MONEY 92 - STOCKS

THIS IS MY 92^ND BLOG ON UNDERSTANDING MONEY TOOLS

A friend of mine asked me if I thought it was a good time to get back into stocks.  I am not an adviser, I don’t render advice, but have been known to hold opinions.

I want to level the playing field a bit with Wall Street, trying to give accurate numbers to the common man. I believe Wall Street and the big banks can take care of their own.  My friend felt that because it now is reported that stocks have lowered from a very high of 23:1 price to earnings ratio (P/E) to a more historical 15:1 this might be a good time to jump in.  I am going to address this with the facts I know for you to make judgment.

Where do I come from to make assumptions on this topic?  I worked in conjunction with Wall Street firms and venture capital firms for almost 20 years holding 4 security licenses. In the mid-1980’s I worked for a well-respected Denver private equity company, L.R. Nicholson & Co. where we worked daily with many corporations in various industries, for start-ups, growth and re-structure; both small private and publicly traded companies.

Let us start out and re-cap what I have addressed in previous blogs.  General Accepted Accounting Principles (GAAP) and General Accounting Practices (GAP) have been used for years with the government setting standards for Wall Street/ Banks and major companies.  This is supposedly regulated by a federal agency, the Financial Accounting Standards Board (FASB).  Also, important here are two terms in order to value stocks you may purchase, price to earnings ratios (P/E) and projected price to earnings ratios (PP/E). To determine the ratio you simply divide the price of one share of stock by the earnings per one share of stock. 

Now, here is what has happened over the past few years. Wall Street wants the P/E as low as possible to make a company look favorable. Wall Street and big companies employ the best law firms and accounting firms to figure out new accounting practices that will hold up to the law and yet optimistically “distort” the numbers, or the actual picture as to what is happening.  Where we used the commonality of P/E and a figure, about 90% of companies now are commonly using projected earnings. The public doesn’t know any better, therefore does not ask. So, we get a 15:1 earnings versus 23:1.  The projected earnings, I believe, are using increased growth numbers that will not be attained, realistic tepid growth (1.5%) versus robust, unrealistic growth (3-4%).

What is actually happening economically here and abroad?  This will have a profound effect on future corporate earnings.  Growth in the US has been stagnant for the past 10 years even with the quantitative easing money that was printed for the purpose of economic improvement.  A decade of growth of only 2%, and yet billions poured into the stock markets.

Many countries have gone to negative interest, these will not be of benefit. Countries are figuring that it will force money into society and investments versus savings.  Japan is in deep debt and financial trouble.  They are now going negative rates as Switzerland has.  I predict this will happen: 1) hurt the middle class and elderly that rely on fixed income (savings, CD's and bonds) thus making the spread between wealthy and poor greater, and further diminishing the middle class 2) not help economies and backfire on countries, and 3) people will get scared from government intervention and hoard money, versus spend more (some countries are cutting out large denomination bills that would make hoarding of money easier).  The longer we fool around with manipulated finances and stay away from free market supply and demand the worse it will be, and the longer to recover.

Historically, we need to be at an ideal 3-3.5% GDP growth. Actually, for a few years 4-5% growth would really stimulate our economy.  The problem is that we can’t get there.  It would lead to some inflation, but we could address that once growth has returned and been established.

The only intelligent step forward is to get money into the hands of the middle class, encourage spending and then measure velocity (flow) of money through society, (M1 and V). I mentioned this in prior blogs, but it would have been better for the Federal Reserve in 2009  to have approved of the printing of money and have given each working American (about 120 million people) up to $40,000 over a few years ($4.5 trillion in quantitative easing) rather than bail out banks, big Wall Street firms and permit big companies and the wealthy to borrow at near zero interest rates.  This did not stimulate our economy and transferred a ton of assets from the middle class (e.g. in losing homes and businesses) over to the wealthy who picked up assets for nothing.

To date, the United States and US companies have faired pretty well in relation to foreign companies. Most have done well up until the past year moving factories abroad, taking advantage of free government money to set up foreign plants, employing cheap labor, not bringing earnings back to the US to be taxed at US tax rates, and holding their profits abroad in trusts.  This prosperity in growth has changed.  Free market supply and demand will prevail in the long term over any manipulated intervention.  Economic downturn has been reflected in the significant drop in every major commodity needed for the manufacturing of goods including, natural gas, oil, coal, copper, iron ore, precious metals like silver, gold, diamonds, etc.  The next thing I have been watching is merchandise shipped worldwide; quantity is way down.  Just this week China announced that exports were down 26%, ouch. Our US exports are off about 5%, but we only export about 13% of goods produced so we don’t rely heavily on exports. Watch the transportation index, it will tell you a lot.

I love Wall Street blaming the small correction in stock market this year first on China and then on oil pricing.  It has merely to do with world supply and demand, and right now world demand is diminishing. Period, that is it. Fewer middle class people can afford things; Europe is a mess with immigration and rising taxes, emerging countries leveraged to the hilt selling bonds supported by their commodities when the value of their commodities have dropped through the floor.  They can’t pay their debt.  Just the way it is, and people need to come to terms with that.  Don’t get too bullish on buying stocks!  Earnings should be declining at most companies. Companies are trying to hold earnings with revenues dropping mainly by more efficient operations including employee layoffs and hiring HB-1 workers.  Go worldwide for the best stock values and high dividends.

So much for this blog.