DaveJ's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/58580/comments http://seekingalpha.com/article/124370-why-jeremy-siegel-s-s-p-earnings-analysis-is-wrong?source=feed#comment-426044 426044 www.indexarb.com/index...

Owning the S&P index is exactly like owning a portfolio of these 500 stocks with weights given by the market cap. Notice AIG is ranked 455. It has a 0.02% weighting. It weighting last year is irrelevant. So if AIG loses another $200B in 2009 year and goes bankrupt, the effect of this stock will be at most 0.02% on your portfolio. If C, BAC, GS, MS together lose another $400B and go bankrupt, those stocks will take down the index another 1.78%. So those 5 companies lose $600B and the other 495 companies could make $600B for a net earnings of zero. So how much is a portfolio worth that makes zero earnings? That is a PE of infinity.

The right answer is that those 5 companies should be ignored. Since they all go bankrupt (worst case scenario of course) you just have a permanent loss of 1.8%. After that you have a portfolio of companies making $600B per year which is about $70 per share for the S&P 500 index. Since the S&P 500 is presently at 757, that would be a forward earnings of 10.8 which seems which reasonable.

This argument is completely bullet-proof and obvious. I can't understand how anyone could even argue that Siegel is wrong.



]]> Sun, 15 Mar 2009 00:09:33 -0400 www.indexarb.com/index...

Owning the S&P index is exactly like owning a portfolio of these 500 stocks with weights given by the market cap. Notice AIG is ranked 455. It has a 0.02% weighting. It weighting last year is irrelevant. So if AIG loses another $200B in 2009 year and goes bankrupt, the effect of this stock will be at most 0.02% on your portfolio. If C, BAC, GS, MS together lose another $400B and go bankrupt, those stocks will take down the index another 1.78%. So those 5 companies lose $600B and the other 495 companies could make $600B for a net earnings of zero. So how much is a portfolio worth that makes zero earnings? That is a PE of infinity.

The right answer is that those 5 companies should be ignored. Since they all go bankrupt (worst case scenario of course) you just have a permanent loss of 1.8%. After that you have a portfolio of companies making $600B per year which is about $70 per share for the S&P 500 index. Since the S&P 500 is presently at 757, that would be a forward earnings of 10.8 which seems which reasonable.

This argument is completely bullet-proof and obvious. I can't understand how anyone could even argue that Siegel is wrong.



]]> http://seekingalpha.com/article/106686-bond-expert-tuesday-wrap?source=feed#comment-309484 309484 Tue, 18 Nov 2008 22:18:27 -0500 http://seekingalpha.com/article/100108-riding-coach-on-the-roller-coaster?source=feed#comment-285445 285445 Sat, 18 Oct 2008 23:50:57 -0400 http://seekingalpha.com/article/97272-aig-details-of-its-punishing-bailout?source=feed#comment-265518 265518 certainruin.blogspot.c...
]]> Fri, 26 Sep 2008 01:04:22 -0400 certainruin.blogspot.c...
]]> http://seekingalpha.com/article/94627-global-capital-asset-death-spiral?source=feed#comment-249998 249998
When I was a kid, I remember thinking that what you did in your 20s is that you saved up your money so that you could afford a down payment on a house once you got married at say age 30. However this way of living changed with the new high-debt lifestyle that has grown up in the past 30 years or so. Mortgages became easier and easier to get. Also people were given more credit via credit cards and so could avoid defaulting on their mortgage by borrowing on their cards. The result was a long period of low defaults and low losses as houses appreciated steadily. Low loss rates leads to further loosening of credit standards which allows the next round of bad borrowers in.

This goes on and feeds back on itself. More demand for housing leads to higher home prices which leads to low loan losses and more bank profits which allows (and requires) more loosening of standards.

The result is the final boom and bust of the last five years. The low interest rates played an encouraging part but I think the main cause was just a loosening of credit and the way new buyers entering the market place skewed the supply-demand balance. I would say the low long-term interest rates was more an effect of high profits in the FIRE sector but the Chinese vender-financing of US consumption also played a major part.]]> Wed, 10 Sep 2008 02:02:43 -0400
When I was a kid, I remember thinking that what you did in your 20s is that you saved up your money so that you could afford a down payment on a house once you got married at say age 30. However this way of living changed with the new high-debt lifestyle that has grown up in the past 30 years or so. Mortgages became easier and easier to get. Also people were given more credit via credit cards and so could avoid defaulting on their mortgage by borrowing on their cards. The result was a long period of low defaults and low losses as houses appreciated steadily. Low loss rates leads to further loosening of credit standards which allows the next round of bad borrowers in.

This goes on and feeds back on itself. More demand for housing leads to higher home prices which leads to low loan losses and more bank profits which allows (and requires) more loosening of standards.

