Prediction is hard, especially about the future. But a quick glance at the Wall St. Journal’s Market Data page made my eyes pop.
I wanted to see if my general sense of unease around the financial markets had any quantitative basis, so I was looking up the price to earnings ratio of the major market indices. The first number I noticed was the current p/e number for the S & P 500: 24.13. That’s only a smidge up from a year ago, but is still historically pretty high.
It is, it should be noted, nowhere near the stratsopheric numbers achieved in the 2009, when earnings crashed so far and so fast that market prices couldn’t crash fast enough to keep up, but it is not far off those in the summer of 2008, just before the Great Recession became brutally obvious.
That’s got me generally a little concerned, as it doesn’t take much to spook “smart” money, and a high p/e is always a good excuse to sell.
But what made my eyes pop was the estimate of forward p/e: 17.65. That is, in essence, a prediction that company earnings are going to improve significantly over the next year — enough either to ease the market into a soft landing, a return to more historically normal valuation, or (if you’re an ebullient sort) to keep the market powering upward for a while yet.
That’s all well and good, and as I’m a lot closer to retirement than my first day at work, I’ve got no objection to such an outcome.
But what has me antsy is that I don’t know the assumptions that went into that estimate, and known or not, I don’t trust ’em. I’m writing now about the South Sea Bubble of 1720, and I’m continuously struck by how easy it was for very smart people — Isaac Newton, forsooth! — to persuade themselves the party would continue, even very late in the game.
All of which is to say that three hundred years of securities market adventures tell us that it’s always when, not if for unpleasant surprises. I don’t know if one is imminent, but I do know two things: given current events, a big crash could produce true social and political ugliness in a hurry; and there are at least a few reasons to watch out for market hubris.
Any jackals got a similar feeling? Any actually knowledgeable types out there want to weigh in?
Necessary disclaimer: I’m not a financial expert. I do not watch the markets closely. Most of my retirement funds are in the most boring possible index funds I can find. I have enough time — a decade-ish — so that I can ignore near term gyrations (ask me again around 2025 how I feel). And I’m certainly not an expert on company valuation, or the connection of or utility of macro- and political economics to something as fine-grained and context-dependent as a market investment. I’m not a financial advisor, nor do I play one on TV. I’m just a guy getting a little queasy.
Also too — a guy who thought we could use some more thread.
Over to you.
Image: A Stock Market Cleaner, cover of Puck, v. 15, no. 376, May 21, 1884
MattF
No expert, but the present market brings Stein’s law to mind: “If something cannot go on forever, it will end”. And when this bull market ends, it will be ugly.
Luthe
As a Millennial permanently scarred by 2008, you’re making me very, very nervous. Not that I have very much in my IRA anyway…
Schlemazel
I took everything out of the market last fall. I am stunned things have not turned to shit already. I believe the Dow is running on the vapors of stock buybacks funded by ridiculous tax cuts. I am hoping to buy up some bargains come this winter
schrodingers_cat
More than the stock market its the tariff wars and anti-immigration hysteria that has me worried. Its like we are replaying the 1920s, and we all know what happened when that bull market crashed.
khead
Oil has backed off to about $70/bbl since I last posted about this, but I still say run.
Wapiti
I’m not a financial expert, but I’ve been around to have seen the tech and housing bubbles burst. I don’t feel good about the markets; I wonder how much it’s being propped up with stock buybacks due to the recent tax law overhauls.
Tom Levenson
@Schlemazel: I’m moving more into cash, though I’m not going to exit entirely — tax reasons, in part, and more an unwillingness to trust my ability to time anything. I am making sure that I basically only own actually competent companies, so that if a crash hits, the stuff I’ve got will survive as working businesses going forward. Best I can do for now.
swiftfox
I’ll be chided for it but when the 2yr/10 yr bond spread is less than 1 (right now it is 0.31), watch out. Maybe not today, but I’d be surprised if things don’t go downhill after Labor Day.
The California real estate market prefaced the last recession and it is currently tanking.
Tom Levenson
@Wapiti: Quite a lot.
Tom Levenson
@swiftfox: Why chided? Or rather, why do you think that particular ratio is significant?
Also — what’s the word on the CA market. What I’ve read hasn’t suggested anything like a tanking.
Yarrow
@swiftfox:
Agreed. I think things will hold for the next month and maybe September but if the market hasn’t tanked in Sept then watch out in October.
Mart
Dumb-asses pass massive tax cuts for the rich while unemployment is at/near all time lows; so there will be no stimulus money when needed. I still think Osama Bin Laden is achieving his goals of depleting our military strength while bankrupting the country. Posthumously he has Russia piling on. I am retiring in a couple years or so, and I think we will be so broke that the knowledgeable one’s will all agree need to attack the social safety net to pay for all our warring. Also too, I do not know nothing about markets, but I know a bubble when I see one. I was too early out of Dow 12,000; but I avoided most of the 2008 massacre. Now we have an idiots trade wars to navigate while we dance on the bubble.
?BillinGlendaleCA
@swiftfox:
It’s not tanking, sales are down from last year, but not significantly. That may have to do with the changes in the tax law making home ownership more expensive in the mid-range properties.
dnfree
I am retired, and I moved part of my IRA from an index fund into flat-out cash after Trump was elected. The combination of the long run of improving economic numbers and the instability of this administration made me decide to do this. Financial experts advise that in retirement some of your funds should be in cash anyway, so if the market tanks like it did in 2009, you can withdraw from the cash portion while the stock/bond portion theoretically recovers.
schrodingers_cat
Poking China in the eye with tariffs when they hold so many of our treasuries is not a wise course of action. Once the $ as the reserve currency and treasuries as a safe haven are gone, we will be in a world of hurt. Our so called President is doing everything to strike at the heart of all our strengths.
dmsilev
@swiftfox:
Could you unpack that a bit? CA real estate has some significant issues but doesn’t seem to be tanking right now as far as I can see. Might very well do so in the near future as rising prices cut off more and more and more people from the buying pool, but that’s a different story.
otmar
Trade war, No Deal Brexit, Turkey imploding.
Interesting times ahead.
schrodingers_cat
If the $ is no longer a reserve currency, cash is not a going to be a safe haven. I don’t think there is another candidate immediately on the horizon. But after WW2 change from the pound sterling to $ was pretty swift.
kindness
Honestly if it is the Masters Of The Universe (the WSJ & the NYT) who are running the show (they don’t but they do influence it too much) they’ll hedge upcoming losses until after the elections in November where Democrats wipe the floor with the Republican vermin. Then the WSJ & the NYT will blame Democrats for any fall.
Of course they will!
evodevo
@Schlemazel: Me too. Nothing beats laddered CDs when the free markit decides to correct itself …
jackmac
No evidence, just a very nervous feeling that this current positive economic run (thank you President Obama) is going to be short-lived. Trump is ultimately not going to be known for a strong economy, but a significant downturn instead..
