Debt Deflation Bear Market: First Bounce - Eric Janszen

[stockman]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Certainly not suggesting that history repeats exactly... but interesting that off the '32 lows small caps also outperformed. Even though following both 1974 and 1932 nominal market lows- economic deterioration and valuation contraction continued to be problematic.

I don't have good data on 30's as far as gold goes but that stock rally off the '74 lows (which lasted over a year) was coincidental with a substantial pull back in gold. FWIW.

I'll be interested to see what itulip comes up with on the review.

[grapejelly]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

This time around, quite a few large caps have huge pension and health care retiree problems that are solvency busters. Small caps do not have defined benefit plans as a general rule. I think this is why large caps are kinda doomed in this depression...

[ThePythonicCow]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

We are looking into this as part of reallocating our large Treasury bond position.

How about in cartons of cigarettes (fits your avatar ;)).

It might be a while before any of the usual investments alternatives usually considered by those with moderately large sums of liquid wealth are a good deal.

[metalman]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

How about in cartons of cigarettes (fits your avatar ;)).

It might be a while before any of the usual investments alternatives usually considered by those with moderately large sums of liquid wealth are a good deal.

cigarettes are the perfect fiat money. they go stale in a couple months... spend 'em or smoke 'em.

[ThePythonicCow]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

cigarettes are the perfect fiat money. they go stale in a couple months... spend 'em or smoke 'em.

I didn't realize they went stale. Thanks for the information. You just saved me from a bad investment. Once again, iTulip comes through .

Toilet paper holds up better, but it's bulky and I'm running out of space. Perhaps I should start taking an interest in the whiskey and ammo markets.

[doom&gloom]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

That's some kinda scary.

I grew up as a kid in the New England community immortalized in Norman Rockwell's paintings. I can personally recognize some of the characters in them. Most of them had a heck of a lot of fun being whatever odd and unusual being they turned out to be.

Most people seem a whole lot more bland nowadays. TV has been an enormous drug on humanity.

I dunno, some days I just feel like Tony Soprano...

[doom&gloom]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

I didn't realize they went stale. Thanks for the information. You just saved me from a bad investment. Once again, iTulip comes through .

Toilet paper holds up better, but it's bulky and I'm running out of space. Perhaps I should start taking an interest in the whiskey and ammo markets.

I dunno, you could reall 'clean up' in theat TP position, especially in a shitty market.

[Guest]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

EJ - does iTulip track with Jeremy Siegel regarding any potential valuation distortions in the conventional S&P valuation methodology?

______________________

HOW CHEAP IS THE MARKET?

by Jeremy Siegel, Ph.D.

Posted on Wednesday, April 8, 2009, 12:00AM

On February 25 I published an op-ed piece in the ‘Wall Street Journal' entitled, "The S&P Gets Its Earnings Wrong." In that article I said that, although the S&P weights each individual's stock by its market capitalization to compute the return on the S&P 500 Index, no such methodology is used to compute aggregate earnings of the index.

As a result, the billions of dollars of losses racked up by, say, AIG, whose market value is extremely low, is added dollar for dollar to the earnings of the profitable firms, such as Exxon Mobil, whose market value is more than 20 times larger. I maintained that S&P's methodology gave far too much influence to firms with big losses and low market values, and thereby gave a distorted valuation to the S&P 500 Index.

A Challenge to Standard & Poor's

I proposed an alternative methodology for computing aggregate earnings: Weight the earnings of each company by its current market value, in a fashion identical to the way the return on the S&P 500 Index is computed. This alternative methodology leads to substantially higher earnings for the index than does the S&P methodology.

According to Standard & Poor's, total reported earnings on the S&P 500 index for calendar year 2008 was a mere $14.97, the lowest in many decades, primarily because of the huge losses of a few financial firms. S&P reports that, at the index's level on March 31 of 798, the S&P was selling at an extraordinarily expensive 53.3 times last year's earnings.

