The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

A conversation with Marissa Mayer, V.P. of Search Product and User Experience, Google

Eric Schmidt, CEO of Google

Thursday, March 5, 2009

I did this interview with a financial site some time ago — Its as good a time to post it as any.

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How long have you been blogging?

About 5 or 10 years, depending upon your definition.

From a weekly email, I eventually moved to Geocities around 1998. That was kinda blog-like. I started “blogging proper” over the Summer of 2003 – I was a beta tester for Typepad. In late 2008, I moved to my own domain (Ritholtz.com) and Word Press.

What got your started blogging?

Its kinda funny – I originally wanted to access my most recent version of written work. Between the office and laptop and house, I always seemed to have an older version of whatever I was working on. It also find it a convenient way to track/bookmark certain pages and articles.

I was very much surprised when an audience showed up.

What is the focus of your blog, i.e. how does it set you apart from the other bloggers out there?

My focus is whatever interests me. I mean that quite literally – if I find it intriguing, it ends up on the blog. So while there is a lot of sophisticated, high level analysis and commentary, I also drop in lots of asides about cars, movies, music, gadgets, concerts, etc.

I think the combination of markets, economics, investing, and technology is what appeals to people — then the personal stuff lets them get to know me.

Its not a conscious marketing thing . . . I merely scratch whatever is itching.

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1:18

JimmyKimmelLive March 12, 2009

Words from the (investment) wise for the week that was (March 9 – 15, 2009)

Global stock markets surged over the past four days as investors adopted a more positive view of the prospects for the beleaguered financial sector and shrugged aside gloom about the economy. Citigroup (C) on Tuesday said it had turned a profit from operations for January and February (BUT did not mention credit losses, toxic paper, derivatives, etc.). JPMorgan (JPM) and Bank of America (BAC) later made similar comments.

A positive shift in investor sentiment, together with the possibility of the suspension of mark-to-market accounting and the reinstitution of the uptick rule, resulted in the best week for equities since November.

Arriving in time for my 54^th birthday today, the reversal of fortune is illustrated by the strong gains of the MSCI World Index (+9.8%) and the MSCI Emerging Markets Index (+8.8%) since Tuesday. Although stashed (or “panic”) cash was deployed, the top-performing stocks were the most pummeled ones of the past few months, indicating significant short-covering.

Extremely oversold markets bounced off levels last seen 12 years ago in the case of the S&P 500 Index and the FTSE Eurofirst 300 Index, and 26 years ago as far as the Nikkei 225 Average is concerned. Talking about being oversold, the Dow Jones Industrial Index has been down for 13 of the past 16 months.

As shown in the table below, the major US indices gained strongly during the week, recording only the second up-week out of ten in 2009.

As far as exchange-traded funds (ETF) are concerned, John Nyaradi (Wall Street Sector Selector) reports that the battered financial sector last week rose like the legendary Phoenix with the Financial Select Sector SPDR (XLF) surging by 32.5%. ETFs like iShares Regional Banks (IAT) (+31.1%) and SPDR S&P Homebuilders (XHB) (+19.8%) also recorded handsome gains. Interestingly, the broad financial sector was the only main US economic sector to beat the top-performing broad index ETF, the Russell 2000 (IWM), which added “only” 11.9% on the week.

Source: StockCharts.com

The fact that government bonds had not been sold off during the equity rally indicates that some “side-lined” cash was deployed to fund the buy orders. The amount of cash hoarded over the past few months as a result of precautionary savings and deleveraging is enormous, as seen from the fact that money-market and savings accounts constitute more than 90% of the market capitalization of the Wilshire 5000 Index. (Hat tip: Todd Sullivan, Value Plays.)

Still on the topic of government bonds, according to CEP News, Chinese Premier Wen Jiabao said on Friday that China was growing “worried” about the safety of US Treasuries and wanted assurances from the United States. “I request the US to maintain its good credit, to honour its promises and to guarantee the safety of China’s assets,” he said, voicing concerns over the state of the American economy. This is not good news for the massive issuance of US government bonds that lies ahead.