Schlemazel
@Tom Levenson:
I don’t have enough time to make it back. I would rather give up some gains now to avoid what I assume is going to be a big drop
StringOnAStick
@Tom Levenson: Without even considering that this bull market is extremely long in the tooth, your exposure to various kinds of investments should change as you approach your retirement age target. When you are younger you can take more risk because you have time to make it up if you just happen to start your career 5 years before a big recession (raises hand). Once you are within 10 years, too much stock volatility and you could end up having to work longer than planned just to make up what you lost. There are plenty of advice books out there about this. Another place you see it is in mutual funds that have a date attached to them, as in if you want to retire at year 2025, buy into this fund and they will automatically reshuffle your investment mix based on the retirement target date. Of course, people need to realize that mutual funds are usually required by their charter to stay nearly fully invested at all times, so thinking that “my mutual fund is top notch, they’ll bail out and go to cash if they see something ugly coming” is to engage in wishful thinking.
It used to be that you had a lifetime pension and the pension managers, with all their education and experience, took care of this for you. The rise of the IRA/401k/etc means that on top of your area of expertise and 40 hour/week job, you’re supposed to make great decisions on your investments as well. Not exactly a level playing field, is it? And that’s before you factor in all the automated trading that is the majority of trades now.
I’ve been wondering when the trade wars and tariffs start to really hurt the economy, and my fear is that it will come late enough that the election of a blue wave will be pointed to by Magats and media as the result of those scary Democrats getting back into (partial) power; why, the market simply collapsed from fear! Dump’s extra special economic secret sauce was working until the demonrats scared teh money fairies away! That would be bull shit of course, but they’ll make that argument just as they’ve been taking credit for the steady economy that was built by the Obama administration’s efforts to keep 2008 from becoming a full blown depression 2.0. The kind of shocks and policy changes the mango moron is hitting the economy with are really outsized and poorly planned, but it takes a long time to turn the economic ship. There are signs of sputtering though, and I second the idea that all the tax cuts that have led to incredible rates of stock buybacks has likely kept the spinning plates up a bit longer than conditions would indicate.
Jim, Foolish Literalist
I’ve been expecting a ‘correction’ for years, and anecdotally it seems to me the real estate market is hot– a friend looking in the Chicago suburbs has had three (IIRC) houses go under contract by the time she makes an offer, and the houses she’s looking at— smallish three bedroom ranch is the goal– seem wildly overpriced to me ($4-500K)
evodevo
@Tom Levenson: See: inverted yield curve …” What an Inverted Yield Curve Means
An inverted yield curve is most obvious with Treasury note yields. That’s when yields on one-month, six-month, or one-year Treasury bills are higher than yields on 10-year or 30-year Treasury bonds. During healthy economic growth, the yield on a 30-year bond will be three points higher than a three-month bill.
An inverted yield curve means investors believe they will make more by holding onto the longer-term bond than if they bought a short-term Treasury bill.
https://www.thebalance.com/inverted-yield-curve-3305856
PsiFighter37
I think you have another 12-18 months of slightly upward-trending stock market performance before we start heading south. I work in finance, so take the opinion for what it’s worth.
goblue72
Corporate earnings growth has seen a significant bump following the passage of the Trump TaxScam bill. 2018Q1 corporate profits are up YoY about 23.5 percent. Some of that is continued economic growth, but analysts I have been reading are pegging the portion of that attributable to TaxScam as over 40% of the profit growth.
Increased dividends and stock buybacks are where a good chunk of the profit growth is going. However, capex IS up, by nearly 25 percent in 2018Q1 compared to 2017Q1, with large tech companies like Alphabet and Amazon making significant investments in real estate & equipment. The big bump to capex will be good for the economy. So there’s some potential for at least a portion of the TaxScam to contribute positively.
You might be seeing the forward looking estimate of future P/E dropping as the markets aren’t viewing the TaxScam profit growth as equal to real growth through organically increased earnings, and thus tempering appetite for increased stock prices due to what is really just a one-time boost to profit growth as a result of TaxScam.
Course, the bigger worry is that the Sky is Falling sovereign debt fanatics who have been squawking for the last decades as a smokescreen to cut social welfare spending might actually wind up being the broken close right twice a day. Corporate tax receipts are at a 75 year low as a share of GDP. The TaxScam is pushing the budget deficit to $1T a year. The OMB just revised its estimates and have added another $1T over 10 years to the Federal debt (an extra $100B a year on top of what was already estimated from TaxScam). The Jan – July 2018 Federal deficit is now at its highest since 2012 – the depths of the Great Recession when Federal borrowing to fund the stimulus while incomes (& tax collections) were falling. We are at tail end of what likely to be longest economic expansion in US history when tax collections should be booming and we are bleeding red ink like its the middle of the worst economic crisis since 1929.
Business cycle will end, and the red ink will explode, making the US – already a debtor nation – into a Trumpian level insolvent one.
catpal
OT but I wanted to give an update to my dog bite from wed night – since many here helped with great advice. I think landlord and I are entering the possible pre-legal phase – I gave her a note telling her that I would probably see a doctor about the dog bite, could I get a copy of the dog’s vaccination record, and that the Health Dept would contact her due to their concern about rabies. She knocked on my door and started yelling at me that it was just a scratch and I said that I still needed to be concerned about infection – and she then demanded about going to the ER right away – I said No. she was too angry for me to go anywhere with her. I went to the doctor yesterday morning before work and it is sore and bruised now but seems to be ok.
StringOnAStick
@Jim, Foolish Literalist: Homes in the $300-500k range are still like hen’s teeth here in Denver, but that is due to investors (REITs) coming in and buying up things in this price range for rentals during the 2008 mess. The issue is there is no supply, because these investors are doing so well as landlords they are not selling and people looking for starter homes are finding it very competitive. Some friends just did a home trade in that price range and so far it is all working out find, closing in a few weeks. Their realtor told them though when they listed their old place that the market was starting to soften. At this point I’ve read it has more to do with interest rates, and some people in the age and career point to be looking for a starter home are just plain giving up, saying they can’t afford to buy a home here.
It reminds me a bit about how cars suddenly became a leasing system, that the car makers figured out that people could spend X amount per month on a car and an outright purchase put too many cars out of people’s reach, hence the advent of leasing. Home prices have climbed so much (in urban areas mostly, not rural areas) that with interest rates rising and salaries not so much, the monthly payments are getting past what average people can afford. When this actually starts to really bite is a good question, and with El Donaldo’s glorious trade ware and tariff-fest about to be responded to by China, monthly living costs here are set to rise, and that bites into affordability calculations too. That said, I admit to being risk adverse and overly cautious about Wall Street in general.
Tom Levenson
@evodevo: Gotcha.
Right now, the curve isn’t inverted, but it sure is a lot closer to flat than it would be in “normal times.” One and three month notes are yielding for 1.9 and 2.01 percent, while the 10 and the 30 year bonds offer 2.95 and 3.09 respectively. Not quite the conditions that preceded 2008, but not exactly reassuring either.
trollhattan
I don’t have calendar space to weather a Great Recession do-over but am nearly paralyzed with the daunting task of shoving resources around in my various accounts from many jerbs. Sigh, wish I found this stuff at least a little fun, I just don’t.
