pslater

Carry Correlation Update: Beware

I'm guessing that 'copy and paste' is yet another alias of Cetin who REALLY needs to get a life.....

Charting Economic Data with Market Trends

Great analysis! This graph reminds me of John Murphy's book 'Intermarket Technical Analysis'.

30 Years of Price to Book - Comstock

Saj, a good analysis in all. One observation though; if you overlay long term interest rates over this chart you will see an interesting inverse correlation to the S&P. The very low price/book ratios of the early 80's were accompanied by very high interest rates. I would argue that high interest rates have the same affect on book value (assets) that they do on P/E ratios - they depress them.

If you normalize the price/book ratio for changes in interest rates, I think you'll make a major step toward making this indicator more of a predictive tool. Given the current level of interest rates, I suspect you might find that today's price/book ratio is higher than it should be.

The Long and the Short of It

An excellent job Kimball. Your data neatly summarizes what's going on.

Why Gold, If Deflation Is the Threat?

Well done Rolf. I hold gold through ETF's for the same reasons mentioned in your article. I believe the risks of BHO and his merry band of henchmen repeating FDR's gold confiscation and currency devaluation are significant. I have also believed for the last year that the very credibility of every Central Bank in the world (and therefore ALL fiat currencies) relies on the price of gold not going up too much. Zero Hedge's recent discovery that the Fed has been manipulating the gold market for decades is chilling to say the least.

Don't Ignore Low Interest Rates

I suggest you use the BAA bond rate (currently around 5.5% with a 52 week high of 10.2%) to determine P/E ratios as that is the average credit quality of the non-financial companies in the S&P 500. This gives a P/E of about 18 (100/5.5) which is very close to the 19 your chart suggests.

The 20% overvaluation appears to be valid IF you assume that 5.5% is reasonable for the lowest quality of investment grade bonds. The Treasury market is overtly manipulated and IMHO, the biggest bubble in the world. If the BAA rate goes to 6.5% the P/E drops to 15. I'll let you do the math as to what that does for the level of overvaluation.

Commercial Cataclysm? Moody’s / REAL Commercial Property Price Index (July 2009)

Yet another 'green shoot' wilts. There's more to come. Estimates vary but somewhere between $400 and $800B of commercial loans need to be refinanced in the next 12 months. Not only are the banks not lending on these properties but if they were the values have fallen so much that most of the owners equity is gone. Good luck raising new equity in this environment.

On the residential side, another wave of ARM resents is coming in 2010 and 2011 - this time in the prime mortgages and the expensive homes. A recent estimate of the resets is that the average owner of these homes will see their mortgage increase more then $1,000/month. Still want to buy a house now?????

Stuffing Uncle Sam: Is More Trouble Coming for Mortgage Market?

perpetual (Cetin) please go away...AGAIN!

The Widening Gap Between Operating and GAAP Earnings

With the current BBB rate of around 5.67%, a P/E of about 17.6 is implied. (100 / 5.67 = 17.6) An analysis of the last 21 years of actual year end index numbers compared to 'fair value' estimates using the BAA (currently 5.67%) interest rate to imply P/E ratios shows that in recessions (1991- 1992, 2001-2002, and 2008-2009), the S&P tends to have about a 3.0 multiple to the implied P/E ratio (this is skewed by 2008 where the multiple is 4.8!) whereas in economic expansions (the rest of the years) the average is 1.6 (which is skewed upward by the 1998, 1999, and 2000 P/E spike).

If we use the 'as reported' trailing four quarter number of $7.51 we get a fair value for the S&P 500 of 396 ($7.51 X 17.6 P/E * 3.0 recession adjustment).

If we use S&P's 'as reported' EPS estimate for the next four quarters of $41.49 and the economic expansion adjustment of 1.6, we get an index fair value of 1168 (17.6 X $41.49 X 1.6 expansion adjustment) or about 9% above today's close of 1072.

The questions are:
A) Do you buy the economic expansion argument and the implied forward looking EPS numbers in light of a deleveraging consumer and rising unemployment?

