Der USA Bären-Thread

aber nicht im US Markt, da schrumpfen sie 2,8%

www.stocks.ch/nachricht/...egen_Medikamentenrueckruf_AF__54366

The biggest surprise in Goldman's Q2 8-K was the firm's disclosure that Trading and Principal Investment revenue plunged by 43.2% sequentially, and 42.4% quarter over quarter. The firm's once unbeatable trading operation is finally showing cracks. If a firm backed by the full faith and credit of the risk free discount window is not showing record trading revenue growth quarter over quarter, what can the rest of us do? One wonders if the firm may have finally started following guidelines on prop from flow information segregation. While the 8-K does not disclose profitable trading day information, we are confident that when released, the 10-Q will demonstrate that this quarter Goldman had at least 10 trading days in which it lost money in the current quarter: a stunner compared to the recent near flawless performance in the past several quarters. Either Goldman's Achilles heel has been exposed or the firm is blowing money on purpose..(ein paar schöne Charts)
Lastly, one headscratcher is the firm's Q2 tax rate, which came in at 57.7%, certainly an outlier. We believe this may be associated with the UK bank payroll tax issue this quarter, although we have not yet validated this assumption.
www.zerohedge.com/article/...nue-drops-40-sequentially-and-qoq

www.bloomberg.com/news/2010-07-19/...ary-by-william-pesek.html

Last week, the world’s credit-rating giants got scooped on the biggest rating decision: whether to strip the U.S. of AAA status. Worse, the U.S. was downgraded by a company that few people have ever heard of, and a Chinese one at that.

While Moody’s and S&P ignore the wreckage that America’s finances have become, Beijing-based Dagong Global Credit Rating Co. is uncorrupted by the system that enables developed-world debt addicts to appear fiscally clean. It rates U.S. debt AA, two levels below the top grade.

Dagong is right to turn the world of A- and Baa1 on its head even though rating China higher than the U.S. is hubristic at best. Anyone who thinks China deserves a top rating or is devoid of debt landmines isn’t looking very hard. ......

zu #66349 - hier mit Link

Excluding the $600 million impact of the U.K. tax and the $550 million impact of the SEC settlement, Goldman (GS  145.79, +0.11, +0.08%)  would have earned $2.75 a share, still down 44% from the year-ago period.

www.marketwatch.com/story/...sachs-profit-slumps-82-2010-07-20

Mancher Ami, der Junkbonds kauft, träumt bei 9 % Zinsrendite von den "guten, alten Aktienzeiten". Dabei wird freilich übersehen, dass Junkbonds ebenfalls aus dem Nichts stark  fallen können. Man sah es zuletzt im Herbst 2008.

Das Junkbonds-ETF HYG hält sich - gemessen an der Schwäche im US-Aktienmarkt - (noch) erstaunlich gut:

Irland, Griechenland und Spanien konnte heute problemlos ihre Staatsschulden am Markt platzieren. Das ging zum Teil billiger als vor kurzer Zeit und die Nachfrage war weit höher als das Angebot. Inzwischen ist der Euro selbst wieder deutlich überbewertet. Wird Zeit, dass eine neue Sau durchs Dorfgetrieben wird damit er wieder eine faire Bewertung erreicht.

überbewertet gegenüber was oder wem?

July 20, 2010, 12:54 a.m. EDT
Double  dip looks doubly certain
Commentary: The economic recovery is just an illusion
By Robert P. Murphy

NASHVILLE, Tenn. (MarketWatch) -- Economists and financial analysts are currently arguing whether the economy will experience a "double dip," a recession followed by a short recovery, followed by another recession.

Some think the worst is behind us, and that output and employment will slowly but steadily increase during the next few years. Others believe we are headed for another crash. The lessons from the last business cycle favor the case for pessimism.

Market chart readers view stocks as being vulnerable to further declines, while fundamental analysts see stocks as a bargain given strong corporate profits, reports Barron's Michael Santoli.

It has been said that if one laid all the world's economists end to end, they wouldn't reach a conclusion. Even so, a surprisingly large number of economists now agree that then-Federal Reserve Chairman Alan Greenspan made a tragic mistake. After the dot-com bubble burst in 2000, Greenspan opened the monetary floodgates.

