I am becoming terribly enamored of the charts Ron Griess highlights each week form The Chart Store. Now that earnings season is all but over, Ron looks at a few charts that are revealing of the extent of the damage done to corporate profitability. It is, in a word, breathtaking:


How Cheap Are Stocks?



How Much Have Profits Fallen?


Category: Earnings, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

190 Responses to “Normalizing Earnings During Profit Freefalls”

  1. John from Concord says:

    I wonder what these charts look like if you take the S&P and exclude GE and financials (put another way, I wonder how badly AIG et al are skewing these numbers). If I have time today I’ll see if I can get someone to pull it together and post it.

  2. I wonder what my Batting Average would have been in High School if I excluded strike outs . . .

  3. rob says:

    And yet we’re hovering at mid-90′s index values, when earnings were 3-4 times more. Insane! Anyone else think a summer blood bath is coming? Final purge of the hopeful?

  4. John from Concord says:

    Barry, more like… I wonder what your batting average would have been if you excluded the four games where you had the flu and could barely stand up but played anyway.

    I think just excluding AIG will make a huge difference here. We’ll see.

  5. danm says:


    It’s that kind of thinking that helped us get here…

    Companies keep on smoothing their earnings quarter by quarter, waiting for eveybody else to report some weakness. Then they replace their CEO, and this entitles him (usually) to throw in everything but the kitchen sink in one quarter. And nobody really cares because… WOW! Imagine the % eps growth coming now that they’ve cleaned up their books and they are starting from a lower level.

    Never mind the value destruction along the away.

  6. ben22 says:

    it is amazing looking at that bottom chart of real reported earnings, not only is it the biggest decline on the chart, look at the speed of the decline.

  7. danm says:

    WOW! Imagine the % eps growth coming now that they’ve cleaned up their books and they are starting from a lower level

    And we didn’t really notice the lower starting level because by that time Greenspan had already lowered the interest rate to kickstart the economy, lifting the general PE multiple in the system.

  8. John from Concord says:

    danm: I hear your point. But. We’re looking at a chart and saying “wow, we’re REALLY in trouble”. If the real issue is that a few companies lost a crazy enormous amount of money last year and the rest are muddling through, and that the crazy enormous losses significantly skew the results as a whole, is that consistent with what the chart is communicating at first glance?

  9. Bruce N Tennessee says:

    The problem with all this, and the steps that have been taken to remedy it are that they highjack the ones responsible for this economic miracle..the american taxpayer and investor. Tax monies have been redirected from sound investment to paying off unsound debt. The leveraged banks and mortgage holders have been found to be insolvent, and we’ve moved the debt from them to a now insolvent government. Much, much higher taxes are coming. It is a fait accompli. As you see debt being piled up day after day, and more and more types of businesses are added weekly, you may be sure that what you see as debt today, you will see across all strata of society as higher taxes in the near future. And of course, this will slow the American engine of wealth production.

    I don’t care that what happened in the past was due to poor regulation, and poor choices. I do care that this pretty much seals the future. By not allowing failure, we’ve guaranteed a poorer outcome for all of us.

  10. super_trooper says:

    Still agree with John from Concord, AIG etc are statistical outliers. They shouldn’t be included, in fact AIG should be bankrupt and not even on the list. Hence make a graph with and without the financial sector.
    As for BR
    “I wonder what my Batting Average would have been in High School if I excluded strike outs . . .”
    I bet you had more strike outs than anything else. Hence statistically significant.

  11. globaleyes says:

    Although I’m living a chart-free lifestyle, I’m still able to read ‘em. What do I see ? Answer: Blood On The Tape .

  12. “I don’t care that what happened in the past was due to poor regulation, and poor choices. I do care that this pretty much seals the future. By not allowing failure, we’ve guaranteed a poorer outcome for all of us.”–BnT, above..

    Hellooo, That’s the Point.

    I mean, Who really cares Who did What, and How, to Whom, Yesterday?

    What matters is what we have(left) to deal with, Today, and what we’re going to do Today, to make Tomorrow better..

