CaptainJJack

Large Caps Could Lead the Market Much Higher

We have had a HUGE run-up of P/E multiples since March. In fact, I could argue that the ONLY thing that has really changed since March are the P/E multiples.

Anybody who has been in this market over the last year knows how notoriously bad the forward earnings numbers are -- just take a look at forward estimates at the start of this year for THIS year.

While there is a lot of manufacturing leverage now that companies have cut so much payroll, the current fixed infrastructure is currently being supported by large government (both US and Abroad) stimulus.

The key question is: What happens when the stimulus is withdrawn?

The key metric is the top line, not the bottom line: Those forward earnings are only as good as the sales projections.

As an aside, there has been a significant tax cut which, if I remember the numbers right, amounted to 2/3 of the tax stimulus proposed by some Republicans ( there never was a unified Republican stimulus alternative, but the number $400 billion was often used as the tax cut required --- and the only stimulus needed).

We should have seen the top line numbers rising by now if the tax cuts were as powerful as they were being promoted, and I for one, do not see it.

As far as I can see, the $250 Billion tax cuts have had almost zero effect, and this is similar to the tax rebates of last year--coming into effect in at the end of the 2nd quarter, after the recession was 2 quarters old, and just before the economy tanked.

America's Banks: Are They Really Insolvent?

Even though there are a lot of comments here, I feel compelled to add my own solution:

I think the banks should be required to mark to market each quarter, BUT it should be in a footnote and not part of the actual balance sheet. This IS a distinction with a difference because the capital adequacy ratios and the ability to lend should be based on the balance sheet and not the footnote numbers.

The numbers that go on the balance sheet should reflect the ECONOMIC reality as the bank knows it at the end of each quarter, and that speaks to the question of WHEN and how much cash flow the bank is truly expecting from the asset.

If the bank expects that it will only receive 50% of the cashflow from the asset that it had been expecting to receive, it should market the asset down to 50% and put THAT amount on its balance sheet.

Yes, this IS mark to model, and yes, it is subject to manipulation, but that is why the true market value is in the footnote. The bank could play some games, here, but in the end, the analyst, and regulator, can see both numbers.

In other words, it should be based on the bank's expected cash flow.

I believe you will see that the "stress testing" outlined by Geithner is designed to effectively move from market to market to expected cash flow as the basis for evaluating the bank's creditworthiness and solidity.

I guess Geithner feels he cannot avoid mark to market balance sheets, so he is doing the next best thing to what I am suggesting.

Finally, I predict that Geithner will wait until the stress test is pretty far along before starting the auction market, but that needs to be set up to get the true market values to keep everybody honest, and it will.