Specifically, Greenspan allowed the "monetary base" to increase 22% from June 2000 through June 2003. The monetary base, also called "high-powered money," is the base upon which bank loans are pyramided, expanding the total amount of money held by the public.

During the same three-year period, Greenspan cut the federal funds rate -- the interest rate commercial banks charge each other for overnight loans -- from 6.5% down to 1%, the lowest federal funds rate in more than 40 years.

The rationale for Greenspan's easy-credit policy was to provide a "soft landing" for the economy in the wake of the dot-com crash and Sept. 11 attacks. And for a while, it seemed he had succeeded. People marveled that housing prices continued to rise, even amidst the recession of 2001. Indeed, people referred to Greenspan as "the Maestro."

In retrospect, economists across the political spectrum recognize the role Greenspan's Fed played in fueling the housing bubble. The more cynical analysts argue that Greenspan's policies weren't "easy" at all and merely postponed the inevitable day of reckoning for the economy. Rather than gritting its teeth and suffering through the necessary adjustments in the early 2000s, the nation got an injection of artificial credit that masked the underlying problems with a euphoric boom.

The housing market eventually collapsed, as all bubbles do. At this point, Ben Bernanke was at the helm of the Fed. Unfortunately, he got his policies out of Greenspan's playbook, except Bernanke doubled down.

Rather than pushing short-term interest rates down to 1% as Greenspan did, Bernanke has pushed them down to almost zero percent. And in contrast to Greenspan's 22% increase in the monetary base during a three-year period, Bernanke increased it by 94% in one year.

The unprecedented monetary stimulus from the Fed, in conjunction with the massive deficits of the federal government, did succeed in partially re-flating the stock market and stabilizing home prices. Time magazine named Bernanke its 2009 Person of the Year, and Obama administration officials are taking credit for nipping the Great Recession in the bud. Yet the parallels with the Greenspan episode are clear.

It makes no sense to "rescue" the economy by having politicians borrow and spend trillions of dollars. It also makes no sense to fix the horrible mistakes of the housing-bubble years by having the Fed create electronic money out of thin air to buy "toxic assets" from investment banks that would otherwise be insolvent.

The alleged economic recovery is unfortunately just as illusory as the prosperity of the housing-bubble years. It is disturbing to consider that if this is the calm before the storm, then the pending crash will be painful indeed. In the current debate on the direction of the economy, those predicting a "double dip" have the stronger -- if more depressing -- case.

Robert P. Murphy is a senior fellow in Business and Economic Studies at the California-based Pacific Research Institute.

www.marketwatch.com/story/...p-looks-doubly-certain-2010-07-20

Währungen der wesentlichen Handelsräumen wie z.B. dem US-$ und anderen EU-Währungen.

Der Schweizer Franken ist diesbezüglich unerheblich. Die Schweiz als großes Steuerparadies und Fluchtburg für alle möglichen Gelder hat momentan wieder selbst erzeugten Ärger. Der Hintergrund dazu verteilt sich über die letzten Jahrzehnte. Die laufend niedrigeren Zinsen haben dazu geführt, dass der Franken stark im CCT genutzt wurde. Und zuviel gedrucktes Geld findet irgendwann den Weg zum Erzeuger zurück. Auch das von der Schweiz fleißig verbreitete Vorurteil vom "sicheren" Hafen erzeugt nun seine Probleme. So als ob die Schweiz ohne Europa existieren könnte. Es gibt eben Geschäftsmodelle, die gehen irgendwann zu Bruch.