The result is the final boom and bust of the last five years. The low interest rates played an encouraging part but I think the main cause was just a loosening of credit and the way new buyers entering the market place skewed the supply-demand balance. I would say the low long-term interest rates was more an effect of high profits in the FIRE sector but the Chinese vender-financing of US consumption also played a major part.]]> http://seekingalpha.com/article/94627-global-capital-asset-death-spiral?source=feed#comment-249890 249890
So the only difference between their CDS contracts on RMBSs and the other categories of assets is that there exists a market for them, albeit an illiquid one. Does the existence of a market really change the value of an asset? If everything was marked to market then AIG would be insolvent since it can't easily sell its insurance contract on an Eastern European charcoal factory or that policy on an Algerian oil rig. No one else has done the due diligence to know the value of those assets and so no one would buy without a large haircut. But does that mean they are worth less than par? Similarly, if there was no market for RMBs, then AIG could mark up its CDSs on RBSs by about $15B, even with conservative assumptions on loss estimates, and it would be in great financial health.

The situation is the same with the banks. Their loans are not marked to market but rather are marked down only when collection becomes doubtful. Should they be marked to market? If so, then every bank is insolvent right now and in fact would be insolvent just about anytime.

So mark-to-market cannot be the right answer for many assets. You need to consider whether the market is liquid and normally functioning. If the cash flows do not appear to be impaired but there are just no possible buyers then you need to reconsider. As Bill said, a religious observance of mark-to-market can lead to a death spiral that doesn't help anyone. I think time has come when you say, "enough is enough". There has been plenty of punishment dealt out already and so I don't think moral hazard should be our first priority as a nation right now.

]]> Tue, 09 Sep 2008 21:50:00 -0400
So the only difference between their CDS contracts on RMBSs and the other categories of assets is that there exists a market for them, albeit an illiquid one. Does the existence of a market really change the value of an asset? If everything was marked to market then AIG would be insolvent since it can't easily sell its insurance contract on an Eastern European charcoal factory or that policy on an Algerian oil rig. No one else has done the due diligence to know the value of those assets and so no one would buy without a large haircut. But does that mean they are worth less than par? Similarly, if there was no market for RMBs, then AIG could mark up its CDSs on RBSs by about $15B, even with conservative assumptions on loss estimates, and it would be in great financial health.

The situation is the same with the banks. Their loans are not marked to market but rather are marked down only when collection becomes doubtful. Should they be marked to market? If so, then every bank is insolvent right now and in fact would be insolvent just about anytime.

So mark-to-market cannot be the right answer for many assets. You need to consider whether the market is liquid and normally functioning. If the cash flows do not appear to be impaired but there are just no possible buyers then you need to reconsider. As Bill said, a religious observance of mark-to-market can lead to a death spiral that doesn't help anyone. I think time has come when you say, "enough is enough". There has been plenty of punishment dealt out already and so I don't think moral hazard should be our first priority as a nation right now.

]]> http://seekingalpha.com/article/82940-in-the-cat-bird-seat-a-review-of-emcores-business?source=feed#comment-235192 235192 Whatever! Nobody is saying they will come anywhere close to this. Try 45% and 1500 suns tops.


]]> Wed, 20 Aug 2008 19:26:05 -0400 Whatever! Nobody is saying they will come anywhere close to this. Try 45% and 1500 suns tops.


]]> http://seekingalpha.com/article/89967-aig-willumstad-s-hard-choice?source=feed#comment-225918 225918
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]]> http://seekingalpha.com/article/61164-hank-greenberg-is-thinking-of-unloading-aig-stock?source=feed#comment-113355 113355 Mon, 28 Jan 2008 23:29:19 -0500 http://seekingalpha.com/article/50802-how-can-the-peg-ratio-be-used-to-value-stocks?source=feed#comment-100084 100084 ]]> Sun, 28 Oct 2007 01:18:59 -0400 ]]> http://seekingalpha.com/article/50917-eight-notes-on-insurance-economics-and-value-investing?source=feed#comment-99677 99677
In addition, piggyback loans are going the way of the crop and buggy since banks don't want to take on this risk. This gives MI a larger part of a declining market. The declining price environment will increase payouts but raise persistence which is good for MI companies.

This is just reason that I am long AIG. They also benefit from world growth, have a great reputation for underwriting and inovation. They can grow at 12-15% and pay dividends and buy back shares. In addition they benefit from a declining dollar since half their revenue is from oversees. They at P/E of 10 which is an all time low.]]> Wed, 24 Oct 2007 17:50:40 -0400
In addition, piggyback loans are going the way of the crop and buggy since banks don't want to take on this risk. This gives MI a larger part of a declining market. The declining price environment will increase payouts but raise persistence which is good for MI companies.

This is just reason that I am long AIG. They also benefit from world growth, have a great reputation for underwriting and inovation. They can grow at 12-15% and pay dividends and buy back shares. In addition they benefit from a declining dollar since half their revenue is from oversees. They at P/E of 10 which is an all time low.]]> http://seekingalpha.com/article/50802-how-can-the-peg-ratio-be-used-to-value-stocks?source=feed#comment-99403 99403
I hate the PEG. I think it is fairly useless. Your assumption that the final PE will equal 100*G is nonsensical. Why would that be true? What is so special about the number 100? The fact that it gives a final PE of 3.8 for Pfizer is practically reductio ad absurdum why this doesn't work. Pfizer usually has a PE or 20-30. It would never be below 6 let alone 3.8.