Yet S&P's own Web site says that "AIG's record setting Q4 '08 'As Reported' loss of $61.7 billion, or $22.95 per share, took $7.10 off the index." AIG's quarterly loss was so massive that it more than canceled out the entire year's income of Exxon Mobil, which earned $45 billion in 2008. For the full year, AIG lost over $99 billion, more than twice the total profits of Exxon Mobil.

Where the Distortion Comes In

Here is where the distortion comes in. Exxon Mobil has a market value of $350 billion, while AIG's value is now a mere $15 billion (and it was only $5 billion a month ago). That means that the average investor owns more than 20 times as much Exxon Mobil stock in their portfolio as AIG stock, so that for the average portfolio of those two stocks, the oil giant has over a 95 percent share and AIG has less than a 5 percent share.

S&P says that an investor holding 95 percent of his portfolio in Exxon Mobil and 5 percent in AIG has negative aggregate earnings and an infinite price-to-earnings ratio because the losses of AIG are greater than the profits of Exxon Mobil, no matter how much you hold in each. S&P would say this even though 95 percent of your portfolio is in Exxon Mobil, a stock that sells for less than 8 times its earnings.

My methodology would weight the $45 billion earned by Exxon Mobil by 95 percent and the $99 billion loss of AIG by 5 percent to obtain a weighted average earnings of $39 billion for the portfolio. With a weighted average market value of AIG and Exxon Mobil of $335 billion, this would lead to approximately a 9 P/E ratio for the portfolio, not the infinite P/E computed by Standard & Poor's.

With a few firms sporting huge losses, weighting the gains and losses by market value gives a much better picture of the market's current valuation. Instead of reported earnings of $14.97, the market-weighted earnings is a much higher $71.50, which gives the market a P/E ratio of just over 11 instead of 53.3, as reported by S&P.

The big losses in the financials impact operating as well as reported earnings. S&P reports that total operating earnings for the S&P 500 was $49.49 in 2008, giving the Index a 16 P/E ratio. Once the earnings are weighted by market value, operating earnings rise to about $79.40, giving the market a very cheap P/E ratio of 10.

S&P's Response

After my article appeared, a flood of emails and phone calls came not only to my office but also to Standard & Poor's. David Blitzer, the managing director and chairman of S&P's Index Committee, posted a letter on their Web site defending their methodology and claiming that my methodology "failed the simple tests of both logic and index mathematics. A dollar earned or lost is the same, irrespective of whether it is earned or lost by a big index constituent or a smaller one."

S&P continued, "To use an analogy, we could hypothetically view the S&P 500 as a single company with 500 divisions, with each division having earnings and an implicit market value. The smallest of these divisions could have an outside loss that wipes out the combined earnings of the entire company. Claiming that these losses should be ignored or minimized because they came from a less valuable division is flawed."

What is completely flawed are the logic and economics of the above paragraph. The independent corporations that make up the S&P 500 Index are valued completely differently than if they were divisions of one company. The losses of one company do not cancel the profits of another. Exxon Mobil's shareholders are not impacted by AIG's losses. In fact, AIG's losses are now taken by the bondholders -- or, to the extent the government bails out the bondholders, we, the taxpayers, shoulder AIG's loss. Liabilities do indeed cross the divisions of a single firm, and that is why the New Products Division of AIG tanked the many other profitable divisions of the insurance giant. But these losses do not cancel the earnings of profitable firms.

A Point Well Taken

My good friend and colleague Prof. Robert Shiller of Yale University, who has used S&P earnings extensively in his work, agreed that my point was very well taken. He said that the basic economic principle comes from the theory of options. The value of a firm's equity can be viewed as an option on the total value of the firm, after the bondholders and other claimants have been paid. It is a fundamental theorem of option theory that the sum of the option prices on individual firms is worth more than a single option on the value of all the firms. In other words, the sum of stock prices of 500 stocks must be worth more than "a single company with 500 divisions," as David Blitzer claims the S&P 500 Index represents. This is particularly true if one or more of the divisions has extreme losses, as do AIG and many of the other financials.

