normality test on the residuals before declaring things like the number of standard deviations a given data point is?

    You say either extreme "reverts", which can mean negative serial autocorrelation with a particular lag, or it can mean fitting a mean reverting process to the series, or it can mean testing whether the dispersion grows with holding period faster, equal, or slower than the square root of the time. Which do you claim and whete is the test, and what is the hypothesis, and what are the test statistics?

    But I see no evidence of any of this.

    Leaving aside stats, do you have an actual economic argument about income shares, portions of GDP represented by public companies in the first place, etc - that are unchanged over century time scales, unaffected by top personal tax rates of 91% vs 28%, corporate rates from 48% to 28% and back up to 35%, monetary system from gold to gold exchange to fiat, technical change from buggy whips to information technology...

    What reason, if any, do you in the end have to expect US corporate profits to necessarily and always move to 6% of GDP? Hint, they in fact do not do so.
    Mar 25, 2015. 12:54 AM | 2 Likes Like |Link to Comment
  • The Real Value Of The US Money Supply [View instapost]
    I understand. As I said, I would like to find things to like about the better European banks for the sort of "improvement possible" reasons you discuss, and also just to make use of the stronger dollar. But I still see pitfalls, so I explain them. So you know, the most promising to me at the moment look like UBS, Barclays, and Nordea. Deutsche Bank is also interesting though the riskiest in that set (highest leverage level). Each of those seems to me to have franchise value beyond the cire bank, in capital markets expertise and the like.

    On ING, I did bank with them some before they sold their US consumer business to Capital One. I haven't since.

    Some full disclosure in this area - I own modest direct positions in preferred series from Goldman and Chase, and I do most of my own consumer banking with Chase (bank accounts, mortgages, other loans, etc). Neither is my broker, however - I use TD Ameritrade for that (division of Canada's Toronto Dominion Bank). Most of my stock is however held through funds, Vanguard and Fidelity. I am looking to add Goldman common overbthe next few months, and would consider Chase too on any move down.

    For the Euro area owns, just watching them at the moment, not buying.

    On whether the Euro has bottomed, hard to say. Most of the move is done in my opinion, and it isn't crazy to want to buy Euro area stock with stronger dollars around now. I think that opportunity will persist for at least 3-6 months, however. Could be some Euro to dollar retrace, but it woukd prove temporary on that kind of time scale. I am saying averaging is fine this year, you won't have to call the bottom tick.

    I hope this helps. Good discussion...
    Mar 22, 2015. 09:03 PM | 1 Like Like |Link to Comment
  • The Real Value Of The US Money Supply [View instapost]
    longdistance - I want to like some of the better European banks, including some of the Scandanavian ones, including UBS, ING, Barlacys in England, and the like. But they still have serious leverage and profitability problems at this point.

    ING is trading at tangible book, but so are a lot of banks. It still have 25 times as much in total leverage as it has in tangible book, and in the last year its return on equity didn't break 5%. Admittedly that is a down year and in good times they might manage 10% - but they are earning 5-10% on equity while running at 25 times leverage. Their return on assets is abysmal by US standards.

    There are 4 key ratios to look at when evaluating a commercial bank.

    The most important is their efficiency ratio, which is the percentage of total gross income they spend on expenses, including their employee compensation and the like. 60% is an OK number, 50% is actually do-able and represent a very well run, lean bank with the common shareholders really earning their share for the risks they run. To be clear, you want to take a total expenses line item and divide it by a total gross income line item, and that is the number I am talking about here. Low is good - the difference between this number and 100% is the amount making it through to the shareholders.

    The second is the return on assets. 1% is a good figure, and another north of it is very good. Only 0.5% return in assets is poor, and will require quite high risk taking in the form of leverage.

    The third is the leverage ratio in the sense of total assets divided by tangible book value. 10 is quite safe, and anything in the low teens is likely livable and can sometimes be more profitable than very low leverage. But anything 20 and above is simply taking too much risk with the stockholder's equity - there isn't enough share capital actually "sharing" the risk, and junior debt is effectively doing the work of equity.

    And the fourth is a pure valuation measure - what is the ratio between the market cap at current prices and the tangible book value? Below 1 is a discounted bank. At 1 is a good price for a well run bank in other respects, but it not enough to merit a position in a badly run bank. A modest premium of market to tangible book is OK if it would be "earned through" in a year or three, and if you can be reasonably sure the next year or three will have no recession years.

    So in those terms, what does the "report card" on ING look like?

    Efficiency ratio - 78% quite poor, C- to D"
    Return on assets - 0.26%, very poor, "D to D-"
    Leverage ratio - 25 to 1, quite poor, "C- to D"
    Price to tangible book - 1.00, solid B"

    I don't want to invest in a report card that looks like that.

    Let's compare the same 4 measures for JPMorganChase, US Bank, and Goldman Sachs.