In some chipper Friday news, NRA declare their very existence is threatened. Wouldn’t that be a shame–send them thots n prars.
Let’s have a big New York
welcomesalute for the NRA!NobodySpecial
The MOTU are desperately trying to hold the rally together long enough for Democrats to get voted in. If they do that, they’ll switch their bet to the other side of the market, let it all collapse, and let the fallout put their buddies back in so they can get more tax cuts and free money. They don’t care who gets hurt, because as 2008 showed us, they always get their money back first.
StringOnAStick
@catpal: I didn’t see your original story, what happened? It does sound like you’ve got a pissed off landlord now, and that has unpleasant implications for sure. Glad your injury is looked better today.
catpal
OT again – I got a formal letter from landlord with the dog’s vaccination record and she wrote “as agreed in the past” that I would not open the gate if the dog was there loose in the yard. We never had that specific a conversation about the dog and she knows he has “nipped” at my ankles a few times previously – so the “agreed to” is a lie. Should I write a response to her about that phrase?
Gelfling 545
I annuitized my 403 b account in January. I felt like Trump getting elected was a sign things were going to go to hell in a hand basket and wanted to be as safe as possible. My agent said at the time that it was hard to advise people because with Trump getting elected likelihoods no longer applied.
trollhattan
@catpal:
Do you have a rental agreement? Is it in there?
Jim, Foolish Literalist
@catpal: IANAL but I would send her an email, maybe with a screenshot of her letter so you have a record of what she said and your immediate response. As much for your landlord/tenant relationship as the dog bite
EthylEster
I am semi-retired now and have most of my retirement funds in fixed interest investments.
Money in the mattress conservative here.
I have several TIAA contracts that pay 4% and I’m not letting go of them.
My financial adviser told me that they did monte carlo simulations of various growth scenarios.
Earnings went up a bit with more equities in the mix but so did the variability.
So he said to solider on with my boring but relatively safe approach.
I put all the profits from the post election surge in fixed interest and index funds.
Note: housing prices have started to cool a bit in seattle.
Who know what is going to happen in the markets?
I did not sweat bullets in 2008-2009 because of my conservative position…lost < 10% of portfolio value.
I worked hard to save this money. And now I'm going to spend it. I am very fortunate.
MomSense
It was, in part, black of adequate retirement funds that caused my panic/melancholy last weekend. Ugh.
VFX Lurker
I moved all of my IRAs to the Vanguard LifeStrategy Moderate Growth fund in January 2017. I try to mimic that 60/40 asset allocation in my 401k, but I hope my IRAs are now safe from my emotions.
We’ll see.
MomSense
@MomSense:
Black should be lack.
germy
p.a.
3 sites ahead of the curve in 2006: Ritholtz, bonddad, Calculated Risk. Past performance does not etc etc
justawriter
@swiftfox: I have seen other stories about the high end real estate markets in Toronto and London are dropping fast as well. So it could be an international splat when the poop hits the air delivery device.
The Moar You Know
No large corrections for at least a year. More of the same- no big gains, no big losses.
catpal
@trollhattan: I had a rental lease for prior 2 years but this year she did not ask me to sign one and I did not ask why because I m hoping to move soon but was waiting a few months due to recent financial difficulties – she has cashed the last few rent checks and never said a word to me. She said horrible things to me after the dog bite – I am looking to move asap finding new place and borrowing money to move. Now this makes me worry about my privacy without a lease – if she would enter my apt and go through my stuff looking for any info for whatever reason.
germy
Robert Benchley: “The Causes of The Depression”
British Pathé 1930
debbie
I remember my dad telling me when I was a kid and he was teaching me about finances that if I wanted to invest in a company, the P/E to look for was 13/1. My oh my, how times have changed.
lgerard
Saw these guys demonstrating in downtown Boston today. A dozen or more guys in white outfits with white hats and a bunch of signs and banners. There were a few women as well, but they had the sense to duck under the eaves of a building since it was showering quite hard.
A new one on me. I wished I had a camera with me but I was just running out to the bank.
Ohio Mom
@catpal: I don’t think your landlady is at all reasonable, and I mean that in the sense of
“Someone you can reason with.” It doesn’t matter if she never mentioned this don’t-go-in-the-yard-if-the-dog-is-loose thing before or not, she insists that was settled long ago and you won’t budge her. Just pretend to yourself she’s demented and proceed accordingly.
You were smart to go to the doctor, and I am glad to hear you are healing up nicely.
Perhaps you have some leverage over the landlady because you are a good tenant who pays her rent on time. If you leave, she might have a month or more without rent money coming in, plus every landlord knows there are terrible tenants out there. You are a known, safe bet. At least until she loses the rest of her marbles…
Brachiator
There’s not much point in trying to second guess the financial markets. Corporate profits have been rising in some sectors, but as many have noted, much of this is related more to incorporating tax cuts than increased productivity.
We won’t get a good idea of how the tax cuts affect individuals or states until people start filing their tax returns next year (although there are indications that a significant number of taxpayers will owe money because they did not have enough withheld).
We’ve got trade wars and BREXIT. And most of all, Trump himself, the ultimate unstable wild card, making things up as he goes along without any guidance or pushback from Congress.
The oligarchs who normally funnel cash to the GOP can’t decide whether they still love Trump or hate him. This makes it harder for the average person who is trying to figure out what the hell is going on.
catpal
@MomSense: I can relate as I cannot even think about retirement even if I wanted to. The worst really seems to be that wage income has not increased and other expenses especially health care are constantly increasing so I am almost always broke.
smintheus
@catpal: Yes, you have to have a record of having rebutted that claim. She is trying an old trick, assuming you may not be smart enough to challenge her claim immediately. You can’t just send her a note either; it needs to be something you have your own copy of, like an email as suggested (with receipt for when she opens it).
debbie
@MomSense:
I’m with you. I lost everything, including employment, in 2008. I will be working until I die. I try not to think about it too much because thinking does no good. It won’t change a thing.
Goblue72
@Tom Levenson: Its softening – slowly – not tanking. The slowdown in sales is most prominent in the Inland Empire, which is basically where homebuyers go when they can’t afford LA County. California has a multiple decades long housing under-supply problem that started back in the mid-1970s when the anti-growth movement took root in coastal CA and has kept getting worse since as regulatory barriers to housing construction have grown over time. Prices have reached the silly phase and even well compensated tech employees are getting priced out. Its not tanking so much as buyers starting to refuse to pay stupid prices, and possibly some trimming of the sails due to rising mortgage rates and the fact that the TaxScam bill’s capping of SALT and MID hits California homeowners (and thus potential homebuyers) the hardest.
cmorenc
Meanwhile, the TSA is trying to cut $300 million from its budget, including a proposal to eliminate screening at more than 150 small to medium-size airports. How could anyone at TSA possibly forget that the 9/11 hijackers deliberately originated their flight schedules that morning out of a small Maine airport precisely because the security screening was nonexistent at such airports? All for a budget reduction to help just a bit toward offsetting the huge Trump tax cuts for billionaires.
geg6
@Yarrow:
October is historically a bad month for the market. I expect anything to happen in October.