Prof. Shiller did say that the theory does not lead directly to my methodology of value weighting, and probably the "true" earnings of the S&P is a far more complicated function of the individual firms' earnings. The true earnings may in fact lead to even higher values than I have calculated. My calculations on historical data show that, in most years, it makes little difference whether earnings are calculated by market value or by using the simple sum as S&P does. This is because when earnings are positive, the two methodologies give similar results.

But as option theory indicates, when the earnings of a few companies turn sharply negative, there is a big difference between the two methodologies. Back in 2002 the aggregate earnings of the S&P 500 Index also plummeted when a few firms, such as AOL and JDS Uniphase, took huge writedowns on some of their Internet investments. Reported P/E ratios soared into the 60s in the second quarter of 2002, yet rather than being overvalued, the market was just approaching its bear market low.

Final Word

The true valuation of the market is no where near as dismal as the aggregate earnings reported by Standard & Poor's suggest. When portfolios of stocks are weighted by market values, the market is cheap by historical standards. No one can say for sure whether March 9 will mark the bottom of this dismal bear market (I personally think it will), but I am sure that investors who hold a diversified portfolio of stocks today will be rewarded by above-average returns.

[The Outback Oracle]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

In a nutshell

A dollar earned or lost is the same, irrespective of whether it is earned or lost by a big index constituent or a smaller one."

S&P continued, "To use an analogy, we could hypothetically view the S&P 500 as a single company with 500 divisions, with each division having earnings and an implicit market value. The smallest of these divisions could have an outside loss that wipes out the combined earnings of the entire company. Claiming that these losses should be ignored or minimized because they came from a less valuable division is flawed."

The options argument is irrlevant to the issue. An indidual option is higher because it is determined by individuals who each think they can see something better in that company than the overall market.

RE the AIG Exxon issue, each individual may have the same NUMBER of shares but as their values changed the value of AIG in the portfolio decreased.
Lukester maybe I have missd something. You're pretty sharp but this looks to me like a monumental bunch of tripe
This bloke is just talking to hear his own noise.

[Guest]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

I leave it up to other iTulipers to chew to pieces. My take on it is that the S&P argument is the less likely. Surprised you are reading it otherwise as the point to this reader appeared quite clear. I'm certainly not one of the more competent ones here to argue this case, but this was what became apparent to me. I would in fact have picked out exactly the same quote as you have, to evidence why the S&P argument is the invalid one. "The market" is definitely not a single corporation. "The S&P 500 market" is solely made up of 500 individual corporations, and many of these may be of sharply cheaper a real price without this argument's specious overlay (appears so without undue struggle to comprehend it - to this reader anyway).

S&P QUOTED: S&P continued, "To use an analogy, we could hypothetically view the S&P 500 as a single company with 500 divisions, with each division having earnings and an implicit market value. The smallest of these divisions could have an outside loss that wipes out the combined earnings of the entire company. Claiming that these losses should be ignored or minimized because they came from a less valuable division is flawed."

This excerpt comment of Siegel's, is pointing out a valuation inefficiency in progress:

SIEGEL QUOTED: What is completely flawed are the logic and economics of the above paragraph. The independent corporations that make up the S&P 500 Index are valued completely differently than if they were divisions of one company. The losses of one company do not cancel the profits of another. Exxon Mobil's shareholders are not impacted by AIG's losses. In fact, AIG's losses are now taken by the bondholders -- or, to the extent the government bails out the bondholders, we, the taxpayers, shoulder AIG's loss. Liabilities do indeed cross the divisions of a single firm, and that is why the New Products Division of AIG tanked the many other profitable divisions of the insurance giant. But these losses do not cancel the earnings of profitable firms.