B) Do you buy 5.67% as an appropriate BBB interest rate given the Fed and Administration policies? The only way I see this rate not rising is the Fed and the Treasury continuing to soak up most of the available capital which will result in much slower forward economic growth.

Judge's Message to Rating Agencies: Free Speech Not Freedom to Defraud

An excellent article and very good comments too. I believe that once again Congress is sat the heart of this mess. Congress created the need to use the rating agencies when they designated them Nationally Recognized Statistical Rating Organizations and required large investors to use their ratings. This not only sanctified the raters business model of the issuer rather than the consumer paying for the ratings, it also created a high barrier to entry (read: monopoly) for any potential competitors.

There will be no meaningful reform of these agencies (or anything else in government) until there is meaningful reform of Congress.

Discretionary Spending as a Market Timing Tool

Nice work Babak. Doesn't the ratio have to bottom before we would see an economic/market turnaround? Your chart certainly doesn't show a bottom in the ratio forming.

A Historical Perspective on U.S. Debt Growth

Let's put some real perspective on this. According to the Federal Reserve - St. Louis, Federal Government receipts (tax income) compounded at an 8% rate annually between April 2003 (right after the passage of the last of Bush's tax cuts) and October 2007. During the same period of time, Federal Government expenditures (spending) rose at an annual rate of 5.9%.

The last budget deficit of Mr. Bush was $458B for the 12 months ending 9/30/2008. That "Mr. Obama inherited a gaping budget deficit from the previous Bush administration due to tax cuts." is patently absurd.

Every tax cut in the post war period has been accompanied by skyrocketing revenues to the government (Kennedy, Reagan, and Bush II) while every major expansion in the role of government (FDR's New Deal, LBJ's Great Society, and whatever you want to call the mess left by Nixon, Ford, and Carter) has resulted in decades long stagnation, inflation, recessions, and sub-par growth.

Consider this: Federal, State, and Local government spending as a % of GDP has risen from 5% in 1920 to more than 35%. In other words, government spending has grown at 7 times faster than the rate of the economy over the last 90 years. (Data source: Federal Reserve - St. Louis)

Of course, the political class has jumped on every increase in revenues in a mad rush of government expansion to insure their re-election through patronage jobs that overwhelmingly vote Democratic. Questions regarding the perpetual failure of government programs to deliver on any of the financial projections of their programs are always met with the same answer - we just didn't spend enough.

In my opinion, Obama and the Congressional Democrats' ultimate agenda is the permanent expansion of government to the point where Democratic majorities are assured. The auto, banking, health care, 'cap and trade', etc. are just smoke screens to hide the real agenda.

If you look at what they are doing instead of listening to what they are saying, there is nothing inconsistent about my conclusions.

Keynesian economic policies and the sycophants such as Krugman that believe them have unquestionably been one of the greatest disasters of the last 100 years.

California Borrows $1.5 Billion to Pay Off Borrowed Money

One of my clients recently asked me '...so how is life in the capital of the land of fruits and nuts? (I live east of Sacramento)

I replied 'it makes Disneyland look like a reality show'

Mid-Term Budget Numbers: Someone's Wearing Rose-Colored Glasses

Why don't we just privatize every thing in the government except what the Constitution mandated - defense of the union and the occasional infrastructure projects too big for the private sector. Let the public sector pukes understand what it's like to have customers instead of servants.....

Causes of the Crisis: Why Debt Is Bad

Mr. Kwak, I think it is disingenuous of the authors of the upcoming book you mentioned to ignore the role of Congress in bringing the bubble to life. In many ways they are more culpable than the Fed. I also disagree emphatically with "..because of the Bush administration’s emphasis from 2001 to 2008 on cutting taxes while still spending."

Tax revenues to the govt exploded in the 2003 - 2007 period just as they have every time taxes have been cut in the past. Politicians, as the President's Chief of Staff Rahm Emanuel noted "hate to waste a good crisis (or opportunity)", ramped up the spending in one of their typical porcine binges.

After all, the political class will fall on their swords before they let the myth of Keynesian economic policies be proven. In other words, if revenues go up, spending MUST go up more.