ERICOPOLY

This is a very good question and the answer is: profit margins will keep getting higher! ;) But this doesn't invalidate Mr. Hussman's historical data. Which is what I am trying to do! Gio I think his correlation might just be completely full of shit. Does Japan have record profit margins? http://boards.fool.com/the-most-recent-personal-savings-rate-just-came-in-30965776.aspx Thanks. The first few sentences say it all: The most recent personal savings rate just came in at +4.9%. The government deficit as a % of GDP in 2013 is expected to come in at -3.9%. This thread was partly about Hussman's claim in 2012 and again earlier this year, that the sum of these two rates determined, by accounting identity, the corporate profit rate.

This is a very good question and the answer is: profit margins will keep getting higher! ;) But this doesn't invalidate Mr. Hussman's historical data. Which is what I am trying to do! Gio I think his correlation might just be completely full of shit. Does Japan have record profit margins?

One thing he takes for granted is that today's profit margins are due to government and private sector deficits. So I have a two-part question: Are government deficits going to shrink in the decades to come? How high are private sector deficits today? I read his paper, and I am left with the impression that he is saying the rising deficits led to the rising profit margins. So what if the government deficit keeps getting bigger?

Can't Hussman invest in areas that aren't showing record profit margins, like banks and insurance companies? Are the interest payments on bonds that an insurer counts as income... are they too high from a historical standpoint? His argument sounds like that of a young man who refuses to date women because (due to the aging baby boomers), demographically women are older than they used to be and he only wants a young woman. For example, he brings up bank insolvency again but those worries are long past. I think he is trying to justify why he didn't buy the market bottom and of course, it wasn't because he was wrong that the market rallied, it's because of an accounting fraud. You missed the bottom, quit whining baby! There were lots of bargains to choose from -- you didn't need to stay away simply because of banking insolvency.

The more expensive the overall market (the greater it's total valuation mass), the greater the gravitational pull it will exert on undervalued stocks. This happens when people trade expensive for cheap. There comes a time where a lot of stock become expensive and few cheap ones remain. This is a bullish outcome for the prospects of those cheap stocks. I am talking about truly cheap stocks, not just ones that are "cheap" for good reason.

I tend to think my portfolio will gain about 35% next year (from now through end of 2014), and that makes me bullish. That's without using leverage. It has nothing to do with central banks making me go into stocks. A 35% probable return is enough to do it for me. I also tend to think people will warm up to what's in my portfolio at an accelerating pace given that less opportunity is available elsewhere -- that's my efficient market hypothesis, I will expect a call from Sweden any minute now.

Look at the relative headwind coming from the US Treasury this year. They were injecting $1.3 trillion into the economy in 2011, and this year roughly 1/2 that much. On absolute terms, it's still a deficit. But I look at the relative change -- it has to be growing from year to year in order to be boosting the economy relative to the prior year, no? Instead, it's drastically shrinking which (relative to prior year) is a big punch in the gut. http://www.usgovernmentspending.com/federal_deficit_chart.html FY 2013: $680 billion FY 2012: $1,087 billion FY 2011: $1,300 billion FY 2010: $1,294 billion Note that it will start increasing again due to structural issues (at least according to CBO): http://www.calculatedriskblog.com/2013/08/update-shrinking-deficit.html Yes, but before that happens it's expected to roughly halve from present levels (relative to GDP): Quoting: For the current fiscal year (ends September 30th), the CBO is projecting a deficit of 4.0%. This is down sharply from 7.0% last year. And the CBO expects the deficit to fall to 2.1% of GDP in 2015.

Money isn't easy. The Fed tries to make it easy, but then it goes through this filter (aka "the banks") who are exceptionally difficult to borrow from. The banks aren't reporting much lending growth, indicating that as easy as the money may be, it's not driving the economy on any kind of debt binge. Not consumer debt anyhow. My comments are in relation to what your experience would be if you walked into a bank and wanted a loan, as a consumer.

Look at the relative headwind coming from the US Treasury this year. They were injecting $1.3 trillion into the economy in 2011, and this year roughly 1/2 that much. On absolute terms, it's still a deficit. But I look at the relative change -- it has to be growing from year to year in order to be boosting the economy relative to the prior year, no? Instead, it's drastically shrinking which (relative to prior year) is a big punch in the gut. http://www.usgovernmentspending.com/federal_deficit_chart.html FY 2013: $680 billion FY 2012: $1,087 billion FY 2011: $1,300 billion FY 2010: $1,294 billion