Verniedlichung der Probleme die vor uns liegen. Das hört sich so an: "Nochmals eine Rezession und dann haben wir es überstanden." Dabei ist es absolut unerheblich ob uns die geschönte Statistik nun auf Quartalssicht oder Jahressicht wieder ein negatives Wachstum liefert oder nicht. Das Wachstum wird auf jeden Fall auf Jahrzehnte minimal bleiben und ja, manchmal auch negativ werden. Die aufgehäuften Probleme wird man nicht so einfach los und die Aufhäufung begann lange vor dem Platzen der Technologieblase. Die breite Verschuldung von Konsumenten und vom Staat hat inzwischen schon eine Tradition von 4 Jahrzehnten. Die Handelsungleichgewichte sind auch schon lange unterwegs. Wäre alles in Ordnung gewesen, hätte es die Blase 2000 so nicht gegeben. Greenspan hat die Lage dann verschlimmert, ihr Gründer ist er nicht. Die Amis unterliegen eben immer noch der Illusion, sie kämen ohne Schweiß und Tränen davon. Statistisch kann man das hinkriegen, weinen tut aber schon ein immer größerer Anteil der Bevölkerung.

sondern ganz allgemein.

Der Schweizer Situation bin ich mir auch bewusst. Sollten wir auf die Idee kommen uns nach hinten zu lehnen wirds irgendwann dunkel. In Zukunft werden auch wieder diejenigen Menschen, Dörfer , Städte und Länder überleben die was machen und arbeiten. Die Amis haben sich doch die letzten Jahre zurückgelehnt und auf Pump gelebt. Deren Notenbank hat auch noch nix besseres als Konjunkturspritzen im Sinn. Arbeit wird weiter ausgelagert. So kommen die nie aus dem Loch.

Meiner Meinung nach wirds weiter runtergehen bis der Markt die Politik zum Handeln zwingt. Die Zinsen senken geht nicht mehr und weitere Konjunkturprogramme werden auf massiven Wiederstand stossen. Es bleibt also spannend.

Stimmbürger schneller eingreifen kann wenn die Politik Mist baut.

Apropos Mist - schon die Grüner-Kolumne gelesen? Welche Baby-Boomer werden denn diesmal den Aufschwung der westlichen Welt tragen? Oder schreibt der über China, Indien und Brasilien? ;-)))

Bayern, Hamburg und jetzt? Der Souverän muss aktiver werden.

Da muss ich etwas verpasst haben.  ;o)

Ja, und der Chart der US-Häuslebauer signalisiert, dass diese wohl die Sauere-Gurken-Phase überwunden haben. :o)))

__________________________________________________
Sobald wird sich eh nichts zum Besseren ändern!

- und desolatesten - Indexcharts:

- wenn ich den charttechnisch vermeintlich richtigen Zeitpunkt erkannt zu haben glaube - ist i.d.R. meine Basis zum Erfolg, auch wenn ich in dem einen oder anderen Fall falsch liegen sollte. Dieser Mut hat sich seit April - bis auf BIDU - in allen Fällen gelohnt, insbesondere bei AA, GILD, GS und WFC. Der WFC-Chart z.B: zeigte mir im April/Mai auf EOD-Basis ein klassisches Triple Top, das ich einfach mal "auf Verdacht" geshortet habe.

"IWF lobt Athen"

Der Internationalen Währungsfonds (IWF) lobte in seinem Statement vom 17.07.2010 Griechenlands Fortschritte bei der Kontrolle der Staatsausgaben, bei der Rentenreform und den Strukturreformen. Immerhin, nach den vorläufigen Daten des griechischen Finanzministeriums sank das Staatshaushaltsdefizit (General Government) im 1. Halbjahr 2010 um beachtliche -46% auf -9,645 Mrd. Euro nach -17,866 Mrd. Euro im Vorjahreshalbjahr. Bei der Reduzierung des Defizits ist Griechenland zwar bisher erfolgreich, nur wird Griechenland durch eine gesenkte Neuverschuldung noch lange nicht in die Lage versetzt seine Staatsschulden dauerhaft zu bedienen oder gar abzutragen:

Hier weiterlesen

Das ist der dümmste Titel, den ich je Bubblevision gelesen habe ;-)

Das heißt so viel wie: Die Zahlen waren zwar beschissen, aber Aktien steigen trotzdem, also ist alles gut.

www.marketwatch.com/story/...s-out-earnings-worries-2010-07-20

---

Apple hat wie erwartet die Zahlen geschlagen, aber nicht deutlich, steht nachbörslich 2,93 % im Plus mit Abverkaufs-Tendenz.

