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Old 09-14-2012, 11:26 AM   #61
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I thought the P/E overall was under 15 and was still historically low?
I look at this skeptically, though. A P/E of 15 didn't seem all that high in an environment where the economy was being propped up by heavy and steadily increasing personal, corporate and government debt loads that enabled high GDP and earnings growth. But when that train leaves the station, can there be enough earnings growth to justify that as a "reasonable" multiple? I'm not sure.

One would have to see sustainable 3-4% GDP growth and 10% earnings growth (or more) to justify 15 as a "reasonable" P/E.
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Old 09-14-2012, 11:39 AM   #62
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One potential side-effect of this on employment: It could actually make the unemployment situation worse as some retirees who hoped they could "tread water" with terrible rates on savings for a little while may have to throw in the towel and look for a j*b until they get more than 1% on savings and CDs again.
Of course if they have any money in stocks . . .
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Old 09-14-2012, 11:40 AM   #63
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That 10% earnings growth we used to expect was in an environment of 4-5% inflation though.

In an environment of 2% inflation, earnings growth doesn't need to be as high to justify a P/E.

Even without any growth, a P/E of 15 is an earnings yield of over 6.5%. I'll take that over sitting on cash.


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I look at this skeptically, though. A P/E of 15 didn't seem all that high in an environment where the economy was being propped up by heavy and steadily increasing personal, corporate and government debt loads that enabled high GDP and earnings growth. But when that train leaves the station, can there be enough earnings growth to justify that as a "reasonable" multiple? I'm not sure.

One would have to see sustainable 3-4% GDP growth and 10% earnings growth (or more) to justify 15 as a "reasonable" P/E.
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Old 09-14-2012, 11:41 AM   #64
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One would have to see sustainable 3-4% GDP growth and 10% earnings growth (or more) to justify 15 as a "reasonable" P/E.
PE of 15 equals an earnings yield of 6.7%. If earnings stayed the same in real terms (ie increased at the rate of inflation) then I say the investments yield 6.7% long term (either capital appreciation by reinvesting earnings into the business to grow earnings even more or dividend payouts).

Pretty hefty risk premium vs bonds paying between zero to a few percent. And that is based on zero real growth in earnings forever.
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Old 09-14-2012, 11:41 AM   #65
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Are corporations in debt? I thought they had record cash balances.
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Old 09-14-2012, 11:42 AM   #66
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Are corporations in debt? I thought they had record cash balances.
It's very industry-dependent. Manufacturing companies are capital intensive and are likely to have debt on the books. Technology companies, in contrast, tend to have very little debt in relation.
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Old 09-14-2012, 11:47 AM   #67
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I meant like for the S&P as a whole.

They haven't been adding jobs, while still generating good profits.

But with real low interest rates, it might not be a bad idea to borrow, issued more bonds.
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Old 09-14-2012, 11:50 AM   #68
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An interesting interview with Ray Dalio, a successful hedge fund manager CEO Speaker Series: A Conversation with Ray Dalio - Council on Foreign Relations

The developed world has too much debt. The Central Bankers are not trying to fix that, just lessen the pain and avoid a repeat of '30. We have a long, difficult trudge ahead.
I find it ironic that you are using a CFR website to highlight your point that the developed world has too much debt.

The CFR was established by bankers, to help ensure that the developed world remains in debt.
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Old 09-14-2012, 11:53 AM   #69
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Hasn't the Fed indicated that it wouldn't be taking these kinds of measures if fiscal policy was more proactive?
The Fed has been asking for a long time now for some fiscal help. So I think the answer to your question is probably "yes."

I think most economists agree that fiscal policy is ineffective when the Fed has the willingness and ability to offset it (e.g. deficit spending isn't expansionary if the Fed is tightening to keep inflation in check.)

Now, with the Fed hard up against the zero bound there is general agreement (although not complete) that Fiscal policy would be effective because not only won't the Fed act to undo it, but is limited in its ability to add more or less stimulus. In that environment, any fiscal action that helps or hurts is not buffered by counterveiling monetary policy.