  13. ben22 says:

    Couple of ideas on the market as I didn’t have a chance to post much at the end of last week.

    I still don’t think the May 8 highs will be it for this rally but the first larger pullback seems to certainly be underway at this time. Part of my thoughts on this have to do with time. It just doesn’t seem that this rally has been long enough as a countertrend rally given the fact that we just had a 17 month downturn, over 7,000 points on the DOW.

    I think one of two things happen from here.

    1. We retest the March Low and then from there prices bounce higher than the May 8 highs.
    2. We have more of a zig-zag pattern and move to around 7900-8000 on the DOW, on our way to higher prices after. (AT, my idea here is that we have a double zig zag like EW pattern, do you think that could be probable?) In this example I’m still looking for my old price targets which were to press up against the 200 day MA’s, which I was looking for 965-1k on the SPX.

    3. I shared on here about two weeks ago that for the last 4 months I’ve been watching put/call’s much closer as SB pushed me in that direction. There seems to be a trend happening there since the March lows and I think it is signaling lower prices in the very near term. At the time I first posted I said that p/c ratio was .64 and .66 on 3/18 and 4/13 respectively and that both times it happened the market went flat for about two weeks. This just happened again as on 5/6 we had a p/c of .67 at the close and since then we are flat/down. Now the problem this time is that in both instances above in March and April after the flat to down movement p/c went up as the flat/down movement happened, since May 6 however p/c ratio has actually continued to drop, this indicates we’ve got further to fall during this correction, as you’d prefer to see options traders doing the opposite to signal a short term bottom. This would be correct though that as the rally gets more and more tired and extended, more people commit money on the expectation of higher prices.

    4. Last week I talked about decliners vs. advancers on the NYSE as a signal. Friday’s sell-off wasn’t nearly as intense as Wednesday’s so we could get that little head fake on the way to lower prices in the very near term. Maybe the head fake is today/early this week. I see futures are all green this morning. I still think we are going down hard before this bear is over but before I’d make that call that the downtrend was on again I’d want to see, among other things, a ratio like we saw back on March 2 where we had 16/1 down vs. up on the NYSE. We aren’t there now, we weren’t there on Wed. last week.

  14. Wes Schott says:

    S&P to 70 ish if earnings do not improve?

    PE at bottoms – 10 to 15.

    Oh, I’m reading the date axis – 19 “70″ ‘s

    Same answer – S&P = 70

  15. constantnormal says:

    @ John from Concord, super_trooper — when you do this “throwing out the bad numbers” exercise, be sure to repeat that process with the historical data that you compare it to, so that you are not comparing a sanitized today to reality’s yesteryears. It’s going to be tough to pick out and exclude the worst 10% in past times, though.

    While I am sure that such an exercise will be not worthwhile (due to the lack of any comparable historical framework to compare it against), it will still be interesting, as I expect it to show the rest of the economy is still declining, giving us a picture of the immensity of the change that is rolling across our economic landscape.

    I predict that no upturn will be visible, even after taking out the biggest splashes in the ocean of red ink.

  16. ben22 says:

    You can’t bash the chart by saying that “AIG was a statistical outlier”

    Wasn’t the way we got this much debt and over-leverage a statistical outlier? I only know of two other times in the last 100 years where we can draw comparisons to the debt/GDP we have right now and that was the GD and Japan in the late 80′s.

    Saying we need to make a chart without AIG is like saying that we should just not count the last 20 years when trying to figure out where we are today. Just ignore that credit bubble, it was an outlier…. I’m not sure I understand that logic. What am I missing in the comments about taking AIG/others out of the analysis?

