The Bill is Due

We've all been there... or at least I have. You open the mail to find a surprise bill that you cannot afford to pay. Of course it shouldn't be a surprise if you paid attention to where your money was going.

Yes prior to my wonderful wife, and understanding personal finance to ignore the indoctrination of credit companies, I had debt. And a few times I couldn't pay a bill. So like millions, I used a cash advance from another credit card to pay the bill. I was paying ridiculous interest twice on the same balance. Thankfully I learned before getting in real trouble. Some people do this until the cards are all maxed. And why not? It is good enough for the U.S. Treasury.

Update to Market Valuation and PE Q2 '09

As everyone seems to be interested in what I have to say about the PE of the market from viewings of these past entries, here is an update on what I see over the past few days of quarterly earnings while it is still on everyone's mind.

Update to Market Valuation and PE
Market Valuation

Socialism of Capitalism-Update on Australia Regulation #1

This post from November of last year on Australian regulation is still one of the most read posts on my blog, and rightfully so. I consider it one of my most thoughtful, original, and well researched. But in sharing this information with other professional peers, and the public, I have realized further truth that I believe is worth your time to read. I will focus posts on these thoughts over the coming weeks.

Unintended Consequences of Tax Policy

So Florida changed the basis on property taxes for non-residents versus residents. Non-residents have a noticeable increase. Off the top of my head I don't remember specifics. But let's just say that the average snowbird would pay twice as much per year if staying an Indiana resident ($2,000 and maintaining a Florida condo).

Update to Market Valuation and PE

This is an update to my blog entry on market valuation that is important enough to reiterate and has additional details I am now willing to share with those who are not clients. Just as important are other thoughts that may have serious implications for the future that I will write about in coming weeks.

The following chart is simple to understand. The left column heading is the PE, the top row is the earnings of the S&P 500, and the intersection is the price the S&P 500 would be given those two factors.

The PE ratio says how many dollars investors will pay for one dollar of current earnings. When investors buy a stock (knowledgeably or not) they are buying a stream of earnings. When people are more risk averse, they will want more current earnings per dollar. The prior blog discusses historic trends in PE at market highs and lows. As noted at the beginning of the year Standard & Poors estimated that earnings this year would be around $40. Well, with 99% of companies reporting for Q1 '09 they overestimated by 25%. Overestimates are common with declining earnings as are underestimates with rising earnings. The band highlights the rough range of where the S&P 500 is today given various forward earnings.

As I hinted before, either investors must have an historically unprecedented appetite for stocks in a bear market (PE usually ends below 10), or earnings have to ramp up in an unprecedented manor to justify current levels, or a combination of both.

I have a hard time believing a person should invest betting on something that has never happened before without tremendous upside. In this case this unusual bet is only to justify current levels of the market, not forward growth.

The following chart shows the inverse relationship of 10 year forward returns on the stock market in red, and current PE ratio in blue. There are deviations, especially over the most recent 10 year periods, but the relationship is strongest at extremes of PE (shown here inversely). Source data: Robert Shiller http://www.irrationalexuberance.com/index.htm

If S&P is correct at $40 per share of earnings, the PE at current levels will almost match that at the top of the dot com bubble (shown here as the low side of the chart). As an investor in the market, are you right or is Standard and Poors? Or are you betting against history?

To find recent S&P 500 earnings information visit http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS

Historical average PE is 14.29
1918 down to 5.74
1924 9.05
1942 7.97
1949 6.62
1975 8.30
1982 7.73

The Ultimate Self-Dealing Government-- not US

So GM goes sort of bankrupt... finally (see this post from November 2008), and two coincidental and seemingly unrelated events happen.

Rearview Mirror Justice- Online Scams, Madoff Response, Charles Ponzi

Subtitled- "No Help for Dudley Dooright"

Last night I discovered (through the person's stupidity) an online scam on craigslist. The person attempted 2 times to sell a really nice Acura TL for $4,000 on Michigan based boards. They used the same e-mail address, and followed with the same Picassa account for more pictures. The first time they even had a picture of a carfax report from a different car. Different cars each time, but in perfect condition (likely from a dealer lot being fully detailed).

Keynes vs Minsky "Financial Instability Hypothesis" and GREED

John Maynard Keynes formulated the body known today as Keynesian economics is his largest work "General Theory" of 1936. Keynesian economics with its microeconomic cousin, neoclassical economics, is the basis for the actions of world governments over the past year of financial bailout and of the economic structure that preceded it (likely even fueled it).

Stock market and Swine flu pandemic panacea...