Yutsano
@catpal: You’re a month-to-month renter. You still have protections under landlord-tenant law*. She still isn’t allowed to enter your property without permission and is still required to perform maintenance. And ending a month-to-month lease requires 30 day notice from either party.
*This varies greatly by state, please consult your state laws. Disclaimer: I am not a lawyer, just a tax guy.
M31
Can’t wait to see your book, Tom! I loved the book about Newton and the Counterfeiter, as well as the Planet Vulcan one, so am excited for your next endeavor.
As a musician, I was always amused that Handel invested in South Sea stock, made a bunch of money but got out well before it crashed, wisely. He was a very savvy investor and died a wealthy man.
Anyone out there interested in early 18th-C London social life, there is a recent excellent book by Ellen Harris on Handel, called “A Life With Friends” — Handel left very little in terms of conventional biographical material, so this is mostly a chronicle of his friendships and his neighborhood, and is fascinating.
cckids
@StringOnAStick:
I have this fear as well; when/if the Dems retake Congress, they will get blamed for the inevitable downturn in markets; it is coming no matter what happens over the next few months. Also, when D’s are back in control, suddenly the OMGDEFICIT will once again become the scariest monster in the closet.
Also, too, on NPR this week, I heard some money manager, when asked why the markets aren’t reacting more to DT’s craziness, reply that “business has just gotten used to uncertainty”. If I’d had a gun, I would have shot my radio. “Causing uncertainty in business” was the excuse used during Pres. Obama’s time in office for everything from businesses not bringing cash back to the States, to lack of hiring/expansion even when it was clearly needed, to being against the ACA. Now that we have an insane clown running the country, its just /shrug/ “whatta ya gonna do?”
Fuckers. Lying, dishonest, greedy bastards.
smintheus
@germy: Thank you for that. I love Benchley.
Yutsano
@Brachiator:
The 2018 filing season is going to be a nightmare. With all the significant tax law changes, withholding amount changes, and other unknown traps (did you know the Republicans failed to repeal the Employer Shared Responsibility Payment?) it’s gonna be a huge mess. And I’m saying that as someone who actually went through the IRS calculator and got an estimate for my refund of a grand $97.
Immanentize
@lgerard: Antisemitism is part of this shit.
Ohio Mom
@lgerard: I already knew there were anti-male circumcision activists who wrote about their cause but I had never heard of them protesting in er, costume before.
It’s not a cause I’m against, necessarily (I mean, not like the NRA, Right to Lifers, Tea Partiers, etc.), but given everything else going on at the moment that also needs protesting, they look a little silly and misdirected.
Immanentize
@cmorenc:
What TSA does is theater
germy
@smintheus:
He makes more and more sense, the older and more confused I get.
David Fud
@catpal: Landlord here. Keep it in writing if your landlord is, and make sure that you refute her statements if they are not correct. If you don’t, and it goes legal, you will have a written record going against you.
CliosFanBoy
my wife’s 401K is very healthy, but earlier this year I moved almost all of it into govt bonds and other safe harbors, leaving only 5% in the stock market. We had lost a bundle (on paper) in 08-09, but under PRESIDENT Obama we made it back and more.
TenguPhule
2019, the crash comes.
Expect the 2018 Christmas shopping season to suck after the Tariffs leaves shelves either bare or horribly marked up.
chopper
the thing that worries me about another recession is, we don’t have the means to help fix it this time – the fed is sitting on low-ass rates, so there’s little room to lower them and so they’ll have to go right to QE. the treasury won’t want to spend a dime on the fiscal side, and goopers in washington will try to blow up any attempt to do so.
Mike R
@Immanentize: From my prospective very annoying theater. Have almost quit flying anywhere. Can’t remember how many times that my gear has been dumped out do to carrying a scuba regulator. Don’t even want to think about how crowded the cabins are yuk. Maybe I just look like an easy mark.
smintheus
@germy: I started devouring everything he wrote when I was 10 or 11 years old. He made a lot of sense to this middle schooler.
TenguPhule
@schrodingers_cat:
They aren’t a major concern on that front.
The problem is that the American government owns most of the treasuries as collateral for Social Security.
That is a fucking major concern.
? Martin
I pay a lot of attention to the market. I agree that the forward profit expectations are more than a little optimistic, however, keep in mind that we’re in a period of massive stock buybacks, and that’s going to goose P/E ratios without profits actually going anywhere, simply by reducing the amount of outstanding shares driving the price up.
Put another way, corporations are sitting on obscene amounts of cash, have no fucking idea what to do with it, and are giving it back to investors in the hopes they can do something with it (we can’t). Impact on GDP will be zero, but stock prices are likely to go up because they are literally shrinking the size of the stock pool.
The problem here is the same problem I had in 2008. I might have faith in the individual companies I invest in, but I have no faith in the overall structure of the economy. In 2008 it didn’t matter how well run a business might be, it could crash and burn simply because it couldn’t respond fast enough to all the shit going on around it. Your business depended on credit – you were fucked, there was no credit. Today it’s ‘your business depends on trade – you’re fucked, some asshole who thinks he understands economics has decided to tax your raw materials – a lot.’
I’d say the stock market has a lot of faith baked into it that calmer heads will prevail on economic policy, and they might, but I don’t like to operate in this environment. That said, the issue above regarding corporate cash has me concerned. There are structural changes to a lot of key industries coming, they know they’re coming, and instead of investing into meeting those changes, they’re holding cash and waiting. TBH, by the time the change is realized, you’re fucked. It doesn’t matter if you have cash or not, you’re too late.
catpal
@Yutsano: Thanks for the reply – I thought so and NY has pretty good renter protections I think – I just have not had time to research yet.
@54 debbie – that is me too 2008-2009 I lost higher paying job and have not recovered financially. Recently lost a better paying temp job – so now I am working 2 part time jobs – and I have to hope for better in the future – but my experience has been that employers do not want to pay much but want to you to take on a lot of work responsibilities.
David Fud
@justawriter: London dropped because of Brexit. The institutional and grey money that went into that real estate market liked the ability to move Euros into the stable London market. Brexit injected risk into that, so investors are leaving it alone for now. The multiples on office building and such have been reduced. I know about a fund that essentially flips office buildings, and they are ok because they only have a portion of their holdings long, the rest turns over after they improve the project. This basically means they buy cheap (compared to before) and sell more expensive (but not as much as before). The net is the same.
TS (the original)
For what it’s worth & I don’t follow all he says, my financial guy said we’d get 2 good years out of trump & then …. I was surprised I thought trump would crash the markets sooner.
The worry is – a crash with this administration – trump & co will make it much worse – they have no idea what to do when things go wrong.