market-ticker.denninger.net/archives/...ting-More-Popular.html

Denninger stellt hier mal wieder seine exzellente Kenntnis historischer Zusammenhänge unter Beweis.

globaleconomicanalysis.blogspot.com/2010/...-historically.html

"nonsensical" bedeutet "unrealistisch", "unsinnig", "unhaltbar".

www.calculatedriskblog.com/2010/07/...ta-only-15000-trial.html

"HAMP" ist das "Home Affordable Modification Program" der US-Regierung, das Eigenheimbesitzern durch zeitlich gestreckte Zahlungsverpflichtungen die Erhaltung ihres Hausbesitzes ermöglichen soll. Man beachte die hohen Storno-Daten, deren Hintergrund in der Tatsache liegen dürfte, dass sehr viele Bewerber im Rahmen dieses Programms einfach nicht die finanziellen Voraussetzungen dafür haben!

http://www.hussmanfunds.com/wmc/wmc100719.htm

July 19, 2010

Don't Take the Bait
 
        John P. Hussman, Ph.D.
     

  Breaking News: Philly Fed Survey at 5.1, Showing that Growth Is Firming at a Slower Pace

     

This was an item that appeared on CNBC MobileWeb  on Thursday. Read that headline again. Growth is firming. At a slower  pace. Talk about "spin." You can't make this stuff up.

 

Important metrics of economic activity are slowing  rapidly. Notably, the ECRI weekly leading index slipped last week to a  growth rate of -9.8%. While the index itself was reported as unchanged,  this was because of a downward revision to the prior week's reading to  120.6 from the originally reported 121.5. The previous week's WLI growth  rate was revised to -9.1% from the originally reported -8.3% rate.  Meanwhile, the Philadelphia Fed Survey dropped to 5.1 from 8.0 in June,  while the Empire State Manufacturing Index slipped to 5.1 from 20.1. The  Conference Board reported that spending plans for autos, homes, and  major appliances within the next six months all dropped sharply. These  figures are now at or below the worst levels of the recent economic  downturn, and are two standard deviations below their respective norms -  something you don't observe during economic expansions.

 

As I've frequently noted, the first year of  post-war economic recoveries are invariably paced by strong growth in  credit-sensitive spending such as housing, autos, appliances and capital  goods. While government programs such as Cash-for-Clunkers and the  first-time homebuyers' credit did bring forward a great deal of demand  to produce short spikes in activity, we continue to observe a failure of  the private economy to pick up where government spending now trails  off.

 

There was a bit of good news last week in that new  claims for unemployment (seasonally adjusted) dropped by 29,000 to  429,000. Still, much of this decline can be attributed to the fact that  several manufacturers, including General Motors, skipped their usual  summer layoffs. While the seasonal adjustment factors are smaller for  the weekly claims data than they are for the monthly employment data  (see Notes on a Difficult Employment Outlook  - February 22, 2010), it's clear that last week's figure benefited from  a downward seasonal adjustment factor applied to data that did not  require it. As usual, the 4-week moving average, at 455,250, is more  informative. Incrementing the latest week's data by about 20,000 to  reflect the excessive seasonal factor would imply a 4-week average of  roughly 460,000, fairly consistent with the other data we're observing.  Given the likelihood of heavy job cuts at the state and local levels in  the next few quarters, these figures are at odds with the notion that  the economy is in a durable recovery.

 

Economic Policy Notes

 

The U.S. economy continues to face the predictable  effects of credit obligations that quite simply exceed the cash flows  available to service them, coupled with the predictable shift away from  the consumption patterns that produced these obligations. The misguided  response of our policy makers has been to defend bondholders at all  costs, using public funds to make sure that lenders get 100 cents on the  dollar, plus interest, while at the same time desperately trying to  prod consumers back to their former patterns of overconsumption. These  policies are designed to preserve exactly the reckless and unsustainable  behavior that caused the recent downturn. They are likely to fail  because the strategy is absurd. The ultimate outcome, which will be  forced upon us eventually if we do not pursue it deliberately, will be  the eventual restructuring of debt obligations and a gradual shift in  the profile of U.S. economic activity toward greater saving - either to  finance exploding government deficits, or preferably, to finance an  expansion in productive investment, research and development, and  capital accumulation.

