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Are Stocks Expensive?

On March 9, 2010, in Stocks, by Tim

For some reason, an important graphic was left out of the online version of this story in today’s Wall Street Journal and it seemed like a good idea to reproduce it here from the print edition in an attempt to better understand the questions that David Wessel asks about whether stocks are cheap or expensive today, on the one-year anniversary of the low last March and a full ten years after the Nasdaq reached its all-time high back in 2000.

Anyone looking closely at this chart from Yale economist Robert Shiller would say that, at this point, stocks are a bit pricey. In fact, what’s remarkable about the data below is just how expensive shares were a year ago when people talked of generational lows in valuations. As it turns out, early-2009 was the only period since 1991 when stocks were below the long-run historical average when calculated as Shiller has done.
IMAGE While some would surely argue that we’ve reached a permanently high plateau for valuations since the 1980s, higher prices may have much more to do with how radically different the financial world is today than it was in the century before the 1980s.

With seemingly no limit on how much money and credit can be created and pushed into the system to make all sorts of asset prices levitate, is it reasonable to think that we’ll ever see a secular bear market bottom like the ones in 1982 and prior?

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China on Gold – Stating the Obvious

On March 9, 2010, in Commodities, Currencies, by Tim

Reuters reports on comments made by China’s top foreign exchange manager at the annual gathering of the National People’s Congress in Beijing on the subject of gold purchases.

Yi Gang, head of the State Administration of Foreign Exchange, said that while gold was “not a bad asset,” it would never become a big part of China’s overall investment portfolio.“The international gold market is very limited. If I purchase gold on a massive scale, it will definitely push up global gold prices,” Yi said at a news conference on the sidelines of China’s annual parliament.
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China’s $2.4 trillion in foreign currency reserves and its relatively small gold holdings have fueled speculation the country is continuing to buy, although officials have insisted that any increases have come from domestically produced gold and the international price is too high.

“It is, in fact, impossible for gold to become a major investment channel for China’s foreign exchange reserves. We have 1,000 tonnes now, and even if I double that holding, according to current prices, that would be about $30 billion,” Yi said. “It would just increase the level of gold (in China’s reserves) to about 2 percent from the current 1 percent.”

They’re damned if they do and damned if they don’t and the numbers involved are not likely to get any better before they get worse.

Absent a dip in the price of gold back down below $1,000 an ounce (at which time, they’ll probably snap up that 191 tonnes of IMF gold), they’ll probably just keep adding to their gold reserves quietly and, as they did last summer, announce long afterward that they have made substantial additions to their holdings.

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Three Looks at the Consumer Confidence Data

On March 9, 2010, in Consumerism, Debt, Economy, by Tim

Jake at EconPicData looks at last week’s consumer credit report (a data release from the Federal Reserve that, for some unknown reason, comes at 3PM EST on Fridays) and wonders if the American consumer is once again in a spending mood.
IMAGE Total consumer credit expanded by $5.0 billion in January, the first increase in 11 months and only the third gain in almost a year-and-half in what has otherwise been a decades-long credit and spending binge.

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Housing Quote of the Day

On March 9, 2010, in Housing, by Tim

From a story by Diana Olick at CNBC late yesterday on the possibility of the federal government getting behind a large-scale program to reduce principal balances on underwater mortgages comes a keen observation from housing consultant Howard Glaser.

Home prices have fallen so far in the hardest hit areas, the areas where the bulk of the troubled loans are, that banks would have to write down principal 30 to 50 percent to put borrowers back in the green. Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they’d all be insolvent.

That’s why the Obama Administration has created this kind of shell game in the first place.

I stole that shell game idea from housing consultant Howard Glaser: “We’re spending tens of billions of dollars on a tax credit to get people to purchase homes, we’re spending federal money to keep them in their homes through the modification program, and now we’re going to pay them to move out of their homes. This is not a sustainable system for the housing market. It’s a shell game. Bernie Madoff could have created this system,” Glaser told me today.

Mr. Glaser does a good job with that summation and one important tidbit that dovetails nicely with the tax credits, loan modifications, assisted short-sales, and possible principal reduction is the fact that the U.S. government, via wards of the state Fannie Mae and Freddie Mac, basically own the entire mortgage market.

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More Bad Timing for Toyota

On March 9, 2010, in Our Culture, WTF?, by Tim

On the same day that company officials mounted a defense of their handling of Toyotas’ acceleration problems, a Prius in San Diego has to be corralled by a California Highway Patrol officer, the driver clearly petrified and just thankful to have survived.

At about the 1:55 mark, check out that lady CHP officer with what looks like a mullet. Is that Garth from Saturday Night Live? With a few extra pounds?

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Tuesday Morning Links

On March 9, 2010, in Uncategorized, by Tim

TOP STORIES
So Where’s Consumer Protection? – DealBook
China calls US Treasuries important, wary on gold – China Daily
Greece seeks U.S. help regulating speculators – Washington Post
Collapse of the American Empire: swift, silent, certain – MarketWatch
Public Pension Funds Are Adding Risk to Raise Returns – DealBook
GATA appeals to CFTC to act against manipulative shorts – GATA
Deficit a Problem But Don’t Stop Spending: Romer – CNBC
Blame it on the bubble – Baker, Guardian
Then All At Once – Kunstler, CFN

MARKETS/INVESTING
Oil futures drop on expected rise in supplies – MarketWatch
Gold Declines in New York on Stronger Dollar, Chinese Reserves – Bloomberg
Managers gain 1% in February: Hennessee – MarketWatch
S&P Rally Slowed by Fastest Cash Depletion Since 1991 – Bloomberg
43% have less than $10k for retirement – CNN/Money
Mr. Market – Saut, Raymond James

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