David Fud
@cmorenc: Lock the cockpit door, and all will be well. It is security theatre, not security anyway.
Elizabelle
I’m nerved out too. I don’t see that the fundamentals are as good as we are told.
lgerard
@Immanentize:
i figured that there had to be more to the story. Ordinarily I would have gone over and interrogated them because i enjoy poking under rocks, but it was raining too hard.
germy
@smintheus: Have you read the Wayward Press collection?
Interesting stuff, and made me doubt the Golden Age of Journalism I’d been pining for.
Patricia Kayden
This is exactly why NFL players protest. Hope they continue to protest despite NFL’s new policy. The police need to be stopped from engaging in this cold blooded behavior towards Black people for no god dang reason.
Elizabelle
@catpal: You know, the weird thing is, you have a written record of your side of it, but good. Contemporaneous.
I speak of the back and forth on this very blog. It’s probably better than phone records. Not only who you spoke to, but what you said.
germy
@smintheus:
Yes, that was my experience as well. Some kind soul had stocked my local library with all his books. First editions, too! I plowed through them, all the way through to the posthumous collections. And Gluyas Williams was perfect as his illustrator.
Oddly enough, I didn’t see him on film until many decades later.
catpal
Thanks for all of the great advice and help. I will probably keep asking for your help as you all are so wonderful! I am off to part time job 2 for today so I will comment again soon. Wish you all a good evening.
Mrs. D. Ranged in AZ
I’m queasy too. Even though I can ignore market gyrations for another decade or so I’m still wondering if leaving my money in my IRA is a good idea. Although I’ll be darned if I know what else I can invest it in that will provide anywhere near as good a return. And it’s not like I have any financial vehicles through work. In fact, he doesn’t provide much of anything except free water. My boss thinks providing health care to his employees is “not his problem to solve” (and yes, that’s a literal quote).
Omnes Omnibus
@germy: Having a study carrel next to the Benchley section in the library did not help my freshman year grades.
azlib
@swiftfox:
An indicator of a coming recession is when the bond yield curve inverts. e.g. long term bonds are cheaper than short term bonds. Has not happened, yet, but the yield curve is pretty flat right now. I suspect the Fed is looking at this very carefully as it plans more short term rate increases.
I am not actually that surprised to see this result. Inflation is pretty low and long term rates are a reflection of inflation expectations.
efgoldman
@StringOnAStick:
Are are looking eventually to sell our (small ranch) house in Northern RI and move to the Arlington VA are to be near the kids. Right now the market is super hot – most houses are getting quick offers above asking. How long it lasts? Who knows.
CliosFanBoy
@efgoldman: you may have to look further out than Arlington…
Another Scott
A few things that everyone here probably knows:
1) Market timing almost never works. If you get out now, when will you get back in? How comfortable are you in missing gains on the way up?
2) Low cost, broad-based, index funds are the way to invest in the stock market. Management fees and excessive trading kill real returns.
3) Dollar cost averaging protects you investors from emotional gyrations. You buy (relatively) more shares when the price is low, and (relatively) more shares when the price is high.
4) By the time you hear in the popular press about some grand scheme that is making everyone rich, it’s almost certainly past the peak and dangerous to even think about investing then. E.g. Bitcoin is at $7,400 today when it was above $19,000 last year.
I think it’s hard to know how instructive historical P/E data is any more. Donnie just gave businesses and the MoTU huge tax cuts. P/E probably should stay high for that reason alone. There’s also still a huge amount of money out there with owners that are looking for high, yet safe, returns. If people get out of the US stock market, where will they go instead? Real estate? Seems unlikely as interest rates are rising and returns aren’t that great in most cases. Bonds? With Donnie and the GOP blowing up the deficit? Don’t think so. Pork Bellies? With Donnie starting trade wars with everyone? Don’t think so. Russia or China’s stock market? The rule of law in the USA is still worth an awful lot compared to those places…
One never knows when some technological advance or disaster will hit, of course. Life is risky.
My $0.02.
Now to see what everyone else said…
Cheers,
Scott.
(Who is a STEM guy, not a finance guy.)
Bess
The market goes up and the market goes down. Over the long run the market goes up.
If you have superior knowledge you could get out right before a correction and back in just as the market picks up again and make some nice additional profits. But no one has that superior knowledge. Too many people tend to get out at the wrong time (e.g., when Trump was elected or during the ‘crash’) and then hesitate before getting back in, waiting to “make sure the recovery is for real”.
Best strategy is probably assume the market will grow over the next ten years and twenty years like it has in the past. There will be periods, usually lasting about two years, when stock prices will be down but then the market will recover and continue on up. Put your money into index funds and leave them the hell alone. Between bad timing and tax losses you’ll probably screw yourself over by jumping in and out.
Don’t put any money in the market that you know you will definitely need, short term. Don’t put your kid’s tuition money in the market if she/he is going to need it in the next couple of years. Put your kid’s tuition money into the market when they are in daycare through elementary school and start taking it out when they are in high school.
If you need part of your capital for living expenses After retiring then keep a couple of year’s needs in a non-volatile account. CD sort of investment. If the market goes sour then use your CD money until it’s gone or the market comes back.
If you have to sell some shares three years into a downturn you’ll almost certainly be getting more for them than if you had sold a year or two earlier. And odds are very good that you won’t have a loss at all.
efgoldman
@CliosFanBoy:
We qualify for elderly/ADA housing.
We’ll have to downsize quite a bit.
?BillinGlendaleCA
@Omnes Omnibus: Happy b-day, bud.
smintheus
@germy: No, first I’ve heard of it.
smintheus
@germy: I had no idea that Benchley did films until I saw his Treasurer’s Report.
J R in WV
@Schlemazel:
So, when you take everything “Out of the market”, where did you put it?
Be specific about the kind of things you moved to, please… We are retired and mostly invested in specific companies. I too am nervous about the market with Trump stomping on international trade, and don’t know where you go to get out of equity markets.
JPL
@Omnes Omnibus: Happy Birthday!
JPL
@efgoldman: Housing prices in parts of the Atlanta area are higher now, then before the great recession. I’m thinking of selling, because at my age who needs close to an acre, but then where would I go. If the market is still strong in the spring, I’ll probably sell and rent for awhile.
CliosFanBoy
We’re retirement age more or less. (My wife can retire in a few weeks, though she will not). I’ll not be too sad if we miss another increase.
p.a.
@efgoldman: Is there an influx of South Asians up there, or just an influx of South Asian restaurants? Godavari, Bollywood Grill and another just on Mendon.
Omnes Omnibus
@?BillinGlendaleCA: @JPL: Thanks. Don’t forget Subaru Diane.
MagdaInBlack
@MomSense:
Right there with ya. I do my best not to think of it, altho I admit to occasional panic attacks. I remind myself I’m not the only one, there’ll be company under the overpass. ?
debbie
@Omnes Omnibus:
I missed the original announcement — happy birthday!