 

From my perspective, bolder approaches are  required. Debt that cannot be serviced should be restructured, rather  than socializing the losses of reckless private decision-making. We will  inevitably have a large "stimulus" package, but it will be essential to  craft it in a way that emphasizes incentives to create and accumulate  productive capital, both private and public.

 

On the tax side, we also have options. There are  far more possibilities than simply preserving or discarding the Bush tax  cuts. Frankly, I was never a fan of those cuts, which added more  variation, not less, in tax rates across various forms of income.  Ideally, efficient tax systems should feature flat rates and very broad  bases. You define income in a very wide manner, and you tax it all at  the same rate. You introduce a progressive tax structure by creating  large exclusions from taxes at low income levels, so that people at  lower income scales pay no tax at all. In my view, the same thing should  be done with Social Security - drop the rate substantially, but include  all income - wage and non-wage. Three-quarters of Americans pay more in  payroll taxes than in income taxes. By reducing the wedge between the  hourly amount earned by employees and the hourly cost paid by employers,  this strategy would create immediate incentives for employment.  Moreover, it would raise more revenue because at present, even Warren  Buffett only pays Social Security taxes on the first $106,800 of income.  Combining a flatter income tax with a flatter and broader payroll tax  would stimulate growth, employment, and greater economic efficiency  without compromising total revenues.

 

As economist Alvin Rabushka at the Hoover  Institution has observed, "Critics of tax reform believe—with some  justification—that the combination of a regressive payroll tax with a  flat-rate income or sales tax would make the overall federal tax code  more favorable to the wealthy. But a modification of the payroll tax, in  conjunction with replacing the current, multibracket, complicated  income tax with a flat tax or a sales tax, would represent a fair  solution. A reduction in marginal income tax rates on wealthy households  would be offset by higher Social Security taxes on them."

 

As for capital gains taxes, the subtle bifurcation  of the word "capital" has always fascinated me as an economist. There  is a great deal of economic theory that suggests, correctly I think,  that reducing the tax burden on capital investment can have pro-growth  effects. But this research emphatically refers to "capital" in the real,  tangible, productive sense. It does not refer to fluctuations in the  value of securities. I am all for significant tax credits for real  capital investment and R&D, which would be passed on to shareholders  as an increase in the returns to productive investment activities. But  it is a stretch to use the economic research on real investment and  quietly redefine "capital" as financial capital in order to reduce taxes  on security price fluctuations. Wages are income. Capital gains are  income.

 

Dividends are income too, but unless we want to  perpetuate economic incentives that allow companies to report earnings  and then squander excess retained earnings on speculative acquisitions  and incentive compensation to insiders, dividends should only be taxed  once. Simply put, dividends should be either deductible from corporate  income and taxed as ordinary income, or they should be payable out of  after-tax corporate income and then distributed as untaxed income at the  individual level. If we want to provide tax credits for investment, and  eliminate or reduce the tax on the sale or disposition of real physical  capital that appreciates in value, that's fine too. But I frankly see  no reason why income from securities is sacrosanct from a tax standpoint  and the wages people earn are not.

 

Don't Take the Bait

 

Investors who allow Wall Street to convince them  that stocks are generationally cheap at current levels are like trout -  biting down on the enticing but illusory bait of operating earnings,  unaware of the hook buried inside.

 

I continue to urge investors to have wide  skepticism for valuation metrics built on forward operating earnings and  other measures that implicitly require U.S. profit margins to sustain  levels about 50% above their historical norms indefinitely. Forward  operating earnings are Wall Street's estimates of next year's earnings,  omitting a whole range of actual charges such as loan losses, bad  investments, restructuring charges, and the like. The ratio of forward  operating earnings to S&P 500 revenues is now higher than it has  ever been. Based on historical data (see August 20, 2007 Long Term Evidence on the Fed Model and Forward Operating P/E Ratios),  the profit margin assumptions built into forward operating earnings are  well beyond two standard deviations above the long-run norm. This is  largely because, as Bill Hester noted in his research article last week,  forward operating earnings are heavily determined by extrapolating the  most recent year-over-year growth rate for earnings. In the current  instance, this is likely to overshoot reality, and in any event, has  little to do with the long-term cash flows that investors can actually  expect to receive over time.