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David Brancaccio interviews Kenneth Rogoff, Harvard economics professor and former chief economist of the International Monetary Fund, about how high we should raise our hopes and what’s at stake for America and the world.

24:10

PBS, March 13 2009

Huzzah! PBS is now doing embeddable video

There is an interesting article in the NYT Week in Review (and not just cause I get a few words in).

BTW, what got left out of the article was our discussion of various ratios, and the issue with inventory (there’s too much) and affordability (debt servicing, down payments).

The charts are particularly telling:

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Source:
Has the Economy Hit Bottom Yet?
VIKAS BAJAJ
NYT, March 14, 2009

http://www.nytimes.com/2009/03/15/weekinreview/15vikas.html

More me media . . . Got to remember never to use a handheld camera . . .

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Barry Ritholtz, Director of Research for Fusion IQ tells TSC’s Debra Borchardt why AIG should be split with the bad insurer spun off and the good insurer sent back to the states.

Joe Nocera had a brutal — and brutally honest — column today. He essentially states that the Madoff victims were willing accomplishes through their own naivete and bad judgment.

“And yet, just about anybody who actually took the time to kick the tires of Mr. Madoff’s operation tended to run in the other direction. James R. Hedges IV, who runs an advisory firm called LJH Global Investments, says that in 1997 he spent two hours asking Mr. Madoff basic questions about his operation. “The explanation of his strategy, the consistency of his returns, the way he withheld information — it was a very clear set of warning signs,” said Mr. Hedges. When you look at the list of Madoff victims, it contains a lot of high-profile names — but almost no serious institutional investors or endowments. They insist on knowing the kind of information Mr. Madoff refused to supply. . .

“These were people with a fair amount of money, and most of them sought no professional advice,” said Bruce C. Greenwald, who teaches value investing at the Graduate School of Business at Columbia University. “It’s like trying to do your own dentistry.” Mr. Hedges said, “It is a real lesson that people cannot abdicate personal responsibility when it comes to their personal finances.”

And that’s the point. People did abdicate responsibility — and now, rather than face that fact, many of them are blaming the government for not, in effect, saving them from themselves. Indeed, what you discover when you talk to victims is that they harbor an anger toward the S.E.C. that is as deep or deeper than the anger they feel toward Mr. Madoff. There is a powerful sense that because the agency was asleep at the switch, they have been doubly victimized. And they want the government to do something about it.”

While there can be no doubt that the SEC was asleep at the switch, so too were these investors. Not only did they ignore all of the Madoff red flags, many of them put all of their monies with one single manager. That is a huge mistake.

Nocera adds that some investors who had been in a previous billion-dollar Ponzi scheme — where investors managed to recover ~60 cents on the dollar — then turned around and gave their money to Madoff.

Astonishing . . .

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Source:
Madoff Had Accomplices: His Victims
JOE NOCERA
NYT, March 13, 2009

http://www.nytimes.com/2009/03/14/business/14nocera.html

The conversation about the SEC with William Donaldson begins at 31:37

2003, 26 minutes

This week we look at the Land of the Rising Sun. Japan is going through major upheavals, and they will have consequences all over the world. And what are those wild and crazy Swiss central bankers up to? It’s time for another round of competitive devaluation. And of course I have to look at the recent Barron’s cover story, about how stocks are cheap. There’s a lot to
cover.

But first, and quickly, I just wanted to take a moment and remind you to sign up for the Richard Russell Tribute Dinner, all set for Saturday, April 4 at the Manchester Grand Hyatt in San Diego – if you haven’t already. This is sure to be an extraordinary evening honoring a great friend and associate of mine, and yours as well. I do hope that you can join us for a night of memories, laughs, and good fun with fellow admirers and long-time readers of Richard’s Dow Theory Letter. The room is filling up and there will be a very large crowd.

A significant number of my fellow writers and publishers have committed to attend. It is going to be an investment-writer, Richard-reader, star-studded event. You are going to be able to rub shoulders with some very famous analysts and writers. If you are a fellow writer, you should make plans to attend or send me a note that I can put in a tribute book we are preparing for Richard. And feel free to mention this event in your letter as well. We want to make this night a special event for Richard and his family of readers and friends. So, if you haven’t, go ahead and log on to https://www.johnmauldin.com/russell-tribute.html and sign up today. The room will be full, so don’t procrastinate. I wouldn’t want any of you to miss out on this tribute. I look forward to sharing the evening with all of you.