I agree. I was thinking along the lines of easy money. We could also look offers at Snapchat (I posted that later) or Instagram. They're not using a lot of equipment but they're getting really dicey valuations. Couldn't we argue about the government debt is similar to the tech boom? We're creating a ton of debt that will never be paid back (at least in real terms). Anyhow, it seems to me that the last two mega-crashes in the stock market were not just about lofty stock prices -- they were about unsustainable bubbles in sectors of the real economy. They were magnified by industries that quickly moved from booms into depressions, and that dragged general employment down and led to recessions (that fed into stock prices). Right, I would agree here, as well. I think this is Klarman's point. The economy is so weak that the fed is not only keeping interest rates low in the traditional sense but with QE, too. They have been doing this for years now and the economy still isn't back to normal. As he sad "there is no free lunch" but, if this works out as people hope, there would be. Perhaps "this time is different" and monetary shenanigans will work out with no super tough pain to get a full recovery, just a longer, less painful way there. This process can take quite a while. That's why I'm cautious but not "batten down the hatches" cautious yet. Things are rarely as good or as bad as we think. They did raise taxes this year. Times are not quite as easy as some of the pundits claim.

I agree. I was thinking along the lines of easy money. We could also look offers at Snapchat (I posted that later) or Instagram. They're not using a lot of equipment but they're getting really dicey valuations. Couldn't we argue about the government debt is similar to the tech boom? We're creating a ton of debt that will never be paid back (at least in real terms). Anyhow, it seems to me that the last two mega-crashes in the stock market were not just about lofty stock prices -- they were about unsustainable bubbles in sectors of the real economy. They were magnified by industries that quickly moved from booms into depressions, and that dragged general employment down and led to recessions (that fed into stock prices). Housing going from mega-boom into Depression overnight was just catastrophic. I mean, that's a real Epic one that we'll probably never top in my lifetime.

That is something that can go on for a heck of a long time -- look at Japan's indebtedness. But I've seen it mentioned many times that it doesn't need to go on for a long time -- only until the private sector deleveraging is over, and we're 1/2 there already (according to a few sources). Meanwhile, debt is growing at a slower pace compared to at the start of this process. The slowly growing economy is gradually lifting government revenue. Inflation, when it comes, will at least be lifting the imputed earnings of the indebted Americans. Take that girl we recently talked about who has $250,000 of student loans and $25,000 of income. Were inflation to be 5%, she would have tax-free imputed income of $12,500, which is a 50% increase over the $25,000 she currently makes.

The Tesla boom you mention is purely stock market related. The tech boom wasn't just a stock market boom -- it was tons and tons of new startup companies ordering tons and tons of equipment using debt that would never be paid back. So it created a real economy that collapsed. Tesla has not spawned a real-economy boom. It's just a stock that went up -- did not drag GDP along with it.

I have been front-and-center in every (2 for 2) boom of my adult life -- perhaps that's why I thought they were so obvious. I had sudden gains from employee options that were suddenly gone. Then, given that Seattle had the 2nd-worst economy (behind Portland) after the tech bust (due to all the laid-off tech contractors), I was able to leverage my Microsoft salary with real estate rentals. The Seattle market wasn't appreciating while other markets in the country were up 20% annually -- I just speculated that the same would happen in Seattle once the local job market recovered. I made a quick little fortune when Seattle had a couple of 20% years of it's own. It was at this time that the Fairfax options came along in 2006 -- I had a couple of hundred thousand to invest from my easy money in real estate. Tada! So, maybe you are right that there is a boom going on right now in the areas you mentioned, and perhaps I'm not seeing it because this time I'm missing out on it. But I'm having a little mini-boom of my own in BAC, which despite the boom-like returns is really still trading at recession-level valuation.

The last two have been easy to see in real-time. You suddenly had grocery stores putting ".Com" on the end of their name. I remember when the local Albertson's became Albertson's.Com. You had commercials on TV for ETrade where the teenage boy was landing a helicopter on his parents' suburban front yard. You had people earnings 6-figure salaries if they could code in HTML. Remember some of those valuations? MSFT was at 70x earnings. I think even KO was in excess of 40x earnings. Then in real estate you had lending in excess of 100% of the homes value. No documentation loans, etc... People new to real estate investing suddenly owned 4 or 5 properties with excessive leverage that were appreciating 20% a year. New housing construction well ahead of household formation -- oversupply building. This wasn't that hard to spot. Not like today, anyway. Where is the common man on the street today earning easy money? Who is lending to him excessively? Where are new college graduates earning 6-figure incomes with limited experience? Who is getting rich quick today, what sector?

And the nation's automobile fleet is about as old as it's ever been. There is a lot of deferred replacement that's yet to kick in.