 

I can't emphasize enough that when you hear an  analyst say "stocks are cheap based on forward operating earnings" it  would be best to replace that phrase in your head with "stocks are cheap  based on Wall Street's extrapolative estimates of a misleading number."

 

More sober and historically reliable measures of  market valuation create a much more challenging picture. Apart from our  own measures, which indicate continued overvaluation, there are several  good indicators of market valuation that are not overly sensitive to  year-to-year fluctuations in profit margins. One is based on the 10-year  average of actual net (not operating) earnings, which is advocated by  economist Robert Shiller, and another is Tobin's "q" ratio which is  based on comparing market value to replacement cost, and is advocated by  Andrew Smithers. Both of these measures largely agree with our own  measures, both presently and on a historical basis. Based on last week's  valuations, both suggest that the S&P 500 is substantially  overvalued.

 

 

[Geek's Note: The chart above is based on the  ratio of the CAPE and q to their respective historical averages. Note  that the axis is logarithmic, so the level of 0.4 corresponds to a  valuation ratio of exp(0.4). This is about 1.5, or 50% overvalued. In  contrast, major secular buying opportunities as we observed about 1950  and again in 1974 and 1982 occurred at values of about -0.6, which  corresponds to a ratio of log(-0.6). This is about 0.55, implying that  the market at those points was about 45% below historical norms.]

 

Ultimately, the value of any security is the  properly discounted stream of cash flows that the security will deliver  into the hands of investors over time. It is very convenient for Wall  Street to operate on the basis of "operating earnings" - which aren't  even defined under Generally Accepted Accounting Principles  (GAAP) - because this measure of earnings is detached from any need to  properly deal with portions of earnings that are lost to writeoffs, "extraordinary" losses, option grants to insiders, and so forth. Yes,  these items appear in net earnings, but to most analysts, it  is apparently unimportant if companies repeatedly write off previously  reported "earnings" as losses, or quietly divert them to incentive  compensation - all of that is water under the bridge even if it occurs  quarterly.

 

Still, net earnings represent the only  amounts that investors can hope to obtain, and then only if the net  earnings are distributed as dividends or invested in productive  activities that don't get written off later. It's those net earnings  that go into the calculation of Shiller's cyclically-adjusted P/E  (CAPE), and the results are not kind here.

 

A couple of weeks ago, I was in a CNBC segment  discussing economic conditions. I decline the vast majority of media  requests, but I thought it was important to talk about the economic  risks we're observing. It was a debate-style format with another analyst  who essentially recapped the same arguments that he made at the 2007  market peak. Indeed, just before the market plunged by more than half,  he asserted "the fundamental underpinnings of stocks are superb." He  later appeared on CNBC in January 2008 sporting a beard, asserting that  all of the recession talk was overblown, and telling a reporter at  TheStreet that he would not shave the beard "until the recession talk  ends or housing recovers, whichever comes first." As of a couple of  weeks ago, he had no beard, which was perplexing.

 

Now, while I have difficulty with analysts who  repeatedly lead investors down the primrose path to abominable losses,  my defensive approach has also left enough on the table from time to  time that I don't want to throw stones. Still, one feature of his  analyst's argument was different from 2007, and the more I've thought  about it, the more I realize how damaging it could be to investors, so I  think it's important to discuss. Specifically, instead of using forward  operating earnings to assert that stocks were cheap, he based his  valuation assessment this time on NIPA profits (from quarterly  GDP accounting). Quoting NIPA profits in the context of market  valuations struck me as odd, but the segment immediately jumped to  another question. Part of the reason I don't do much TV. You can't  thoughtfully discuss the financial markets in 20-second sound bites.