Humdog
Given the number of women who’ve admitted to getting hard hit by the Great Recessionand worried about ever retiring, I wish you could get a Balloon Juice Golden Girls roommate thing going to stretch all your retirement dollars. Just have to pick a state you can all live with.
Omnes Omnibus
@Humdog:
Mommy, I am scared.
Brickley Paiste
I thought the election was a tossup and that markets would crash if Trump was elected so I dumped everything I held and went all cash in late October
So much for my market savvy.
Mary G
I sold some funds last winter when the Dow was over 26,000 even though I didn’t need the cash, I figured the gains were on paper and would not survive long under Trump. In my 401k I got out of high risk funds and into a boring mixed income fund that doesn’t pay much but barely went down after 2008. I have a few bits of individual stocks my mom left me, like 64 shares of Union Pacific, but my own money only goes into no load mutual funds.
The only info I have on the CA market is my own house. It’s estimated value went up 20% between January and June, which screamed end of the boom around the corner to me. Houses on my block almost never go on the market and I got the handwritten letter from the young couple from Silicon Valley who made a bit of money and want to move back here, with pictures of adorable children and dog. Last time that happened was 2006.
Who knows? Interest rates on savings are going up fast and that’s not great either.
ETA: @Omnes Omnibus: Happy birthday to you and SD.
JPL
@Omnes Omnibus: She’s probably out celebrating, but happy birthday to Suburu also. In fact I need to arrange a luncheon date with her soon.
Brickley Paiste
@J R in WV: look into CD ladders.
efgoldman
@p.a.:
The decent Thai place on Front Street in Lincoln is gone. Nearest is at Twin River; we got delivery from there – it was dreck. No Viet closer than Pawtucket.
ETA: Don’t care for Indian. Sorry sc
imonlylurking
My favorite indicator is when Warren Buffet’s style of investing (value) gets called out of touch in the mainstream financial press. Happened about a month ago. I’m mostly out of stocks now. I just changed jobs so I’ve got most of my 401K in CDs spread out over the next six months. I’ll keep doing that until the stocks on my buy list hit the valuations I’m willing to buy them at.
Another Scott
@CliosFanBoy: My step-mom retired when she was around 65 and she’s 73 now. Fortunately, or maybe not, women in her family regularly live to be over 100. So she could easily have another 30 years ahead of her…
But I understand where you’re coming from. Peace of mind is worth a lot. But even retired people need to have some of their savings in investments that have some opportunity for growth.
Someone above mentioned pensions being more common in the past. That’s true, but we shouldn’t think that everything about that system was great. My grandfather was a truck driver and a Teamster. (IIRC – some of the following may be garbled) He had a pension via the Teamsters. Which was nice. But the benefit was such that every time he got a Social Security COLA, his Teamsters pension would be cut by the same amount. Shortly before he died in the early ’80s, his Teamsters pension was a whole $100 per month… :-(
Hang in there, everyone.
Cheers,
Scott.
Jim, Foolish Literalist
@J R in WV: you didn’t ask me but… most of my money is with Vanguard. When I consolidated my investments with them a few years back, they did a portfolio review and pick the funds and weighting for me. I sometimes think it’s actually too conservative, but right about now that feels pretty good.
Lizzy L
I am retired. I don’t depend on my investments for anything – they are my emergency fund. Like you, Tom, I’ve been increasingly uneasy lately. This year I went from 10 percent cash to 30 percent cash. I own some bonds but most of my non-cash investments are in blue chip stocks. I expect to sell more next year.
My general advice: like the song says, the future’s not ours to see. You can’t time the market. Do what allows you to sleep at night. Good luck.
Ruckus
The great recession was based not on fundamentals but on pure greed and sloth. Not one of those that caused the great recession paid one penny for their hubris. Those of us who suffered on the other hand mostly paid all the pennies. Which means that somehow they will do the deed again and screw up the market. And of course this time, with our glorious leader and his band of merry fuck ups, we will be even worse off.
Now if you are asking me when things will come to a screeching stop, Wiley Coyote style, about 25 feet past the cliff and 2 miles up, I have no clue. I expect pretty much any day now. We are busy, busy, busy at work and my boss once told me that he always gets busy during a down turn. He has no reasoning why, just experience. My business experience is exactly the opposite, when it fall off the cliff, I’m at the bottom playing catch. Never a good place to be when the world is falling.
But this place in history really is a different place than we’ve been before, a major economy run, or rather, destroyed by it’s own “leader,” a moron of epic proportions, a financial genius of so far less than stellar performance, they don’t make negative numbers that big to rate how bad he really is. Who knew that laundering money, making horrible business decisions, being a major fucking asshole, lying, cheating and being in general a dick, would be a problem? Well besides the 63,000,000+ people who voted for his opponent.
Roger Moore
@? Martin:
I’ve heard this but it makes no sense to me. If the market is rational, buying back shares should have no effect on the market price. Why? Because all the money they’re paying out is coming out of equity, making the company less valuable. The decrease in the company’s value should be exactly equal to the amount they’re spending on stock, so the price shouldn’t change.
To give a concrete example, suppose a company has a market value of $5 billion, let’s say in the form of 50 million shares worth $100 each. The company has $1.5 billion in cash on hand and decides to spend $1 billion of it buying back stock. At the current price, that should be 10 million shares, leaving 40 million shares. At the same time, the company will now have $1 billion less cash on hand, so the value of the company should drop by $1 billion to $4 billion. Divide that $4 billion by the 40 million shares, and you still have a stock price of $100/share.
The only way the stock price could increase is if the company loses less market value than the amount of cash it’s handing out. That would mean that investors are effectively discounting the value of cash held by the company relative to its actual value, which implies they think management is too stupid to make good use of its money. So if the management seriously expects a stock buyback to increase share prices, they’re admitting to being a bunch of idiots who don’t know what to do with money.
p.a.
@efgoldman: 2 very strange Thai places near me: Lanna Thai & Speederia Pie in Pawt across from Murphy’s Liquors~ Thai and pizza, hole-in-the-wall. I asked the Thai waitress/owner how that came to be. No paraphrase: “My husband is very white, pizza’s all he can do.”. ?
There’s another place on Douglas Ave near Douglas Lumber: full Thai menu, pizza, burgers, and wings. Not bad. And if you’re going out but unsure what you want…
Roger Moore
@Mrs. D. Ranged in AZ:
Actually, an IRA is a great place to have your money. An IRA is just a tax shielded account; you can put the money in your IRA into almost any kind of financial vehicle, and you don’t have to pay capital gains on sales until you start withdrawing money from it*. So you can afford to sell any stocks in your IRA without adverse tax consequences, which you can’t do with a conventional investment account.
*With a Roth IRA, you don’t even have to pay capital gains when you withdraw, provided you wait until retirement age.
Chris T.
@Roger Moore: Here is the problem:
That’s only true if the way you are valuing the company is by looking at its value.
