prudentinvestor

Thinking the Unthinkable: Can Sovereign Nations Default?

I must confess to being baffled by why the Euro-member countries sign a treaty, then abbrogate it whilst expecting no repercussions. How and why did the ECB ignore Greece's flouting of the treaty for this long? If the treaty says 3% deficit, then its 3%. The ECB should have been warning vilotaors from the day they reached 3.5%, and should have begun the process of expelling delinquents the day they reached 5%.

The collapse of the whole notion of responsibility, whether at the country level, corporate level, or individual level is the reason for the impending reduction in living standards for the "advanced" Western economies. Regrettably, it has become so routine and socially acceptable to abbrogate our obligations at all levels, expecting others to bail us out.

If and when we all return to the basic principles of responsible conduct, respecting our obligations, contracts or treaties, then we have a chance to remain "advanced economies".

Bright Days for Bernanke, Bulls and Breadwinners

The future looks brighter for bread-eaters who feed at the public trough, but bleaker for bread-winners who earn their living in useful jobs. Very bleak for those who create useful jobs for bread-winners, and consequently fewer useful jobs!

4 Good Value Stocks Nearing Buy Territority

I also like oil companies, and though I own a little XOM, find it too pricey relative to RD, BP, TOT, E.

XOM pays low dividends to shareholders, and plow cash into stock buy-backs instead. The buy-backs give a paltry return to shareholders, and a super-sized return (100's of millions) to the value of their executives' stock options. Questionnable corporate governance, treating owners (aka shareholders) as second class citizens, and executives as royalty.

Zale Corp's Management: Paid for Failure

Although I've never owned or looked into ZLC, I read your story with great interest. It is symptomatic of corporate governance in an age of collapsing business ethics.

The fact that many listed companies are run for the benefit of their executives and their cronies on the board, not the benefit if their shareholders, is one more reason to apply an additional discount when evaluating the intrinsic value of a stock.

Yet another symptom of the damage artificially-low interest rates have done to the economy: People are forced to invest their savings and pensions in worthless stocks and ponzi schemes because the return they would otherwise recieve is zero or negative.

Lack of Cash Could Threaten the Equity Rally

IMHO, the decision on whether or not to invest in equities at any point in time should not be based on how much cash you have available, but on the price of the equities relative to what you think is the intrinsic value of the asset you are buying.

Chasing any asset, regardless of its price, just to avoid owning low-yielding cash is not a profitable strategy.

John Hussman: Reported Earnings vs. 'Owner Earnings'

Thank you for fleshing this out. Although I had not seen this or a similar analysis, my gut feeling has always been to take reported earnings with a grain (or two) of salt, and focus attention on dividends.

Too many "one-time" charges and expenses, failure to deduct costs of options as compensation, and the inherent opacity of accounting, all help to "dress up" reported earnings. That's why I've always assigned greater value to dividends because they are tangible proof of value delivered to shareholders (aka owners), whereas "earnings" are fudgy.

Why I'm Negative on Equities Despite Good Earnings Season

David, You make many valid points in clearly written terms. You did not mention one factor, perhaps because you don't see it as a negative This is excessive govt control of the economy.

In the US, the govt has basically taken over the housing and financial sectors, and may yet take over the health care sector. It has also largely taken over the domestic automotive sector. If these were truly socialist takeovers, they would be bad enough, but in reality, these takeover are much worse than purely socialist as the losses, costs, and subsidies are being socialised, whilst the profits, lavish pay, and bonuses, remain privatised; especially for finance. This makes these quasi-socialised sectors far more costly than they would have been, had they been truly nationalised. To subsidise them, govt needs to egregiously tax the dwindling number of truly productive members of the economy, in addition to monetise debt, create inflation, and fleece savers.

In the long-term, the risk of misguided policy that decimates productivity and prudence, to subsidise bloated, inefficient and unproductive sectors is the greatest negative of all.

The Precarious State of Our Union

The speech was good, but action speaks louder than words. We need to rein in the banks. We need to recover the $750 bn in bonuses they paid themselves over the past five years, out of bogus profits that are now being paid by the taxpayers. We need to investigate fraud that took place in the mortgage and derivatives markets. We need transparency and accountability at the treasury and the fed.

Recovery, Crisis in Confidence and Curing Too Much Debt with More Debt

I just hope that the ECB stands firm and forces Greece to put its house in order, or failing that, they should simply exit the Eurozone and print as many debased drachmas as their population allows them.