 

Here are the basics. NIPA profits (from the  National Income and Product Accounts, compiled by the Bureau of Economic  Analysis) are a quarterly measure of economy-wide profits, restricted  to current production, less associated expenses. As economists at the  Department of Commerce and the BEA have noted (Mead, Moulton and  Petrick, 2004), this measure of earnings deviates substantially from  S&P 500 earnings. Expenses used in the calculation of NIPA profits  exclude bad debts, resource depletion, disposition of assets and  liabilities, capital losses, and any deductions relating to the  treatment of employee stock options. It also includes an allowance for  misreporting of corporate income. Many of these calculations are only  available on an annual basis, with a considerable lag, and as a result,  quarterly NIPA profit estimates and revisions make significant use of  interpolation and extrapolation.

 

Moreover, the NIPA estimate deviates from S&P  500 earnings not only because it excludes all sorts of expenses that are  relevant to shareholders, but also because it covers the entire  universe of U.S. companies, including small businesses, Sub-S  corporations, and mid-sized companies that are not in the S&P 500.  Indeed, S&P 500 earnings as a share of NIPA profits have fluctuated  between 38% and 85% over the past couple of decades. Except for a slight  amount of predictable mean reversion when S&P 500 net income  declines during recessions, there is no correlation at all  between divergences between NIPA profits and S&P 500 earnings (net  or operating) and subsequent changes in S&P 500 earnings. So they  aren't reliably predictive of anything.

 

In short, the NIPA profit estimate is a frequently  revised, noise-ridden, extrapolation-based quarterly data point,  reported with a substantial lag, that excludes a host of  shareholder-relevant expenses, and covers a broadly different universe  of companies than does the S&P 500. So I've been asking myself, why  would anyone want to use NIPA profits to value the market, instead of  using actual earnings reports, or even forward operating earnings which  are already a sufficiently overblown measure of corporate performance? The only answer I can come up with is that NIPA profits are an even more  overblown and misleading measure, allowing the continued assertion that  stocks are undervalued.

 

To give you some idea of the distinction, the  following chart shows S&P 500 earnings (TTM) versus NIPA profits,  scaled so that each series begins at the same value in 1963. Notice that  in 1963, both measures would have (by construction) given you the same  P/E multiple. But presently, the NIPA line is over 60% higher than the  net earnings line (the same is true for 10-year averages), so any P/E  based on NIPA profits is substantially and misleadingly low. Again,  earnings reports for the S&P 500 companies are directly available.  The NIPA figure does not even cover  the same universe of companies as  the S&P 500, and excludes a whole host of relevant expenses. In  effect, by using NIPA profits, you gradually skew the profile of  valuations over a period of decades so that what would normally  represent clear overvaluation today is transformed into something that  looks soothingly appropriate. It is not.

 

 

Market Climate

 

As of last week, the Market Climate for stocks  remained characterized by unfavorable valuations and unfavorable market  action. The Strategic Growth Fund [von Hussman - A.L.] remains fully hedged here - nearly  fully invested in individual stocks, with an offsetting short sale of  approximately equal dollar value in major indices such as the S&P  500, Russell 2000 and Nasdaq 100, to mute the impact of market  fluctuations from the portfolio. As usual, when the Fund is hedged, the  primary source of day-to-day fluctuations is the difference in  performance between the stocks we hold long and the indices we use to  hedge.

 

In bonds, the Market Climate last week remained  characterized by moderately unfavorable yield levels and still favorable  yield pressures. We clipped a bit more of our precious metals position  on strength last week, as deflationary concerns are likely to become a  primary focus of investors well before inflationary concerns correctly  become relevant several years out. Between its inflexibility to  political and economic freedom and a banking system that is both  underdeveloped and at increasing risk of overinvestment-induced credit  strains, my impression is that China is much more likely to stumble than  investors may appreciate. To a large extent, the strength in  commodities has been tied to very rapid growth assumptions across  developing economies. We've generally done best by accumulating  commodity exposure when investors are abandoning it. That's not to say I  expect a major downturn, but as I've frequently noted, the long-term  thesis for gold may be forced to endure shorter term discomfort.