Which, of course, is actually a really good way to value a company. But it’s totally static. It does not measure how much the company will earn over its lifetime (however long that may be), so another way to value the company is to attempt to measure its total income over all of its future, divided by however long that will be, and then discounted back to present value. (That’s the Warren Buffet / Graham method.)
This is probably the best way to do it. But it’s hard. So some people use P/E (which really should be E/P, but never mind the division by zero…): price-to-earnings ratio. If you use that measure, well, if Company C buys back so much of its stock that instead of 2N shares there are only N shares, and the earnings are the same next year, well, next year Company C will have a twice-as-good P/E.
Ultimately, it boils down to: different people compute value differently. Some of them use a measure where stock buybacks “work”.
Ruckus
You guys have money? Damn……..
I got so hosed by the great fucking recession that I literally had to start all over. I’m not doing too bad but just turned 69 and I’m still working and looking to have to do that for another couple of years. And at this point health wise I may not be able to do that. So at that point I have no real plans other than trying to exist. I have enough income to expat to Costa Rica or Panama, but that’s about it. And even then I’d have to live rather conservatively money wise. Now I expected to have a bit in my mutual fund but that’s been gone now for 7 yrs.
Day by day, one foot in front of the other. Really that’s all there ever is. This concept that anyone but a rich fucker would have enough to retire comfortably is, for at least the foreseeable future, a pipe dream. And I quit smoking a long, long time ago.
Another Scott
@Roger Moore: The Motley Fool:
I think the bolded text is the reason why they’re popular now… :-/
Your point about what should happen in a “rational market” is a good one. But, of course, we know that markets aren’t rational. Especially when companies are run by people who treat the firm as a personal treasury to be looted as completely and quickly as possible…
Cheers,
Scott.
WhatsMyNym
I’ve been following real estate for decades. Housing prices go up for the better houses and then everyone thinks their mediocre house is worth the same or more. Throw in rising interest rates and new homes coming on the market, and you will see some overall downward pressure on prices.
Chris T.
To address Tom’s original question: yeah, the market is probably overvalued. The issue is the usual one: the market can remain irrational longer than you or I can remain solvent.
(What we really need is a lot of inflation—wages and prices both, because of human nature with anchoring—along with a steady improvement in the Gini coefficient, which probably requires a marginal tax rate of ~70% and treatment of all income as “income”. In other words, magic pixie dust.)
Another Scott
@Chris T.: You remind me of several posts at AngryBearBlog.com. E.g.:
Of course, there’s a lot more going on in the data than can be reduced to just marginal tax rates and GDP growth rate numbers. But it’s clear from the data that the top marginal rate can be and, as you say, should be much higher.
Cheers,
Scott.
? Martin
@Roger Moore:
Right, you’re pretty close here. Your description is exactly why the market cap of the company (the overall value of the company) doesn’t increase – because each dollar out is offsetting some # shares held.
But the theory here is that it’s the PE ratio of the company that also remains fixed. Investors aren’t buying cash – that’s boring. Why spend a dollar to buy interest in a dollar? Investors are buying future profits, and when the number of shares goes down, the PE ratio of the company also goes down. Cash isn’t part of earnings, it’s just a held asset, and the loss of cash (presumably) doesn’t say anything about the prospect of future earnings, so the market tries to correct the PE in this case. So, it winds up just being a supply and demand problem. The company takes shares out of circulation by buying them, but has to offer above market rate in order to convince investors to let go of them. That raises the price of the stock because they’ve added demand. They then don’t return those shares to the market – they’re retired. If a minute later another investor wants to buy, those shares are no longer available to buy, so they need to push the price up a little bit more to convince someone else to sell who wasn’t willing to sell at the price the company offered.
In reality the buyback has a slightly stronger impact on the stock price because it signals that the company is sufficiently confident of those future profits that it doesn’t need to hold cash for some future need – they’re planning on replacing that cash through profits.
Apple is the clearest case of this as they are absurdly good at generating cash and hold so much of it. They’re currently executing a $100B buyback program (basically buying one Qualcomms worth of stock) but investors are confident they can replace that cash within 2 years. When PEs are reported, they are sometimes reported in two ways – forward PE, and forward PE ex-cash. Apple’s forward PE is 18.8 (which is absurdly low for a company that just hit a $1T market cap) but they have $250B in cash, so on the assumption that the $250B is not assets at risk of devaluation (they’re just dollars) their PE is assumed by some investors to be 14.1. That’s the company is worth 14x the expected future earnings, because if they folded up tomorrow, at the very least there’d be $250B to distribute to investors – it’s not assets at risk.
dnfree
@Brachiator: Speaking taxwise, when they changed the “marriage penalty” the last time around with tax reform (1980s?), there were special forms to fill out to calculate what you would owe under the new system, so that’s how we set up our withholding. When tax calculation time came, our input to the form had been pretty accurate, but we wound up owing an extra $1500, which was NOT chump change at that point. So that’s what I have been thinking with this new law–how will it really fall out when people calculate their taxes?
dnfree
@smintheus: I grew up on Benchley and Thurber.
germy
@dnfree: Perelman, I also remember reading some of his essay collections.
Procopius
@PsiFighter37: If you check Naked Capitalism, specifically Lambert Strethers’s 2:00PM Water Cooler, you’ll find he includes statistics. There’s a lot of noise, but he includes manufacturing indexes, shipping, commodities futures, all kinds of stuff. For political reasons I was hoping for a severe shock this year, but it looks like your estimate is supported by a lot of market evidence. Of course if Trump bombs Iran all bets are off, but it looks like, despite the scary price/earnings ratios, the economy is pretty solid. Something has to be done to improve the EPOP, the percentage of prime age workers actually employed, and break the conspiracy to suppress wages, but there’s no obvious bubble out there like there was with the housing market from 2003 onward.
germy
@dnfree: The interesting thing is, Thurber idolized Benchley. I remember an essay he wrote: “The Incomparable Mr. Benchley” which was over the top sentimental. Talked about the angels having to stay up late in heaven now that Mr. Benchley is there, etc.
Recently, I read some letters Benchley wrote from Hollywood to his wife in Scarsdale. His wife had mentioned their son Nathaniel, a young journalist, wanted to write a profile of Thurber.
Benchley’s letter basically said “Thurber and his circle are some of the biggest neurotics in the country. I wouldn’t bother, it’ll be a pain in the ass trying to please them.”
? Martin
@Another Scott: I don’t think so. I mean, you’re exactly correct to the benefits to executives, but I really think it’s more a matter, at least for the largest companies, that they legitimately don’t know what to do with that money. You’re Apple and you have $250B in cash and generate roughly $50B per year in profits. Do you build factories? Sure, but they’ve done that – in fact, they are often the bank for their suppliers – giving them cash to build in exchange for priority on product (or outright exclusive). Apple has capex up in the range of massively capital intensive companies like GM and Exxon. Do you buy other companies? Perhaps, but $250B buys you Walmart, or AT&T, or Chevron, or Intel. That just puts them in legal jeopardy. What about buying out suppliers and moving production to the US? Well, they could do that, but enough of their suppliers are state-owned and not for sale that it would only make the supply chain inefficient – dumping money into moving parts back and forth, but no real output or jobs (lots of pollution though).