  17. Bruce N Tennessee says:

    Thanks MEH…after I posted this, I reviewed other web sites and once again Dr. Hussman is paying attention to the ballgame. His eye is very much on the ball this morning:


    “The bottom line is that the attempt to save bank bondholders from losses – to provide monetary compensation without economic production – is not sound economic policy but is instead a grand monetary experiment that has never been tried in the developed world except in Germany circa 1921. This policy can only have one of two effects: either it will crowd out over $1 trillion of gross domestic investment that would otherwise have occurred if the appropriate losses had been wiped off the ledger (instead of making bank bondholders whole), or it will result in a stunning and durable increase in the quantity of base money, which will ultimately be accompanied not by a year or two of 5-6% inflation, but most probably by a near-doubling of the U.S. price level over the next decade. As I’ve noted previously, the growth rate of government spending is better correlated with subsequent inflation than even growth in money supply itself, particularly at 4-year intervals. Regardless of near-term deflation pressures from a continued mortgage crisis, our present course is consistent with double digit inflation once any incipient recovery emerges.”

    …for those of you who come here for ideas, just don’t forget that actions have consequences…and there will be very big consequences soon from this inability to let the system purge itself…there will be a point when the deflationary trends come to an end, and when they do we will be in very interesting times indeed…

  18. jc says:

    the banks are a systemic risk to the averages, take them out, GE and GM too since they were getting most of their profits from financial activities, many of them would be BK without the kindness of strangers, take them out on the basis that they are trulu bankrupt

  19. Wes Schott says:

    BnT and MEH – it is baked into the cake at this juncture.

    The right on John Hussman was screaming a bit louder than normal in his anechoic chamber today.

  20. ben22 says:


    This whole idea of taking out the financials from analysis started with CNBC guests last summer when they attempted to argue why overall things were still fine and if people stopped paying attention only to the banks, they would easily see that. This was an attempt at finding a green shoot, it just wasn’t called that then. I agree that not much insight is going to be gained by pulling out the banks. Real earnings have declined across the board as credit deflation is already here. It has impacted ALL businesses, not just the banks.

  21. dead hobo says:

    I think the markets will look very interesting over the next few months or longer.

    To me, unless a stock’s price is exclusively based on dividends, the only thing that explains stock prices is the greater fool’s theory combined with the concept of too much money chasing too few assets.

    For example, if a stock pays high enough dividends so that it looks like a bond, theoretically speaking, then prevailing market interest rates would explain its price. If the price can’t be explained using a theory of interest, then value is derived in another way.

    EPS, anticipated future performance, and price earning ratios are commonly accepted pricing techniques Pick your favorite. Logically speaking, all are meaningless unless you can entice someone else to accept your approach. For example, if a company is bought out, then you won the lottery and your stocks are given actual value in the form of cash or you get another lottery ticket in the form of more shares issued by the buyer. Or, using the other extreme, a company fails. In this case you get nothing or maybe some liquidation dividend based on a fraction of remaining market value.

    Thus, the only reliable way to make money with stocks is to buy low and sell high or profitably short it. Everything else is just something to talk about.

    In order to profitably trade stocks, you need someone to take it off your hands at a better price than you paid. But the person who buys it will get nothing unless their stock is converted into a winning lottery ticket via good fortune, a liquidation dividend, or the proceeds from another greater fool.

    The only way for a stock to increase in value otherwise is if the stock market agrees it is worth more. This may be because earnings have improved. Logically, this should make no difference in value unless each owner shares in the gain. Most don’t. Employees may get bonuses but stockholders get bupkis. Thus, improved EPS causing valuation gains is another facet of the greater fools theory. Another way for stocks to gain is asset inflation. In other words, too much money chasing too few stocks. Money has to flow somewhere, A shared fantasy about asset valuation is as good a place as any.

    So why will stocks be interesting over the coming months? At some point, shared fantasies need to be adjusted. Either they get hyped even more because economic conditions support the fantasy. Or the economy doesn’t improve and people wake up and adjust their behavior. I suspect that the latter will come to pass. Possibly, substitute investment vehicles will appear that provide a more realistic store of value.Otherwise, a trash for cash transformation will occur, again. (aka: another bubble burst is likely)

    I think this will cause the stock market to take on a repeating ‘W’ shape for a couple of years. Asset inflation and greater fools theory will alternate with bubble bursts.

