Blog on the Run: Reloaded

Wednesday, June 4, 2014 11:21 pm


Nine years ago today, my father died. He was 75 and a self-employed financial consultant who was still working about 30 hours a week right up until his final illness (acute pulmonary fibrosis), which lasted a couple of weeks before his death.

From an early age, I heard Dad talk about the importance of saving and investing, and I did the best I could to follow his advice. As I got older and better able to grasp the mechanics, he talked about the stock market as the best long-term investment vehicle for retirement (although he did say that once I hit 50 I should start swapping some equities for bonds).

To the best of my abilities, I have followed his advice. I won’t give you numbers, but I’ll tell you the following: I don’t have a ton of ready cash and never have. But were I to die tomorrow, my family would be pretty well fixed, especially considering I was a journalist, and thus not particularly well paid, for most of my career. Like many Americans, I haven’t gotten a dime in retirement matching for coming up on about seven years now, but — although no one can read the future — I think my family and I will be OK assuming I live to 67 and actually get to retire.

But Dad didn’t live long enough to see the mortgage bubble burst. He didn’t live long enough to hear all the revelations about bank and nonbank and insurance-company and security-rating shenanigans on a scale that dwarfed the crimes of the S&L crisis two decades prior. He thought repealing Glass-Steagall was a bad idea, but he didn’t live long enough to see just how bad. For that matter, he didn’t live long enough to see high-frequency trading and the ease with which the practice makes front-running a trade possible.

So although I’m remembering Dad today with warmth and his passing with sadness, for some reason the Dad thought that has been most on my mind today has been: I wonder what he would make of today’s financial markets? Would he still consider it possible for a single, well-informed investor to do OK? Or would he be convinced, as I have been, that most of the market is a rigged game — that there is a club and that most Americans like me aren’t in it?

(And I’m writing from a middle-class prospective. My problems don’t even begin to touch the problems of the working poor, who are being robbed outright.)

I don’t know what he’d think. All I do know is that while he certainly wasn’t perfect, in his professional life, to the best of my knowledge, he acted with integrity and took seriously his fiduciary duty to his clients. I’m struggling to name a commercial or investment bank that exists today that I’m confident does the same thing.


Friday, September 4, 2009 11:18 am

Why the stock market’s uptick won’t last …

Filed under: We're so screwed — Lex @ 11:18 am
Tags: ,

… and we may even be headed for a double-dip recession: Stock prices currently have no realistic relationship to actual earnings, and that can’t last anymore than Wile E. Coyote can dangle indefinitely in midair over the canyon once he runs off the edge of the cliff:

  • While the S&P has increased by 50% to the (to date) peak, it has done so on a 6% decline in actual [earnings per share], implying the rally has been one of [price-to-earnings] expansion, 66% to be precise. … This is the third largest recorded PE expansion in history, with only the 72% PE expansion recorded in 1982 and the 78% in 1974 surpassing the current market.
  • Yet, what is unique about this market, is that while both 1974 and 1982 achieved their move higher in about a year (11 months for the trough to peak PE move in 1982, 16 for 1974), the S&P has hit its current PE peak a mere 5 months after the trough. This is an unprecedented record in the history of US recessions, and demonstrates just how much of a push influence Obama’s stimulus and Bernanke’s [monetary policy] have had on the PE multiple alone, if not on actual EPS.
  • At this point hope is exhausted (in the form of the PE multiple having plateaued), and any further gains will all have to come from an actual improvement in earnings. Yet for that to happen, more than just overhead will have to be cut: actual revenues will need to increase. However, with the record amount of slack still in the system, and the under investment in corporate CapEx, the probability of revenue growth at this point (and thus EPS growth) is slim to none.

Another observation is that at a 19.9x PE through the current market peak, the market is almost 3x turns more expensive compared to the historical peak PE average of 17.1x, and was cheaper at the peak than just the recessions of 1961 (22.7x), and 1990 (21.6x). Any claims that the market is cheap at current earnings are outright lies.

Apparently what came up this year may well be headed right back down. And to judge from their trading behavior, corporate insiders know it: If you’re selling almost $62 of stock in your own company for every $1 worth you buy, you clearly ain’t expecting your stock to do so well.

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