The 2007 stock market crash was triggered by an economic crash. You had all the people borrowing against their homes, you had overbuilding of housing units and the accompanying economic boom... then all that vaporized way too fast. Right now, I see underemployment. I see no special amount of borrowing against appreciated assets. Housing is still underbuilt on an ongoing basis versus trend household formation, and so if anything we're still getting a negative headwind from real estate -- or at least far from a tailwind. So the jobs keep grinding back. There isn't a big balloon in the economy about to burst.

I was satisfied with the argument that you don't buy stocks today for their earnings 10 years ago. You buy them for the next ten years' and beyond. What happens when your estimates of their future earnings power is incorrect? I thought this was a value blog. I love your comment :-* :-* :-*

I was satisfied with the argument that you don't buy stocks today for their earnings 10 years ago. You buy them for the next ten years' and beyond.

The first two brave analysts are giving a "consensus" of $1.80 a share for 2016. That's $21.60 per share at 12x earning. We all think they will generate more than $2 per share in capital in 2014 and 2015, on average. That takes you up to $25.60+ in 24 months. So that's a 64% gain, and really perhaps since this is so fricken obvious the market front-loads the bulk of those gains? Or you could say the stock is worth $21 right now because you only have to knock 60 cents off of the $21.60 figure (40 cents for 2014 and 20 cents for 2015, according to Bernstein estimates). And then you could argue that the DTA will go towards paying more settlements.

It's hard to say what it should trade at. The majority of analysts think they'll bring in $1.90 next year and $2.27 the year after. Then in 2016, $1.80 (without using a DTA) -- and presumably more than $1.80 for every year beyond. So just a stupid 10x forward multiple on the lowest of those years (in a 19x p/e market) gets you to $18. And 10x seems pretty low. You could run to $21.60 on a 12x P/E -- that's not exactly unusual valuation. Of course, this is just as obvious as I type this and yet the stock is only at $15.50 ???

It trades at 11.5x times forward 2014 net income estimates of $1.34, which of course are on the light side because of the DTA which brings it up to about $1.90 per share. That's a 40% discount to the S&P500 market multiple of 19. So while taking that big risk from the lofty valuation in 2014, for the following year you are left with merely $1.59 consensus net income estimates for 2015, which with the DTA amounts to roughly $2.27. Of course, that $1.59 is only 18.6% above the prior year's earnings, and if all we're doing is compounding at 18.6% we should definitely sell it now. Then, in 2016 the consensus is for $1.81 net income, which only gives a further 13.8%. Once again, if you are only making 13.8% you should certainly sell out. Oh wait... those are just the capital gains! Doh, silly me... I forgot that the $1.90 earned with DTA help in 2014, and the similar $2.27 earned in 2015 are excess capital that can fuel further shareholder gains. My bad. Let's wrap that all up now: For 2014, 18.6% of $15.50 is $2.88 in capital gains with the additional $1.90 in earnings. Hmm... only $4.78 per share in gains. Just not good enough for me, that's only 30.8% return over today's closing price of $15.50. I'm used to much higher returns, so for sure I don't want to own this. For 2015, 13.8% of $18.285 is only $2.52, which when added to $2.27 earned (with DTA) comes out to only $4.79. This would be another 25% year in 2015 after the 30.8% return in 2014. And all that does is keep the stock trading at 11.5x forward earnings for the next two years -- same multiple as today. Yep, yep, scary scary stuff ;)

Does Packer want to manage OPP? (other people's pennies... what were you thinking I meant!!).

Why did Cheviot Savings Bank need a $62 bailout?

You are over analyzing the situation and should reconsider your priorities. In twenty five years in the business, I have seen hundreds of bright young people, often from great schools, get nowhere in the finance field because they choose to "strategize" their career path instead of responding to opportunities. I remember laughing at 25-year old Ivy League MBAs who didn't want to run financial models because they feared being pigeonholed as a "numbers guy". They wanted focus on the "big picture". In two years these empty suits were gone. They go it backwards by thinking that the firm was there to serve them. This new fund is a critical test for you. Ignore the assurances from your superiors that this is your choice. It isn't. If you say no, you have put yourself ahead of your firm and for that there will be consequences. Maybe not tangible way, maybe not immediately, but people will take note and it will happen. The bottom line is this: you should take the job and work your tail off with a positive attitude to make it a success, or leave the firm. The best way to advance in your career is to gain a reputation as a "can-do" individual who will do whatever it takes for the benefit of your current boss and your firm. Once you succeed here (and it will take many years of effort), opportunities will follow. Lots of them. When bosses start to fight over you and you start to get job offers outside the firm, then you are making good progress! That is basically how the world worked at Microsoft from what I can tell, so it is probably a general corporate truism of any field.