In a nutshell

A dollar earned or lost is the same, irrespective of whether it is earned or lost by a big index constituent or a smaller one."

S&P continued, "To use an analogy, we could hypothetically view the S&P 500 as a single company with 500 divisions, with each division having earnings and an implicit market value. The smallest of these divisions could have an outside loss that wipes out the combined earnings of the entire company. Claiming that these losses should be ignored or minimized because they came from a less valuable division is flawed."

The options argument is irrlevant to the issue. An indidual option is higher because it is determined by individuals who each think they can see something better in that company than the overall market.

RE the AIG Exxon issue, each individual may have the same NUMBER of shares but as their values changed the value of AIG in the portfolio decreased.
Lukester maybe I have missd something. You're pretty sharp but this looks to me like a monumental bunch of tripe
This bloke is just talking to hear his own noise.

[ThePythonicCow]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

EJ - does iTulip track with Jeremy Siegel regarding any potential valuation distortions in the conventional S&P valuation methodology?

______________________

HOW CHEAP IS THE MARKET?

by Jeremy Siegel, Ph.D.

Posted on Wednesday, April 8, 2009, 12:00AM

On February 25 I published an op-ed piece in the ‘Wall Street Journal' entitled, "The S&P Gets Its Earnings Wrong." In that article I said that, although the S&P weights each individual's stock by its market capitalization to compute the return on the S&P 500 Index, no such methodology is used to compute aggregate earnings of the index.

As a result, the billions of dollars of losses racked up by, say, AIG, whose market value is extremely low, is added dollar for dollar to the earnings of the profitable firms, such as Exxon Mobil, whose market value is more than 20 times larger. I maintained that S&P's methodology gave far too much influence to firms with big losses and low market values, and thereby gave a distorted valuation to the S&P 500 Index.

A Challenge to Standard & Poor's

I proposed an alternative methodology for computing aggregate earnings: Weight the earnings of each company by its current market value, in a fashion identical to the way the return on the S&P 500 Index is computed. This alternative methodology leads to substantially higher earnings for the index than does the S&P methodology.

Sometimes one has specific uses in mind for a statistic and depending on just what one is doing, either of these two methadologies might be better suited.

But otherwise and for most purposes, this nice article looks to me like it came from Taleb's Mediocristan (he of Black Swan fame.)

[Guest]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

Yes didn't someone post a link to a chart evidencing an S&P market PE in the 80's? That's shocking stuff. Siegel's saying that stat alone is an artifact derived from an incorrect distribution of market losses and has the unintended corollary of obscuring a few quite large valuation discrepancies out there.

I just wondered if iTulip separate into discrete segments their S&P valuations, to either confirm or negate the existence of pockets of marked low valuations in this market. Add just a tiny handful of other mega-cap stocks of Exxon's size, sporting PE's of 8-9, and you get at least a discrepancy of market segment valuations worth a passing comment.

Do "we here at iTulip" acknowledge any "valuation discrepancies" worth mentioning, as part of the 2009 market environment? It's a messy corollary to include, as it gums up the certainty that the entirety of the markets is nowhere near a sustainable floor. Makes the market's valuation become annoyingly ambiguous, doesn't it?

[stockman]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

On valuation I like the Shiller methodology of using 10 years earnings.

Shiller Valuations 041309.jpg

Shiller stock prices 041309.jpg

Like Lukester I think it would be interesting to see historic valuations broken out- by industry group and/or by market cap. Not sure reliable data is readily available.

[Chris Coles]

Re: Debt Deflation Bear Market: First Bounce - Eric Janszen

One of the interesting aspects of the Shiller graph above is the prediction of Robert Beckman in his book The Downwave which centred upon the idea that Disaster Theory posits a graph that climbs for some decades and then hits a double top, as above; and then drops right back to the beginning.

http://www.amazon.co.uk/Downwave-Sur.../dp/0903852381