The world needs a relatively stable currency. Since WW2, and until the Greenspan era, the US has provided it in the form of a semi-stable USD. However, since the Greenspan bubble era, the US has abdicated its role as a provider of a stable global currency, preferring short-term fun over long-term stability; and the Euro grew to fill that void. Now the Euro is in jeopardy because of the irresponsible behavior of the government of one of its junior members. If the Euro follows the path of the USD, the world will have to resort to commodities as the new currency, and hyperinflation will engulf the global economy.

Why Does It Feel like 1987 for the Markets?

The equities market has to reach its intrinsic value level. This is the level at which rational investors believe that dividend returns are adequate to compensate for downside risk of losing principal. If you look at valuations today, you will find some stocks to be fairly valued, with healthy dividends (>4%) and stable business models. If you own stocks that fit this description, my advice is to hold them through any unexpected market drop. Many dividend payers have climbed to the point where their paltry dividend does not justify their downside risk. If you own these equities, my advice is to sell them on strength and wait until they have dropped to reasonable valuations before buying them again.

While a few stocks in game-changing technological areas can be good investments even if they don't pay a dividend, there are many other worthless stocks riding on their coattails, paying no dividend and going nowhere.

Valuations for stocks that pay zero or paltry dividends, and which lack prospects for compensatory growth, have been divorced from fundamentals for two decades. Uncertainty now reigns because the majority of equities fall into this category. Once markets return to levels conforming with basic and clear valuation based on dividends, they will be stable but boring. Until then ponzi fantasies, wherein investment is premised on a greater fool rewarding each lesser fool, will guarantee continuing instability.

Removing Oligarchs from Per-Capita GDP Statistics

I agree that govt does produce useful things. However, if you add up Federal, State and Local govt, you get about 1/3rd of the economy. I used 20%, not 33% as my approximate number for redistribution, and treated the rest as useful production. Additionally, I accept some level of redistribution as necessary for social stability, but this does not mean that it should be double-counted as "production", simply because it is not production, but a redistribution of production.

Removing Oligarchs from Per-Capita GDP Statistics

GDP stands for "gross domestic product".

We include government spending in GDP, but government does not "produce", and only redistributes, taking from some and giving to others, so about 20% of our "production" is actually redistribution.

Financial services now account for 7.5% of US GDP. What have they recently "produced"? If you wish to count borrowing money created by the fed from thin air @0.15%, then lending it to the treasury @4% as a "productive activity", then GDP is indeed growing.

To calculate real GDP "production", I would propose to exclude all redistributive and parasitic activities. This would show true production of useful value, such as food, energy, manufacture, medical services, entertainment services, etc. Excluding the parasitics, I doubt that you would see much in the way of GDP growth in recent years.

It's the Business Climate, Stupid

Challenging for successful entrepreneurs to maintain their efforts when they feel that whatever additional success they achieve is likely to be confiscated. In such an environment, an increasing proportion of these human engines of prosperity will choose to retire early and "spend time with the family", rather than keep working to further grow successful businesses and hire new people.

Mark Thoma wonders whether Bernanke will get the message with 30 votes against - not that close, but still the most nays since Volcker's 16 thumbs-down in 1983. Megan McArdle: Whew; who'd be confirmable if not Ben? Rolfe Winkler notes the seven senators who likely wanted a campaign point: voting aye on cloture, but then switching to nay on the all-but-certain confirmation vote.

Mr. Thoma attributes dissatisfaction with Bernanke to what he assumes to be Bernanke's preference for low inflation over employment, and therefore admonishes Bernanke to make employment "pre-eminent", i.e. keep rates at zero forever. Mr. Thoma is missing the point that artificially low rates have distorted our economy so extremely, that persistent unemployment has been the paradoxical result, and that greater distortions of the economy are likely to exacerbate the employment problem in the long-term by further misallocation of capital and human resources.

Servicing Mortgages (Part 1): Underwater Homeowners, Banks and Social Trust

I share your pain for those who have had the principal of their loan increased. The reality, however, is that it is only being increased in proportion to the reduction in their monthly payments, with the lender hoping to recover the money he forfeits every month when the house is eventually sold, years down the line, after inflation has done its magic.

However, the social, economic, and political implications of the government bailing out those who have chosen to live lavishly, at the expense of those who have chosen to live prudently, remain to be explored. Many will argue that the government should bail out "the little people" just as it has bailed out "the fat cat banksters" at the expense of the taxpayers. After all, the latter are rejoicing with record bonuses ($150 bn) at public expense, as a reward for creating a mess, whilst the overstressed mortgagees struggle to make ends meet. This argument has merit, arising from the moral hazard already entrenched in the bailout nation paradigm that we have been suckered into. Once on a slippery slope, it becomes harder to climb back to the high moral ground.