  22. “…most probably by a near-doubling of the U.S. price level over the next decade…”

    that is what People should be “Taking to the Bank”, and keeping in mind when reviewing things like “Insurance Policies”–at the Minimum.

    BnT, no problem, Hussman’s take has been a valuable service for those with ‘eyes to See’..

  23. RealReturn says:

    I think this is the time to start focusing on the Free Cash Flow instead of the reported earnings.

  24. Super-Anon says:

    Also it seems that to fund its expanded operations the government is going to have to claim a much larger percentage of corporate income for itself – those tax revenues aren’t going to be coming from the consumer any time soon.

  25. Steve Barry says:

    I have posted on this several times recently…Barry makes a good point about exclusions. Also, companies abuse the “one-time” losses that seem to happen every quarter so that “operating” earnings have a large historical spread to “as reported” GAAP earnings. That being said, being a huge bear, I will bend over backwards to stress test the bearish case. I will advance my outlook to exclude 4Q 08, which was a massive -23.25 and likely won’t be that bad again. I’ll look at forward estimates ending 12/09, which total roughly $28 per share. That means the S&P trades at a forward multiple of roughly 31.

    That may not sound that bad, but it is a dangerous bubble. Long term average of trailing as reported earnings is 15. The market only traded above 20 or so right before the GD and during the tech mania. In a depression-like environment, I would expect a bottom at no more than 10 times earnings. That would mean a fair value for the S&P is 280. And I was very generous to exclude the worst quarter and look at forward estimates…the long term average P/E on forward estimates is lower than 15 and has been single digits at bottoms.

  26. danm says:


    I would not bother with the homework (netting out the losers that is) because if the others do have earnings, I’m convinced it will be short lived.

    So yes, maybe the financials, now that they’ve taken huge cuts (not most of them anyway!) will be posting better results, but the non financials eps will probably suffer.

    Revenues will be down
    Fixed costs will be up because of lower unit sales
    Input costs up (would not be surprised many firms are stuck with higher contracts than in the past)
    Interest expense will be up due to soaring credit spreads

    net net: earnings down and eps down even more thanks to new issues or conversion dilution.

  27. Cursive says:

    For those who would discard the financials, GE and GM – do you not think that earnings for commercial REIT’s, consumer discretionary, consumer staples, oil and gas – integrated or independent, oil service drillers, liesure and retail, just to name a few sectors, haven’t experienced a lasting readjustment? This is a deleveraging event and demand will sag across all sectors for some time to come. This is the “new normal.” You could try one of those trendy “pair” trades, long SPY and short financials/GE/GM, but I don’t think your long SPY position will be a money maker in the 3 year time period 2009 to 2011, either.

  28. cjcpa says:

    Kobe Bryant went to my high school. As a result… the average starting salary for a graduate of my high school was quite high.

    When you look at earnings ex-AIG, you would get a picture of how the rest are doing. I think this is useful if you are considering buying stocks other than AIG. If losing 80Billion in a quarter, or more, skews the numbers, then taking it out gives good information.

    CNBC was talking about S&P ex-Financials and that is dumb is you are saying S&P500 is a buy based on taking a large part of it out.

    If I wanted to know what my prospects were upon graduation, I think it would be appropriate to take out Kobe’s starting salary.

  29. ben22 says:


    You went to Lower Merion? I know some people that went to school there.

  30. MexicaliBlues says:

    BAC: is now a “conviction buy” after being up what 250% since march?


    Going to have to put that in the contrarian indicator category. I think goldman added AXP to it’s sell list around march 9 with a 7 dollar target. Nice timing there.

    The link I like “a tad” more than the latest link (above) pertaining to Goldman’s calls is this one



  31. Steve Barry says:

    Let’s not even argue…even if you use OPERATING EARNINGS and exclude everything these companies call one-time losses and their analyst lapdogs nod in agreement, the S&P trades at a forward multiple of 20…still a dangerous bubble by that very accomodating analysis. Just hit the sell button while you still can.

