THIS IS MY 153rd BLOG ON UNDERSTANDING MONEY
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January, 2018
Time again to write a blog. This one is on the stock markets. I find the markets to be ever fascinating. I can draw parallels between stock
markets and sheep farms. You have
the farmer, he is the Federal Reserve, Wall Street and the president (control);
you have the sheep dogs herding the sheep, they are the financial advisors
being told what to do and what to invest in; and then you have the sheep, the
public investing in the markets and following others like sheep are supposed to
do!
Partially what gets me to write are all the falsehoods
coming out about the economy and markets.
We are in a normal downward correction...normalization in the business
cycle. And, this is happening
worldwide. Cycles are perfectly
normal and to be expected, however it seems Mr. Trump cannot accept this part
of the cycle. Today, as I write,
it is January 2nd. I
just finished a blog on the “Plunge Protection Team” intervening last week, and
buying up stocks to protect the downside.
It happened again today.
This morning Asian markets were down and our future’s markets were also
down, big time (better than 400 points).
The Plunge Protection Team goes into effect with Executive Order,
meaning the president or someone he appoints draws parameters on controls. Sure enough, resistance at 23,000 on
the DOW and buying occurred. It was a “seesaw” type of trading day based around
this 23,000 number. This permits
the big 6 banks or the Federal Reserve to buy up stocks stabilizing markets,
but they will eventually run out of cash doing this. What will the banks do with all the stock they are buying at
high prices when the stocks fall more and correct in the future? At some point they need to watch their
“capital reserves” to meet Federal requirements.
Mr. Trump made the statement that December’s correction in
the markets was a “glitch”. He
feels that the markets will trend higher once he negotiates trade deals with
China. Wow, in 2018 we reached a
parallel, or close to it, of having the highest stock market valuations related
to earnings in history, surpassed or equaled only by 1929 and 1999, and both
those years led to disaster. How
can it go higher when we already are in very dangerous territory? Only if corporate earnings
sky-rocketed, when in actuality they will be declining over the next couple of
years, and this is worldwide. The
cycles!
Talking with a friend today, he asked a very good
question. That question was, “it
was announced today that in December we lost $2.9 trillion in the stock
markets, where did that money go?”
Good question, and the answer is, “it never really was there, it was an
artificial value”! It was a loss,
(yes), of “artificial value”. Let
me use a simple illustration.
Let’s say there is a very small restaurant for sale that has pre-tax
earnings of $50,000 for the year.
As a private corporation or individual I might offer to buy at 3 times
earnings, or $150,000. Now, why do
most people want to go public in stock markets? Greater valuations to earnings. Historically, over the last 100 years, or so, publicly
traded companies trade their stock at about 15 times earnings, or what we refer
to as a 15:1 P/E.
In this example of the restaurant if it were a publicly
traded company we might expect 15 times $50,000 as the purchase price or
$750,000. Another WOW! You
wouldn’t pay that, would you? It
would take you 15 years to get your money back (the P/E). So let’s assume we are in today’s
overpriced market. Many of
the stocks on the NASDAQ are tech stocks, but the NASDAQ has been at about a
50:1 P/E. (In 1999 when it was
this high it dropped 50% in value.)
With the example of the restaurant we would price it at $50,000 times 50
or $2,500,000. Perhaps the
restaurant stated that they wanted to expand. It could never justify $2,500,000. This is what has happened to our markets, all way overpriced
to historical standards. (Look at companies like Tesla, Amazon, Netflix, and
Facebook.) Reflecting back on my
friend and his question, you can see how the disappearance of $2.9 trillion
from the markets in December happened, but it was phony money…it never should
have been there, and we need to reach normality. I never want to refer to my fellow Americans as being
“stupid” as that reflects IQ, however very naïve may nicely apply! Perhaps sheep might be a nice fuzzy
comparison, as in my first paragraph!
This is exactly what is happening.
Wall Street and the government is leading us astray, pushing the emotion
button, “greed”. Following the
herd. We are being tremendously
manipulated in what is supposed to be a “free market” society.
If you read my previous blogs I gave many reasons why the
markets should, and will, trend down.
GDP will be cut in half this year from 2018, at a high of 4%
growth. Another factor entering in
this year and effecting corporate earnings is the rise in the Federal minimum
wage of $.50/hour. Not much, but
will erode into corporate earnings for those businesses now paying minimum
wages. Minimum wage will vary from state to state, however it will bring the
national wage to $10.10/hour. You
might think Jeff Bezos is kind-hearted going to $15/hour, however he is doing
away with bonuses and stock options thus making more money for Amazon and
himself. Look behind the scenes of
what is on the news each night. He
also is pushing faster into totally robotic warehousing, thus eliminating the
human being and saving on such necessities as workman’s comp insurance,
liability insurance, FICA and employee wages and benefits.
As long as we just mentioned Amazon, let’s proceed in the
“real world” and discuss it briefly.
Amazon, for the most part, is a distribution, “plain Jane” company. As of today, it is trading at
$1,521.44/share. It has a P/E of 334.26/1 and a market capitalization of $748
billion. Would I buy this stock, hell no!
Here is the “real world” on stockbrokers and investment advisors: This advisor needs to feed his family,
and it comes from commissions and fees.
This person tells you to buy Amazon, but underneath is thinking, “buy
the stock at this ridiculous price and we most likely will find another buyer dumber
than you to get you out in the future!”
With the economy here and worldwide trending down, at least
this gives Mr. Trump the ability to blame it on the Democrats, and perhaps a
chance to win the 2020 elections, if he so elects to proceed forward for
another 4 years.
Again, you must come to your own conclusions. I just try to point out some facts for
a clearer thought process.
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