    JPM -

    Efficiency ratio - 58% good or better, B+
    Return on assets - 0.87%, solid, B
    Leverage ratio - 14.63, good or better, B+
    Price to tangible book - 1.30, bit rich, unexciting, C

    USB -

    Efficiency ratio - 53% Excellent, A
    Return on assets - 1.54%, outstanding, A+
    Leverage ratio - 13.0, very good, B+ or A-
    Price to tangible book - 2.58, very rich, D

    GS -

    Efficiency ratio - 64% fair to good, B-
    Return on assets - 0.96%, very good, B+
    Leverage ratio - 10.3, excellent, A
    Price to tangible book - 1.05, solid B

    Of those, GS isn't in quite the same business but is also near tangible book and it is a vastly better run company. The only mark against it is that it pays its employees well, and not everything falls to the common shareholders as a result - but that is a matter of wanting a 5% better efficiency ratio, not a big miss.

    USB shoots the lights out on every metric but valuation, and the valuation simply acknowledges that it leads the class. A return on assets over 1.5% with near 50% efficiency ratio and 13 times leverage is about perfect for a bank. It means the common shareholders are reliably earning close to 20% on their equity and it is actually going to them, not padding pay within the bank.

    JP Morgan is between those. Its valuation is richer than GS or ING, but its return on assets are little behind those Goldman achieves and its efficiency ratio marginally better, and squarely in the competitive range. Its premium over tangible book is an amount that 2-3 years of earnings fully covers.

    This is the way to grade banks. I hope it is useful.
    Mar 22, 2015. 06:21 PM | 5 Likes Like |Link to Comment
  • The Real Value Of The US Money Supply [View instapost]
    longdistance - Yes the Fed was the cause in the 1970s, and they even knew better as an institution. It was political branch interference in the running of the Fed that "undid" their past lessons learned. The Fed tamed the Korean War inflation by asserting and winning its independence from the Treasury, and letting long rates rise. They didn't have to rise nearly as much as in the 1970s, and Eisenhower's administration cooperated (Truman fought it every step of the way).

    What happened in the 1970s was first the late Vietnam war period, with Burns being sent by Nixon to the Fed. "We are all Keynesians now". He closed the gold window, left Bretton Woods, and we got the first oil shock on top of all that. But both his presidency and the Democrat controlled congress after Watergate were committed to "full employment", and demanded monetary stimulus whenever real GDP turned down, no matter how briefly.

    The Fed analysis from the 1950s period was entirely sufficient to tell them what to do, but the political people put in over the technocrats resisted doing it. Until Carter, broken by the second oil shock in 1979, put in Volcker, who unlocked that technocratic understanding. He then needed political support in the 1982 recession to keep it up despite higher unemployment - and got it from Reagan. Notably, the move away from technocratic monetary policy in the early 1970s had been bipartisan. By a decade later, the move back to technocratic running of monetary policy was similarly bipartisan. The elected politicians had learned the hard way that they did not actually understand the subject, and that having their way with the Fed didn't produce good outcomes, for the country or for them.

    As for the comment that the Fed is "requiring" people to hoard more money, I deny it. People burned by the 2008 crisis are making that decision all on their own, despite strong pushing by the Fed to get out of risk free cash. It is true that the Fed and government more generally have increased capital requirements at the commercial banks and generally kept them in the doghouse, even suing their pants off in many cases. That has not helped broad credit growth. But in the US, we basically have made it through that stuff and the banks are sound again.

    In Europe, not so much. In Europe, equity is still only 4% of overall assets - 25 to 1 leverage. The European commercial banks cannot grow their sheets rapidly while that remains the case. They need to raise equity capital - my preferred solution there is debt for equity swaps, starting voluntary but with strong regulator push if necessary, to resolve it fast. It is more than a bit shameful that the Europeans have made so little progress fixing all of that, a full seven years after the 2008 crisis.

    On the string analogies, if the monetary authority has kept narrow money very tight, it can indeed restrict narrow money growth, mechanically. The US Fed did so in the 2004 to 2007 period, as it raised rates up above 5%. M1 barely moved in that stretch, and in real terms it was declining. Broad money could still grow and did, but that was a much stronger control over bank expansion (restraining it) than even the QEs have been at "telling them" to grow.

    The Fed's actions in the fall of 2008 were not pushing on a string, though. The move from banks being reserve constrained to only being capital constrained was a sea-change, and they have not needed to worry about reserves or narrow money controls since about mid 2009. That doesn't mean they can expand at will, however. They still face *capital* requirements.

    It isn't so much string as it is knowing where the leverage point is. When commercial banks didn't have enough reserves, $1000 more in new reserves could produce $10,000 in new loans. Now it doesn't, it only produces the $1000 in expanded credit, directly to the end borrowers, of the stuff the Fed actually monetizes and takes onto its own books. Basically, the Fed has no leverage there any more.

    But there is a leverage point. It is bank capital. If the banks make another $1000 in *profits*, they can and they will expand their sheets by something approaching another $10,000. The Fed just hasn't been focused on or aiming at that leverage point. Meanwhile other parts of the government, by suing the pants off the commercial banks, have been directly reducing that figure.