  32. MexicaliBlues says:

    personally expecting the highs of 5/8 to remain the near term top, riding the sds from 56-58 atm. Admit I do expect to have to endure a lot of chop with any short term correction of the rally off 3/6-3/9 lows. Today

  33. ben22 says:

    A few items from the conference I was at the last few days that some of you might find interesting.

    My company, like most, has a set of prop mutual funds. We launched an infrastructure and recovery fund recently (we also opened a tech fund in 2000, lol) the fund has had inflows, on average, of 75 million per week since Feb. 1.

    At the conference the phrase: “we passed through the eye of the storm” was used over and over again, often times with a lot of hand gestures. There was a message that the worst was now behind us, though things were not going to be easy moving forward. Sort of that “new normal” idea.

    My fav. quote from the conference came from an insurance VP. He said, and I quote, “never before, in the last 100 years, did you not get 50, 60, 70% capital gains after the market went down this much” If I told you what it was in reference to everyone here would laugh. I left that session immediately after he said that.

    Nick Murray closed the conference down Saturday morning. His message was pretty simple:

    “There are 80 million baby boomers out there, even if half of them lost all the money they had, you still have 40 million people to prospect to”

    There was a general message that advisors that lost 30% last year for clients need to “get over it” and need to set that expectation for clients as that’s what is right for business. There was mention of Japan with a chart on Saturday for about 10 minutes but deflation is being given a 30% probability according to our CIO. This goes right along with what I said before, as more and more people hold out on deflation, the deeper it can go.

    This conference is for the top 10% of producers at my company. In talking to many advisors there, they all think the bottom is in, that unemployment is about at the peak, and most important, all of them that I talked to believe the consumer will soon spend again. I never felt so out of place in my life. I have qualified for this conference for three years now and never before did I think I was so surrounded by idiots. One advisor that I spoke to at this last year asked me if I was still as bearish as I was last year, I answered yes, he said this time I would be wrong, nobody ever gets it right back to back years.

  34. cjcpa says:

    Ben. yes.

    Noticed your Phila post a few weeks ago. I changed my login… and have tried to stay away from posting. … ruining my day as I try to make $200 in the market.

    Might as well put my trading log up.
    April 29 purchases of QID and SRS were in the money for about a dollar, and my moved up stops got tripped, and I’m out for a profit.

    My earlier purchases of SRS (early) and FAZ (early) are still under water. The decay is bothering me.

    Here, I admire Karen. I bot small amounts of FAZ at 17, 10, doubled down at 8, and then… was too uncertain — lacked conviction to go again at 4/5. It appears that she got in at 4/5 and got out around 6. obviously a better outcome.

    My thesis was that the stress tests would reveal that the banks need money, and the stocks would go down. Did not really happen. My other thought was that this was so obvious that it would be priced in by the time the results were announced. This also didn’t happen. I was only half right –banks need more money. But the important part, stock prices going down, not so much.

    I am still watching a bit, but the salivating over the double n triple short trades has ended.
    This is a ‘sentiment’ call. one bear that has somewhat capitulated.

    If anyone has questions about trademarks (Leftback) I can say that I’m good at that.

    Also, to participate in reflation, we are going to buy a house. And finance the daylights out of it, care of FHA. Might as well shift the risk to the gov, and the taxpayer. It seems like the real winning trade.

    I say that with some sadness.

  35. dlipton says:

    Normalized earnings is the correct way to value companies as long as you incorporate net debt (cash). If these losses are truly one-time then they should be evaluated based on their balance sheet impact, not their repeating income statement impact.

    Of course, many companies play games with what constitutes one-time vs. rare-but-repeating and that needs to be taken into account. If you think these massive losses will occur regularly then they should be accounted for as a repeating accounting expense, like depreciation is.

  36. Cursive says:

    This was/is a credit bubble. One would expect the financials to have felt it more than other sectors, but the demand destruction will affect all sectors. To paraphrase Ron Griess, would you buy the SPY today knowing that December 2010 estimates for as reported earnings are currently $35.67, implying a P/E multiple of 25 times at Friday’s price? Forget selective exclusion of data, that is the pressing question.