Where Have My Earnings Gone?

Barron’s probably jinxed the stock market by stating why they think the Dow won’t fall to 5000, although we do have what I hope is the start of a nice bear market rally. Part of their reasoning is that stocks are cheap. They assign a price to earnings (P/E) ratio of a lowly 13, based upon 2009 estimated earnings of $51 in operating profits, which they suggest is historically low. And I agree that 13 is toward the low end and would represent a good long-term buying opportunity – if indeed it was 13.

Actually, if you want to get really bullish, go to S&P’s web site and look at their estimated earnings for 2009. They calculate a P/E of 10.89 on 2009 estimated operating earnings. As I have written over the years, the long-term P/E studies all use “as-reported” earnings, or earnings that are reported on tax returns. Operating earnings are of the EBBS variety, or Earnings Before Bad Stuff (or whatever you want to designate as the BS component). Companies like to tell us to ignore all those “one-time” writedowns, which seem to happen a lot more than once these days.

Going back a few decades, operating and as-reported earnings were very closely aligned. That relationship began to change in the mid-’90s, as management wanted to make a more bullish case, which certainly helped with their stock options. And the difference between operating and as-reported earnings is now wider than ever.

The difference between estimates for 2009 operating and as-reported earnings is almost exactly 100%. Which means that analysts are projecting there is going to be a lot of Bad Stuff in 2009 to be written down. The table below is a cut and paste from the S&P web site, where they calculate the earnings for the S&P 500. Notice the difference between the P/E ratios for operating and as-reported earnings. The latter P/E is based on the previous 12 months and used Thursday’s price, so if you calculate it today it would be slightly higher.

Did you notice the as-reported estimated earnings P/E for the quarter ending September 30, 2009? In the 20 years of data on the web site, the highest it ever got to was 46, in the last recession. That P/E of 181 is because of the negative earnings for the 4th quarter of 2008. Of course, this assumes that earnings estimates don’t keep being revised downward, which is not  a safe assumption. They have been revised downward every quarter for almost two years. Seemingly, past projections are not indicative of future results.

Now, to be fair, using the extremely bad earnings of the recent past as a one-time metric is not altogether indicative either. Robert Shiller of Yale uses ten-year average earnings to smooth out the business cycle, and this would give you a P/E of about 13.

My good friend Ed Easterling uses a different methodology to project earnings, involving the historical
relationship between GDP and P/E ratios. This is based upon the historical fact that earnings more or less rise at the level of GDP plus inflation. This is a mean-reverting chart, as earnings cannot grow faster than GDP for too long, and also acknowledges that rough patches like the one we are in now will not last, and earnings will rebound. Using his methodology we end up with a P/E just south of 13.
So, I know a lot of you have stayed in the market the whole time it has been falling and are now wondering what to do. If you have a ten-year time horizon you probably can buy here and do OK.
But I wouldn’t. I think this market is going to have more problems as we confront the real possibility that we will get some really poor earnings for the first and second quarters. The economy is simply weak, and that weakness is hitting more and more companies. From exporting companies to the big international firms, a global slowdown is hitting almost everyone. Even hospitals are being challenged. We could see a real bear market rally lure investors back in, just to crush their hopes this summer.
Markets go from high valuations to low valuations and back again over long periods of time. I believe that we have a long time to go in the current secular bear cycle. As I have written for years, this one began in 2000 and could last until the middle of the next decade. While we will see a “bottom” in stock prices at some point, maybe even this year, we have a long way to go to get to a really low P/E ratio.

Big secular bull markets happen when P/E ratios drop below 10 (and even lower). That acts just like winding a spring. When it is let loose, it explodes for a very long time. There is another bull market in front of us. I would rather be patient and rely on an absolute-return style of investing for now. If I miss the first part of this run, so be it. I see more risk than reward in this latest run-up.

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