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  • Capitalism, Socialism and Democracy... Oh, and Common Sense [View article]
    RE:<It is a fact that the purchasing power of all unbacked fiat currencies has always been wiped out by inflation. Floating currencies don't float. They only sink at different speeds.>

    If all current currencies are fiat currencies and exchangable (which I believe all major ones are at present) then by definition they cannot all sink at the same time whether at the same or different speeds. If one currency falls in value, another must of necessity rise - that is called the currency exchange rate.

    Nor have all fiated based currencies lost their purchasing power to hyperinflation; otherwise the world would be on a international barter system currently.

    Concerning the witnessing of the "total collapse of Communism and Capitalism" - Might you want to admit concerning capitalism that you are getting just a wee bit carried away here with your gradiose rhetoric? World capitalism will almost certainly survive in time the current crisis, albeit with the US in a greatly reduced and much damaged world economic position. Whether Obama can reverse that remains to be seen. If capitalism ends, it most likely will be because world growth pierces the earth's eco-system irreversibly. But don't worry, you can let your children or grandchildren worry about that.
    Mar 16, 2009. 10:35 PM | Likes Like |Link to Comment
  • A Caveat to 'Stocks for the Long Run' [View article]
    Good reminder about the "long run". Barton Biggs has an interesting recent book Wealth, War, and Wisdom in which he makes this argument using examples from different national economies over the last century.
    Feb 18, 2009. 03:56 PM | Likes Like |Link to Comment
  • S&P 500: Perception vs. Reality [View article]
    I thank Brian Kelly for drawing our attention to out of the way data that appear to have special forcasting properties. Unfortunately in this case looking at the source data (
    I cannot find any of the corresponding data series that match this chart. First, the title of the chart is slightly misleading it seems to me since the Fed data are only showing whether the prices paid or received are decreasing, increasing or have no change. They are not strictly recording the price itself. Thus a respondent may report prices received are declining and prices paid are increasing, but this does not mean that the prices received are actually below those paid. Also, the only series on prices that shows negative values are the diffusion indices, but these do not match those shown in the chart. So something is seriously amiss here. Nice chart, but please clarify what data you are actually reporting.
    Feb 18, 2009. 03:46 PM | Likes Like |Link to Comment
  • Assessing the Market's Current Valuation [View article]
    I tried to upload the table in Excel format. If this doesn't work I give up. Sorry.

    12/31/2008 2/17/2009 20 year average
    SP500 Price $903 $789
    PE/ PE/ PE/
    OP Earn 2008 $55.37 16.3 14.2 19.3
    GAAP 2008 $27.72 32.6 28.5 22.7

    OP Earn 2009 (E) $67.55 17.7
    GAAP 2009 (E) $32.42 24.3
    Feb 18, 2009. 12:55 AM | Likes Like |Link to Comment
  • Assessing the Market's Current Valuation [View article]
    Note: I am sorry that when my table got uploaded to seekingalpha, the process distorted the columns so it may not be easy to read as intended. Too bad, it was originally a clear and informative table and really the heart of what I had to say.
    Feb 18, 2009. 12:43 AM | Likes Like |Link to Comment
  • Assessing the Market's Current Valuation [View article]
    Part of the confusion in discussing the SP500 PE ratio is whether one is using 12 month trailing or 12 month forward estimated earnings and whether earnings are measured by net operating income or reported (GAAP) income. Furthermore, since earnings are only reported or estimated for 4 dates (end of quarter) per year, but there are about 250 days of prices during the year, one can generate quite a variation of PE ratios!

    To clarify this matter, let's use source data from the S&P website itself with derived PE ratios in parentheses.

    SP500 PRICE 12/31/08 2/17/09 20 year average
    903 789

    Op Earn 2008 $55.37. (16.3) (14.2) (19.3)
    GAAP 2008 $27.72 (32.6) (28.5) (22.7)

    Op Earn 2009(E) $67.55 (11.7)
    GAAP 2009(E) $32.42 (24.3)

    In interpreting this table one has to make a decision whether to use operating earnings or GAAP, but the preference seems to be to use operating earnings since this is believed to give a truer representation of the ongoing health of a company (and also is more stable historically since GAAP includes one time charges which fluctuate with the economy itself). Concerning trailing or forward earnings, both are important since one tells what investors have accepted historically as a standard, while forward earnings provide a guide whether current prices are below or above that standard.

    If we accept David Rosenberg's standard that 12x Op Earnings are a good base for a recession trough, then the current SP500 price is at or near the bottom with a foward earnings estimated PE of 11.7. He himself, however, believes that consensus estimates of earnings (which the S&P uses in the above table) is too high, and he prefers $55 which means that the forward estimated earnings PE at current prices is only 14.3. Therefore he believes the SP500 has lower to go. There is some research that does suggest that consensus estimates of forward earnings over one year have been historically too high by about 9% and so Rosenberg is leaning in the right direction all else being equal.

