Friday, November 25, 2011

Weekly Update 11-25-2011

Is the value of corporate America, as measured by the S&P 500, undervalued?  This is "the question" pretty much all of the time, so let's look at The Wealth Strategies version of the answer.

Every month I update The Seven Signs of a Changing Economy.  Sign #6 is the S&P 500 earnings per share (EPS).  To be most fair in the earnings estimate we use an average of the estimated earnings reported by several research firms.  This estimate is plugged into a business school "rule of thumb" calculation that is quick and easy, THE RULE OF 20.

The Rule Of 20 also takes into account the rate of inflation.  The rate of inflation can be difficult to measure, as I have written about in prior blogs.  The reason is that the BLS inflation data EXCLUDES food and energy, but does INCLUDE housing with a 40% weighting.  Of course food and energy costs are up a lot and housing is down a lot, which skews the inflation number down a lot.  So, we do what all smart people do, we make a reasonable guesstimate!  Our guess is the inflation rate is 6%.

Here is The Rule Of 20 Fair Market Valuation:  you take 20 and subtract the inflation rate of 6% which equals 14.  This becomes the multiplier.  Thus, you would take 14 X the earnings per share estimate for 2012 of $105.00.  14 X $105.00 = S&P 500 Fair Market Value of 1,470, well above today's close of 1,158.67.

On the surface the S&P 500 appears undervalued.  The problem is this.......our economy is slowing again.  Growth was adjusted down this week from 2.5% to 2.00%, no big deal, just a 20% reduction off of an already poor growth number.  Thus, actual earnings could come in at say $85.00 per share.  In addition, investors may become risk averse and be willing to pay only 10 X earnings not the 14X implied by The Rule Of 20.   All of a sudden Fair Market Value of the S&P 500 becomes 850, well below today's close of 1,158.67!

The point is this:  the value of Corporate America is extremelyy sensitive to both earnings and risk.  At this time risk tolerance is fading and earnings could be close behind.  Like many others I do think we could see a year end rally here.  My concern is that it will be a "suckers rally" and the next sell-off could be to surprisingly lower levels.  It is time to be wide awake with your investment positions!!    

Friday, November 18, 2011

Weekly Update 11-18-2011

It has now been nearly one year that I have been writing about the debt issues in Europe.  In our monthly economic update The Seven Signs of a Changing Economy, posted at, I have detailed how inter connected the banks of the world are.  German and French banks hold very large amounts of debt from Greece, Portugal, Italy and Spain.

Where the U.S. banking system comes in is the guarantee they have made to the German and French banks in the event of Greece, Portugal, Italy and //or Spain defaulting.  JP Morgan Chase and Goldman Sachs announced they alone have guaranteed over $5 TRILLION in default guarantees. 

If Greece defaults the first domino falls pushing the next over, etc.  Because of the uncertainty surrounding the change in leadership and cost cutting measures being scoffed at the governments of Italy, Spain and France are having to pay higher interest rates to borrow, which in turn increases their deficits and debt making them bigger and bigger risks.

It appears The European Monetary Union (EMU) is down to two choices.  They can choose to split up, which in itself could be a financial disaster, or they could print money to back stop the lesser quality countries like Greece.

There is just one problem with that.......printing money by the EMU was specifically banned when the EMU was created!  Can that be changed?  At this point there does not seem to be any other way out of the maze!  Unfortunately, the unintended consequences of this could be just as disastrous and ineffective as our QE-1, QE-2, Operation Twist, ....and QE-3 to come!  


Friday, November 11, 2011

Weekly Update 11-11-2011

One of The Wealth Strategy Groups Seven Signs of a Changing Economy is JOBS!  This is a key sign of economic change as it tells us a great deal about the economy in two quick observations.  1)  if jobs are expanding it is because businesses are growing, i.e. selling more stuff.  2)  that consumers are spending more.  If they weren't businesses would not be growing and hiring new workers.

The reduction in new claims for unemployment suggests a flicker of growth here.  It is only for the week and we really need to see this number trend down over the four week average claims number, and for an extended period before it has any impact, but it is a flicker.  We will watch this to see if there is a trend developing.

I would suggest this is not a trend.  Why?  The "Birth/Death" calculation portion of this jobs report!  As long time readers know, this is not the birth or death of people, but instead, of businesses created versus closed.  As it turns out this number is just a guess by the stat trackers.  It does get adjusted to a more accurate representation once a year, but as a rule is generally released high for obvious reasons.  Example:  For 2010 the new jobs created stat was reduced by over 1,000,000 jobs!

The key is this; if not for the Birth/Death adjustment in the jobs creation calculation, there would have been a jobs contraction versus the growth reported.  The world equity markets loved the news, but I would suggest caution is warranted and a trend is not yet in place.

Friday, November 4, 2011

Weekly Update for 11-4-2011

The November edition of The Seven Signs of a Changing Economy is a must read!  Go to and tab down to the Signs of Change commentary.  It is free so don't be shy!

Why a "must read"?  Well, in the Weekly Update 10-7-2011, I outlined the number of new jobs that would need to be created to reduce the current unemployment rate of 9.0%,....... it was 9.1% before today's jobs report.  In the recent issue I took a deeper dive in to the data that connects the jobs data to the growth of the economy, or lack there of.

The growth of our economy is measured by the Gross Domestic Product (GDP), or all of the goods and services we as a country produce.  The Federal Reserve just announced a rather large reduction in this estimated growth.  This reduced growth expectation does not paint a pretty outlook for jobs creation.

Since it is difficult to be a good consumer without a job, i.e. income and cosumer spending is 73% of our economic growth, it doesn't take alot of thought to come to the conclusion that we are in for a long slow economic recovery.  Check out the details, it is quick read!

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