The best use for that cash so far has been to serve as a kind of endowment and to offset future expenses. Apple paid to have enough solar and wind capacity added to offset their entire global power usage. That’s good PR, but it also means that their future power bills will be more or less $0. They’ve been buying forests to set up sustainable paper production. Same thing. They’ve been investing in recycling efforts. Same thing. The taxes to repatriate all of that foreign cash – they had already put that in escrow – they repatriated $200B with no hit to earnings. At some point your best move is to concentrate the shares of the stock because it brings ownership of the company into a little bit tighter focus.
Yes, it helps the executives, but for companies like Apple where virtually everyone gets stock options, it helps pretty much every employee as well.
J R in WV
Thanks all for the advice, everyone!
I’m not sure a Vanguard Fund is equal to cash… Or other mutual fund companies. My 457 fund (a state government version of af 401) was in 4 mutual funds selected from a list of 30 or 40 by my financial advisor, who we have been with for 35 years or so. It dropped nearly 40% in 2007-08, after which I retired.
All that loss has come back OK over the past 10 years, but now we have an ass in charge of the world economy, or all of it he can grab hold of. I’ll talk to MB next week, thanks for the catalyst to do so in a timely way. Maybe uncut diamonds? No, no, those are just rocks, and deBeers has a quarry full of them. Gold has had a run-up the past 15 years or so…
We do have fixed income from our pension/social security, which is good unless inflation gets up to 1978 levels… hmmm. What to do!??!
Another Scott
@? Martin: It’s dangerous to democracy for huge companies to hold so much cash.
And it’s been going on for a long time. St. Louis FED:
Corporate research (pure and applied research, as opposed to development) has been decimated over the years (Bell Labs, IBM Research, GE Corporate, etc., etc. are gone or are shells of their former selves). “Development” is important, but it’s not research. Corporations aren’t collecting vast sums of cash to fund research.
Corporate taxes are low and have been falling for a long time. Returning statutory corporate taxes to levels of the 1960s (e.g. around 50%) would probably help a lot.
Sorry, I don’t accept that companies with huge mountains of cash have no choice but to keep the cash overseas, or use it to buy back stock or pay huge one-time dividends. They could cut their prices. They could pay their employees more. They could stop demanding subsidies and huge tax breaks from states and localities for their factories and offices. They could hire more people and reduce their employees work hours to help them restore a sensible work/life balance. They have lots and lots of choices.
They’re collecting huge mountains of cash because they can. And because that cash lets them pressure governments to give them even more power.
My $0.02. YMMV.
Cheers,
Scott.
J R in WV
@Another Scott:
Your comments about research labs is right on. IBM and Bell Labs created most of the IT infrastructure we use today, yet no one is doing that research anymore. A Shame.
TCS
@catpal: catpal seems to be a landlords nightmare.
Noah Brand
The lesson I take from the South Seas Bubble, ever since I first read about it in Mackay’s Extraordinary Popular Delusions And The Madness Of Crowds, is this:
Capitalism’s first act on earth, as it stepped forth into the dawn, still damp from birth and yet unconscious of its power, was to crash the British economy. We forget that at our peril.
Bess
Capitalism started when the first cave person had something that another cave person want to us and the owner asked for a payment for use.
Ogg’s most excellent sharp stick earned her a piece of the bunny that Egh speared with her stick.
PJ
@Bess: That’s not actually how hunter/gatherers divide food or other things of value. The notions of a surplus, and of debt that can be quantified, and its later corollary, money, only come into play in agricultural societies (so, roughly 12,000 years ago).
scottinnj
@? Martin:
Just to be clear, Apple (like most companies with significant unrepatriated earnings) did in fact face a repatriate tax under the Tax Cuts passed. For apple, their so-called ‘toll tax’ is around $36 billion, which will be payable over 8 years. Roughly speaking the one-time tax was 15.5% of foreign cash. Apple will pay that $36B over time and they can repatriate the cash (and importantly cash from future earnings) without further tax consequences
scottinnj
@Roger Moore: The value is you lower the share count over time. Let’s say the company today has 50 million shares outstanding at $100 share, so it is worth $5 billion. It has zero cash and zero debt. This year its profits are $250 million, so it is trading at 20 times its earnings. It invests fully in keeping its factories running and people happy. If its free cash flow is equal to its profit, it has $250 million of cash. It doesnt want to do an acquisition so it calls Merrill Lynch, takes the $250m of cash it made and buys 2.5 million shares. Now, it only has 47.5 million shares outstanding. But if we assume the market value equals the future cash generating capacity – $250 million in perpetuity – it is still worth $5 billion. $5 billion divided by 47.5m is about $105.26, so my stock goes up.
I’m being very simple here but the point is that the metric when you buy a share is earnings per share, and if the company is expected to buy stock (ie about 5% of its shares per annum as above) while the ‘pie’ doesn’t grow, you ‘share of the pie’ grows over time.
scottinnj
@Another Scott: If the Dow Jones fell 25% tomorrow…it would take us back to the same level that prevailed on the day DJT was elected President.
I usually recommend to people that they look at a target age based fund – Vanguard and other major firms have these – which allocate specific % of the fund to stocks/bonds/cash and gradually get more conservative over time. The key thing about these funds is that if your desired allocation moves they will adjust. That is if your target allocation is (say) 50% in equities, and the stock market goes up a lot such that you now have 55% in equities, they sell to get you back to 50%. If the stock market falls and you now only have 45% in stocks instead of 50%, you buy. The decision is basically on autopilot.
Basically with this approach you buy when stocks are low, and sell when stocks are high. You wont buy at the absolute bottom and wont sell at the absolute top. There are lots of ways to make money, but I think ‘buy low sell high’ has proven its value over many many many years!
AnonPhenom
It’s a shame this is quite nearly a dead thread as no one has mentioned hedging your investments with options.
For those unfamiliar with Puts and Calls, this is an excellent introduction.
They are an excellent way to reduce downside risk if you believe, as do many here, that this cycle is ‘long in the tooth’ and the markets are near their peak.
Another Scott
@AnonPhenom: The problem with Options is that you have to get the direction of the move correct – tough enough – but you also have to get the timing of the move correct. Almost nobody can get the timing right.
It’s like the old joke says:
Q: What’s the best way to make a small fortune?
A: Start with a large fortune!
:-/
Motley Fool:
Caveat emptor.
Cheers,
Scott.
Beth
@?BillinGlendaleCA: Agreed. Here in the Bay Area, and throughout much of Northern CA, real estate is doing very well, with demand far outstripping supply, particularly at the mid to low end. The exception seems to be remote large acreage with abandoned marijuana grows, little infrastructure, and huge weed hangars. Everyone seems to be trying to unload their properties at once, and I watch the inflated prices go down over time. Everyone needs a hobby, and that’s one of mine.