    When banks are capital constrained, total broad credit is a straight linear and leveraged function of their *net worth*, their stockholder equity. Anything that earns them money and raises that figure, has a multiplied impact on total credit. That's not string, it is solid leverage. Just, nobody is using it.
    Mar 21, 2015. 11:23 PM | 3 Likes Like |Link to Comment
  • The Real Value Of The US Money Supply [View instapost]
    longdistance - no it is not population, it is wealth. To a first approximation, people want to hold about the same portion of their wealth in money form.

    That includes savings money forms like CDs, savings accounts, and money market accounts. The payments system has become more efficient over time, allowing a larger volume of broad money and of transactions to be handled with a smaller narrow money stock, relative to wealth. But broad money and wealth are increasing together. Real wealth is increasing, and the money portion of it is increasing with it, not remaining stable.

    All over the long term, mind. In the short run, within one cycle, there are fairly strong movements in demand for money independent of that secular trend, and the portion of wealth held in money form can dip in boom periods (with overall wealth advancing quickly, and risk appetites large), and rise in bust periods (with risk aversion higher, "deleveraging", etc).
    Mar 21, 2015. 11:03 PM | 1 Like Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    Since the government has utterly bolixed up the job, I really don't think they are required to fix it. Smart government can indeed do many of the things that private business can do. Dumb government, which is what we actually get, is not fit to run a lemonade stand.
    Mar 20, 2015. 12:02 PM | 4 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    "That seems a waste of resources"

    Horsefeathers. First you charge what the water is actually worth, and people will economize on the use of the present supply, avoiding uses of it that are pouring money out the window on unimportant and inefficient things, and focusing the resources we have where they are most useful. Then, if there are still people who want to bid for more water, they can, and anyone who likes can try to supply it. By increasing the overall supply, if that is profitable.

    What happens now instead is that 80% of the supply is used at subsidized prices on less important uses that would not be conducted at all if they had to pay full cost for the water, while higher value uses willing to bid more go begging, and cant' get supply. Or even bid for it.
    Mar 20, 2015. 11:33 AM | 4 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    nbsully - quite possibly, but as long as anyone else buys that newly issued Treasury debt, the money increase still reverses. The Fed has to affirmatively decide to keep it high, again, by a new purchase of Treasuries, to keep the previously monetized portion of the debt, monetized. If it doesn't, the monetarization is temporary, and it goes back to being the Treasury's job place its debt with savers or financial institutions as soon as the original matures.
    Mar 20, 2015. 11:11 AM | 3 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    People are going to buy P&G's products in the future. One reason they have been in business - and profitable - for 168 years, is that people will always need such products, and they are reasonably good at getting those products to people that want them. The age doesn't cause the fact about their future demand, but it does reflect that fact. Both have the same causes. There is nothing particularly worrying about their debt level, and the previous poster was simply right.
    Mar 20, 2015. 11:09 AM | 2 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    "We have no way to cope with a drought"

    Um, charge a rational price for water in California? That one is both simple and purely caused by government subsidy interference. As for the VA, a worse poster child for more government spending you could not possibly find. Just give vets vouchers for private care.

    As for public works investment, sure but not right now. The time to splash out for such things is when the economy is weak, GDP is falling outright or has only just stopped doing so, and unemployment is 8-10%, not under 6. Not "when my party finds it politically expedient" or "because it is a day that ends in Y".
    Mar 20, 2015. 11:05 AM | 6 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    Too much money - or credit - for what? The price level is basically stable and the dollar is soaring. The unemployment rate is falling and real growth is positive, at a moderate pace. The budget deficit is narrowing to about 3% of GDP.

    If inflation were running 7% I could see a "too much money" argument. If it were running even 4% I could see a "definitely need to tap the brake about here" argument. It isn't. What evidence is there that the amount of money or the amount of credit is "too much"? Too much for what?
    Mar 19, 2015. 05:57 PM | 5 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    "they flushed about 16 TRILLION at zero percent interest to Citicorp, Goldman Sachs, JP Morgan, Wells Fargo, Morgan Stanley, Royal Bank of Scotland, etc."

    This is nonsense. It results from adding up loans for 1 week each time they are renewed at those it is an addition to the sum lent. The Fed made plenty of very short term loans in the late fall of 2008 and first quarter of 2009, to the banking system. Many just overnight, others for a week. For amount well under your figure, but several times renewed. They all paid back with (very low) interest by about March of 2009, and a gusher of repayment cash came back to the Fed. Since that period, it is the banking system that has been lending to the Fed (holding bank reserves) not the other way around - as the QEs made the Fed's late 2008 balance sheet increase permanent / long term, by buying long term Treasuries and agency MBS with the funds the banks were repaying to it, throughout 2009.

    The rest is the usual lizard people fairy tales...
    Mar 19, 2015. 05:53 PM | 14 Likes Like |Link to Comment
  • 'The U.S. Is Broke' [View article]
    "Zero interest rate is the main reason economic growth is "nonexistent"."

    There isn't the slightest evidence or reasoning to support this bald assertion.
    Mar 19, 2015. 04:47 PM | 13 Likes Like |Link to Comment