    If you believe that forward estimated earngings are too high (as I believe - analysts are micro estimators by profession and the addition of micro estimates does not make a macro one) then by how much? Clearly, this is not an ordinary recession and many questions remain difficult to evaluate (will the stimulus too large or too small, will it work as implemented, are we facing a Japan style "lost decade", are we entering a "beggar thy neighbor" world trade cycle, etc). So, however you use SP500 PE ratios, be especially careful here. The water is very deep. .
    Feb 18, 2009. 12:36 AM | Likes Like |Link to Comment
  • Abercrombie Q4: EPS Smoke and Mirrors [View article]
    I appreciated this article on ANF as I have a small short position and thought your estimated 4Q EPS was right on. I can't say I exactly followed your FCF analysis, but alternative financial and quantitative models I recently performed on the apparel sub-group leaves ANF near the bottom and confirms your conviction.

    Also, having a tween daughter who recently won a math prize and wanted to spend it at ANF allowed me to field test my analysis. While I am happy my daughter has now moved from happy face tees to something else, I can't say that selling ANF tees at 30$ seems to me to be a sound business in this economic environment. The store environment (in Manhattan) was also bizarre as the whole thing is set up to resemble a night club. First, you had to wait outside in a line to get into the store, which seemed strange once you were in the store and realized there was plenty of space for other shoppers. The lights are dimmed very low and loud music is being played while sales clerks on every floor landing are dancing. I notice at a financial blog site that my reaction was similar to about a dozen other parents who also noted that the service was terrible and they were there only because their child had recieved a gift card.

    I suppose this last analysis is more intuitive and runs the risk of being "out of it" as my daughter often reminds me, but still...

    I also note that my experience and reaction to the store environment was typical of other parents who reported on their experiences at ANF on a financial blog:
    Feb 15, 2009. 09:11 AM | Likes Like |Link to Comment
  • Now's a Great Time to Hedge Your Gold Bets [View article]
    <Re: "A gold denarius is still about as valuable as it was when Caesar conquered Gaul">

    It may be a minor quibble, but there is no such thing as a Roman gold denarius. The denarius was a silver coin with a content at the time of Ceasar about 3.9 grams and one day's payment to an unskilled laborer or common soldier. With a conversion of 1 troy oz = 31.1 grams, and the price of silver currently about $13.50 per oz, an equivalent contemporary silver content denarius would be worth a bit less than $2 at today's prices. This is obviously much less than a day's pay to an unskilled laborer in the US, but may indeed approximate the day's pay for unsklled labor in much of the underdeveloped world.

    The Roman gold coin at the time of Ceasar was the aureus, with a content of approximately 8 grams and worth then about 25 denarii. One oz of gold today would therefore be equivalent to about 4 aureii, or 100 denarii.

    I leave it to others to calculate whether gold has held its purchasing power over these 2000 years, but I think we can agree that gold is a good investment during inflationary times, although not the only one. I note that Bismark put much of his wealth into buying forests which happened to preserve the inherited wealth for his descendents during the German hyper inflation of the early 1920s.
    Feb 13, 2009. 09:59 PM | 6 Likes Like |Link to Comment
  • Israel ETFs and the Gaza Factor [View article]
    A quite interesting article with originality of thought. I particularly appreciated the discussion of the TA-25 index prospects, as I have held short postions in Israeli ETFs in the past. Personally, however, I am not quite as convinced that Israel's economic prospects can be so clearly divided from its geo-political realities as Saxena assumes. Briefly, any region so regularly engulfed in minor and major wars for the last half century must have these probabilities taken into account for the future, both on a long and short term basis. In my opinion at least, the last chance that there could have been a major settlement of these disputes was missed (by both sides in my opinion) at Camp David in 2000. Political and military realities have only worsened since then, so it is unlikely that there will be an permanent peace in this region for any forseeable future that I can see.

    Secondly, as I understand it, one strength of the Israeli economy is US subsidies of various sorts. But perhaps inperceptibly at present, there is a growing questioning of this support in some circles. The book the Israeli Lobby was one indication of this, but a larger question occuring to some people is simply what is the current strategic value of Israel to the US, certainly compared to its costs in a wider geopolitical framework. In a private conversation with one very senior security official in the Clinton administration, it was admited to me that there was none, other than perhaps the need to stand with an ally to assure other allies that the US support is unwavering in all circumstances. Still, while I do not believe Obama is "anti-Isreal" as he was sometimes portrayed in the campaign, should these private questionings grow public, long term financial support to Israel cannot be taken for granted. Israel after all, is not the 51st state.