“There is a certain lunatic fringe in the stock market, and there always will be whenever there is any successful bear movement going on… they will put the stocks up above what they should be and, when frightened, … will immediately want to sell out… when it is finally rid of the lunatic fringe, the stock market will never go back to 50 per cent of its present level…

We shall not see very much further, if any, recession in the stock market, but rather … a resumption of the bull market, not as rapidly as it has been in the past, but still a bull rather than a bear movement.”
 

--Economist Irving Fisher 1929 to a conference of bankers 2 days before the 1929 crash.

Online Calculators

Here is a useful website with links to online financial planning calculators all over the internet for all types of situations.

http://www.choosetosave.org/calculators/

Looking forward to a presentation at a conference in a few days with Harry Markowitz, the father of "Modern Portfolio Theory." We'll see how he views his Nobel Prize work after the occurrence of a statistically impossible event. Well one could occur every 1,000 years. But we have had two of these in a little over 100 years.

Of course it has to be in San Diego. How far can swine flu blow if I am right by the border to Mexico?

An online personal financial planning course

If you want to gain knowledge of personal financial planning issues (for free), I just found a great course to help you get there. It is quite detailed, broken into lessons, and has some useful add-on tools.

http://ocw.uci.edu/courses/AR0102092/

Thank you UC Irvine for being so progressive to help the public, and thank you to Get Rich Slowly for pointing this out to me and helping the public take control of their finances from those who oppose their best interests (which seems to be everyone these days).

Osinski's "Manhattan Project"

The following link is an article by Michael Osinski, one of the main people responsible for developing and implementing the means to repackage mortgages into traditional bonds (so they could be resold), then into CDO's allowing for various levels of risk.

"My Manhattan Project"

Many parties share responsibility for what has happened in our mortgage markets, but I believe this article displays something important in core statistical understanding that contributed to this mess.

Media- Unaccountable For-Profit Financial Advice

John Stewart has been one of the only people calling out some of the most obvious violators of public trust, the financial media.

CNBC Financial Advice

Jim Cramer Part 1

Jim Cramer Part 2

Jim Cramer Part 3

It was funny before, but honestly, am I being taken by everyone?

In reality, most of us will never step foot in a place like the resort the AIG execs ran up a $500,000 bill at, but we have each paid for that right thousands of times over now, not to mention we should get to take a private jet to get there. At least with the NFL owners, it seems less direct. We only fund them through multi-billion dollar tax rebates for new stadiums with more seating so they can have more attendance revenue. That's better than just writing a check.

Do you feel like you are low man on the totem pole?

So today we have the NFL justifying it's meeting at the same resort where AIG was lambasted for their retreat footed by taxpayer dollars. Much farther back in history, during economic hardship, the victorious underdog gave average Americans hope that even if everything is gamed sheer determination can beat the obviously better competitor. Even in horse racing and boxing (2 sports notorious for being gamed) we have the recent movies Seabiscuit and Cinderella Man detailing two narratives from the Great Depression. Yet that was a time when the athlete underdogs grew up as and were still the average Joe. They didn't make millions each year.

Market Valuation

Sorry for the delay on this promised post, but today is the perfect day to encourage you (sarcasm) and say, I can't make the numbers work to justify the market being this high today. It should still go down more. As a disclaimer, I will be speaking specifically of the S&P 500 currently at $706.

Return Democracy to the Capital Markets

There has been a lot of rhetoric lately labeling the bailouts as socialism. I think the debate on both sides is really a lot of noise by people who are not thinking. What is true (and easily demonstrated) is the slow decline of democracy in America's public capital markets. And there are some very obvious and easy fixes to the problem.

Cost of Capital

One of the most famous events to happen on my birthday (May 17th) was the signing of the Buttonwood Agreement in 1792 forming the New York Stock and Exchange Board. Previously exchanges of ownership in companies were handled by auctioneers who added substantial cost to transactions. The initial 24 broker-members agreed to charge each other "one quarter of one percent Commission on the Specie value and that we will give preference to each other in our Negotiations."

The forest through the trees...

The odd thing about financial op-ed is that most of it is backward looking and generally useless for aiding a person's financial success as well as preventing financial ruin.

But every so often--usually about every 3 years, more recently every 6 months--an article appears that if it was the only thing you read, I mean really read with complete awareness, then acted on it, your financial situation would be free from worthless concerns about which growth fund will perform better next year. Sometimes these treasures exist outside of the financial press, but are more difficult to discern in my opinion.

Individuals not Institutions

In the midst of a financial crisis everyone (myself included) looks to place blame. And we find a name--the worst of the worst--Madoff. Prior to finding that name we blame the institutions who propogated the crisis. But an institution is nothing more than a conglomeration of individuals who being of sound mind have the capacity and requirement to make judicious and ethical decisions every day.