Also, where do bond rates enter your analysis? They don't. Your saying that stocks will be unaffected if you get the growth rates right and neglect bond rates going from 4% to 15%? You also neglect dividends.

The correct way to value stock is DCF however since you don't know the future growth rates it doesn't really matter. DCF gives you a good idea of what PEs are reasonable for a given amount of growth however you need to estimate all future growth, not just 5-year growth and put in bond rate assumptions (discount rates).

Mostly, I think valuation formulas are pretty useless. What you need to do is spend more time analyzing businesses in order to predict growth rates yourself rather than relying on others.
]]> Tue, 23 Oct 2007 00:02:16 -0400
I hate the PEG. I think it is fairly useless. Your assumption that the final PE will equal 100*G is nonsensical. Why would that be true? What is so special about the number 100? The fact that it gives a final PE of 3.8 for Pfizer is practically reductio ad absurdum why this doesn't work. Pfizer usually has a PE or 20-30. It would never be below 6 let alone 3.8.

Also, where do bond rates enter your analysis? They don't. Your saying that stocks will be unaffected if you get the growth rates right and neglect bond rates going from 4% to 15%? You also neglect dividends.

The correct way to value stock is DCF however since you don't know the future growth rates it doesn't really matter. DCF gives you a good idea of what PEs are reasonable for a given amount of growth however you need to estimate all future growth, not just 5-year growth and put in bond rate assumptions (discount rates).

Mostly, I think valuation formulas are pretty useless. What you need to do is spend more time analyzing businesses in order to predict growth rates yourself rather than relying on others.
]]> http://seekingalpha.com/article/30282-will-the-sub-prime-debacle-hurt-retail-stocks?source=feed#comment-82958 82958
Think about the simplicty of this argument. How can it be wrong? Things that are unsustainable always have to stop. US consumption has been unsustainable since they were spending more than they were making. QED]]> Thu, 22 Mar 2007 15:06:49 -0400
Think about the simplicty of this argument. How can it be wrong? Things that are unsustainable always have to stop. US consumption has been unsustainable since they were spending more than they were making. QED]]> http://seekingalpha.com/article/29678-pmi-group-and-mgig-investment-subprime-mortgage-storm-brewing?source=feed#comment-82904 82904
certainruin.blogspot.c...

However, I think your being a bit selective in what you post. If your going to mention massive insider selling at PMI you had better point out the massive insider buying at MTG
www.secform4.com/insid...

Insider buying is more significant anyway so is more relevant. MTG has as a board member Karl Case who is an economist who started the Case-Shiller index with Yale's Robert Shiller. Note that Karl is not buying shares in MTG and has even sold some last April. He still has about half a million dollars invested in MTG which is a lot for an academic (maybe he is a rich academic for all I know). I think this means that he doesn't see doom for MTG.
www.secform4.com/insid...]]> Wed, 21 Mar 2007 15:20:52 -0400
certainruin.blogspot.c...

However, I think your being a bit selective in what you post. If your going to mention massive insider selling at PMI you had better point out the massive insider buying at MTG
www.secform4.com/insid...

Insider buying is more significant anyway so is more relevant. MTG has as a board member Karl Case who is an economist who started the Case-Shiller index with Yale's Robert Shiller. Note that Karl is not buying shares in MTG and has even sold some last April. He still has about half a million dollars invested in MTG which is a lot for an academic (maybe he is a rich academic for all I know). I think this means that he doesn't see doom for MTG.
www.secform4.com/insid...]]> http://seekingalpha.com/article/28635-warren-buffet-s-portfolio?source=feed#comment-82096 82096 Tue, 06 Mar 2007 00:04:00 -0500 http://seekingalpha.com/article/28297-if-the-number-of-net-nets-is-a-contrary-indicator-the-market-is-in-trouble?source=feed#comment-81965 81965 Thu, 01 Mar 2007 22:33:53 -0500 http://seekingalpha.com/article/27673-hold-on-to-w-holding-for-better-days-ahead?source=feed#comment-81809 81809
Banks and insurance companie are worth more than book value for the simple reason that they can generate leverage on safe bond/loan investments. In other words it makes no sense for anyone young to buy bonds. Just buy AIG and let them buy bonds for you with leverage. In the long run they will grow at about 12-15% and never run into the problem of getting too big.]]> Mon, 26 Feb 2007 03:44:40 -0500
Banks and insurance companie are worth more than book value for the simple reason that they can generate leverage on safe bond/loan investments. In other words it makes no sense for anyone young to buy bonds. Just buy AIG and let them buy bonds for you with leverage. In the long run they will grow at about 12-15% and never run into the problem of getting too big.]]>