    Finally, Saxena's perspective on the dangers from Iran is counter to a widely helf political perspective, that countries facing internal discord or malcontent seek to create foreign enemy scapegoats to divert domestic attention, a viewpoint best portrayed in Orwell's novel 1984. If this viewpoint is correct (as I believe it is), not only will Iran not be preoccupied by its internal troubles, it is likely to heighten tensions with Israel in an ideological sense, and very likely with a blackmail threat of a nuclear bomb on an intermediate range missle. Not a particularly good investment environment.
    Jan 16, 2009. 09:04 PM | 1 Like Like |Link to Comment
  • Confidence, Flubs and 8 More Thoughts [View article]
    Try talking to some women next time. It makes the world more interesting.

    RE: <Confident men are willing to take on debt; they are so confident that they are willing to take some risk of a large loss from borrowing. Men who are frightened try to preserve some subset of what they have>.

    Jan 13, 2009. 08:13 PM | 1 Like Like |Link to Comment
  • Eight Reasons to Prepare for a 2010 Credit Crunch [View article]
    Maybe both Smelt and Borenstein can both be half right. Everyone recognizes the disaster senario at this point, but also the massive and unprecedented magnitude of the intervention response. Perhaps the latter will cancel out the former but still not be enough for economic lift. At least this is what I understand Paul Krugman to be arguing recently.

    With all these macro analysis eagles flying about, I'm just a small sparrow. Still, I didn't lose any money in 2008 because I don't try to make the big bets but just listen to the market. Since last summer it's been saying be ultra cautious, which for me is mostly cash. There is time enough to be patient a little longer to see how this all plays out.
    Jan 12, 2009. 10:20 PM | Likes Like |Link to Comment
  • Buybacks: Not All They're Cracked Up to Be [View article]
    Response to Icandoitdon: I recommend Tortoriello's book (it has just been publlished) if you are interested in tests of past stock performance related to the types of corporate practices you mention. It is similar in some ways to O'Shaughnessy's What Works on Wall Street (an earlier quantitative test of various corporation value features and stock prices), but Tortoriello also provides a yearly time line chart which shows the time periods where the strategies under performed, etc. It's a fascinating reference. Good luck.
    Jan 9, 2009. 10:58 PM | Likes Like |Link to Comment
  • Bed, Bath & Beyond's Earnings: Price Cutting Beyond the Norm [View article]
    Question: Is there some easily accessible way to obtain quarterly sales and EPS going back for so many years as is the case here with BBBY?
    Jan 8, 2009. 07:13 AM | Likes Like |Link to Comment
  • Buybacks: Not All They're Cracked Up to Be [View article]
    Response to Icandoitdon: The study I was specifically refering to is Richard Tortoriello's Quantitative Strategies for Achieving Alpha, but there are numerous studies dating over the past 20 years that have confirmed this finding including those by Josef Lakonishok, Theo Vermaelen, and David Ikenberry. More recent studies continue to confirm these findings (eg Peyer and Vermaelen, 2005 and Gup and Nam, 2005).

    The one (and only to my knowledge) study that did not show value added by buyback companies as a group was done by Standard & Poor's and covered 2006 and the first half of 2007. Researchers as well as long term investors may well not want to overturn findings that have been true for three or four decades based on eighteen months of recent performance. Still, I suppose it is possible that some paradigm shift has begun and the juice has been squeezed out of this market inefficiency.

    Incidently, I was speaking of share buyback companies as a group, but of course any individual company is another matter. Studies have also shown that share buybacks in context of insider selling or certain use of discretionary accruals, among other things, are red flags for future company performance and these stocks should be avoided.

    But perhaps, as the S&P study initially suggests, there has been a risk myopia bubble that has recently infected a broader swarth of companies on the buyback issue. No doubt this will be looked on in the future as one aspect of the broader value distortion in other financial areas during the last few years. But if it is a bubble, then it is likley to be a passing phase I suspect. Only time will tell.

    Jan 7, 2009. 11:19 PM | Likes Like |Link to Comment
  • Buybacks: Not All They're Cracked Up to Be [View article]
    This opinion is not supported by the facts. Research has consistently shown that companies with the largest one year reduction in shares as a group outperform other stocks, with one recent study showing the top quintile earning a positive excess return of 3.1% vs the bottom quintile earning a negative excess return of 5.2% over the 1991-2007 period.

    On Jan 06 08:33 PM GolfBargainHunters wrote:

    > Buybacks usually are not a good use of a company's capital. They
    > purchase shares to offset executive stock options and the such. Also,
    > company's usually buy shares at the wrong time, when they are fully
    > valued, or even overvalued. It would be more shareholder friendly
    > to disperse the cash to shareholders, and let them decide how best
    > to use the cash, not fund the executive's.
    Jan 6, 2009. 09:50 PM | 1 Like Like |Link to Comment