To this point, Bernanke said in his press conference that he doesn't think his remaining tools are strong enough to prevent a recession if we go over the "fiscal cliff" - which is really just the opposite of a fiscal "stimulus."
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Old 09-14-2012, 11:53 AM   #70
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just to throw a little good news in the thread - If the dollar weakens, it should help out by making our exports cheaper and more competitive globally. That means domestic consumption and demand doesn't have to be the driver of our recovery if folks overseas are buying up our goods and services due to low prices (denominated in their overseas currencies of course). Although historically domestic demand has been a HUGE component of economic growth in the US.

As someone else pointed out, housing starts still seem to be in the dumps, although it is a varied market nationally. At some point we will need to build more new dwelling units to replace aging and obsolete units and to accommodate net immigration and population growth due to births and kids becoming adults, and adult kids moving out of mom and dad's house (once they get jobs!).
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Old 09-14-2012, 12:02 PM   #71
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I thought the P/E overall was under 15 and was still historically low?
Cue the entrance of h0cu5...
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Old 09-14-2012, 12:19 PM   #72
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I meant like for the S&P as a whole.

They haven't been adding jobs, while still generating good profits.

But with real low interest rates, it might not be a bad idea to borrow, issued more bonds.
Why would they add jobs or start any large capital intensive investment in the US? Between the EPA and the govt regs, there's no incentive for them. Apple has about $100 billion or so in CASH........
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Old 09-14-2012, 12:25 PM   #73
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Lots of cash is most often a reflection of inadequate demand and usually lots of that cash is overseas.
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Old 09-14-2012, 12:27 PM   #74
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Cue the entrance of h0cu5...

Figured he was still rakin' cash from a book deal or speaking engagements.



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Old 09-14-2012, 12:32 PM   #75
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I meant like for the S&P as a whole.

They haven't been adding jobs, while still generating good profits.
Sure -- when you have a terrible economy you can use fear of the unemployment line as a "motivator" to make your workers work more hours with frozen pay -- the work increases, but the number of people to do the work falls. All while pay is flat or falling. Ain't life grand?

And manufacturing jobs (which we are losing) scale almost linearly between sales and jobs. Building software or selling zeroes and ones does not. If you're an automaker, if you sell 10x as many cars you need *almost* 10x as many employees. If I'm selling a piece of software, especially an electronic download, how many more employees to I need to sell 10x as many copies? MAYBE a few more, but probably not even twice as many -- let alone 10x as many.
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Old 09-14-2012, 12:32 PM   #76
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Why would they add jobs or start any large capital intensive investment in the US? Between the EPA and the govt regs, there's no incentive for them. Apple has about $100 billion or so in CASH........
That's a political talking point.
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Old 09-14-2012, 12:33 PM   #77
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Lots of cash is most often a reflection of inadequate demand and usually lots of that cash is overseas.
And also allows businesses to turn their R&D departments into M&A departments instead, as more companies are expanding their product lines not by developing them in-house, but by buying smaller companies producing them. This is very common in technology companies, though Apple has mostly been a notable exception.
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Old 09-14-2012, 12:40 PM   #78
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Why would they add jobs or start any large capital intensive investment in the US? Between the EPA and the govt regs, there's no incentive for them. Apple has about $100 billion or so in CASH........
One of the ancillary benefits of yesterday's Fed action is that we get to put claims like this to the test. If the result of massive Fed intervention is accelerating inflation without any significant improvement in the labor market open-minded people will know the economy is facing supply-side constraints like those mentioned above. If, however, the labor market improves without accelerating inflation those same open-minded people will conclude that demand-side factors were constraining the economy. If nothing much happens, we'll conclude that "unconventional" monetary policy is a flop.

Incidentally, the current low interest rate / stable inflation environment in the face of almost four years of unprecedented monetary expansion argues strongly in favor of the last two conclusions at the expense of the first.
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Old 09-14-2012, 12:40 PM   #79
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There are fewer and fewer pure software companies.

Even MS is getting more and more involved with producing hardware products.

Apple pours billions to secure the supply chain, to be able to move tens of millions of product each quarter. But they get great returns on those billions so their cash position keeps growing.

This article cites $3.6 trillion in cash:

Companies, Flush with Cash, Share More With Shareholders. Finally. | Business | TIME.com

But this more recent article indicates corporations are taking advantage of low rates to refinance debt by issuing more bonds at lower rates:

Corporate Bond Market's Busiest Day in 2 Years - WSJ.com
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Old 09-14-2012, 12:52 PM   #80
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