  37. ben22 says:


    That’s what I’m saying above, when you have credit deflation and an economy that is 70-75% based on consumer spending, and that spending is contracting, along with credit, all earnings are going to take a beating.

    Best of luck to anyone trying to predict earnings between now and 2010. One look at the expected earnings of the S&P over the last 2 years and how they have been revised reveals that they haven’t got a clue where they will be. Why should I assign any sort of multiple then based on a projection out to 2010. The market is trading on emotions right now, very little of what is going on has to do with earnings or the health of balance sheets outside of the financial sector.

  38. leftback says:

    Some days SPX goes up, some days it goes down. It remains over-valued.
    Every single day there is a massive amount of debt overhanging the US consumer. It never changes.
    Some people live in “a million dollar home”, but that doesn’t mean they can sell it for $1M pictures of George Washington unless someone creates a great deal more of the latter.
    In the long run, we are all dead. While we live, we trade.

  39. cvienne says:

    I mean…

    If this is all true…If the SPX is 131x earnings, or 30x earnings, or 20x earnings (and ‘knowing’ that even 20x earnings are levels of the 2000 crash, and the GD), then couldn’t the case be made that these ‘stockpickers’ that they troll out on CNBC are almost to the point of ‘criminally’ pumping up stocks at this point…

    What’s the difference between Westbury, or Lufkin, or anyone telling you now that “stocks are cheap”, or Mozillo about 5 years ago selling you “cheap” financing, or the NAR saying that home prices would go up for at least the next decade?

    They rounded up all these guys and made criminals out of them yey OBAMA himself was coming out last month and telling people that stocks were cheap, buy stocks!


  40. Mannwich says:

    Our morning reality check. Mulch and weed (green shoots) killer may be selling at Lowe’s and HD though. I know. I recently bought both……


    Ho hum. Just another day in pretend land.

  41. Steve Barry says:

    Anyone long any equity or commodity is on borrowed time. Things could crash at anytime…credit needs to be reduced and assets of all types will be sold at a discount to pay off the debts…the dollar will actually be supported by all this in a counter-intuitive way, as the government cannot print enough money to avoid asset deflation due to liquidations.


  42. cvienne says:


    The foreclosure resale page is EXACTLY what one would expect…

    Back in ’80-’82 (the housing mess BEFORE even the 1990 housing mess), I did property inspections for FHA (as well as ‘board-ups’ in the exact same area)…

    The big difference back then was that interest rates were WAY HIGHER, but the result was the same…

    Either people with cash (and actually a lot of ‘syndicates’ pooled $$ together and bought up mostly on the low end)…They turned whole neighborhoods into rental areas…

    Ultimate landlord-serfdom phenomenon…

    One thing that happens is that as people start getting kicked out of their houses, they actually start living together (and sharing rent & expenses)…That is a phonomenon that is still YET TO COME (and certainly won’t be talked about by the NAB guys at 1PM)…

  43. Transor Z says:

    I think it may be worthwhile to look at S&P profits ex financials to try to spot relative investment value, but the S&P includes financials so it is what it is. If you’re damned and determined to make a Happy Chart, then just take everything out that you don’t like and Be Happy, by all means. It’s a free country.

    WRT the Kobe Bryant high school grad analogy, this chart takes into account the “graduating classes” of 2006-09, yes?

  44. ben22 says:

    @ Steve Barry,

    I completely agree with what you say at 10:55. And I also agree with that outlook on the $.

  45. Seth says:

    Jeremy Siegel has his doubts about this earnings calculation: Stocks are cheaper than they look.

  46. leftback says:

    “these ’stockpickers’ that they troll out on CNBC are almost to the point of ‘criminally’ pumping up stocks”

    That would indeed be the business model and raison d’etre of CNBC, old sport. Agreed with SB and ben22, the $ will be much stronger this summer and fall than people realize.

    ben22: nobody ever gets it right two years in a row – except ben22 in 2008-09. You’ll end up as a legend.

  47. Mannwich says:

    Apparently it’s ’07 again. Companies pretend to have quality earnings (or at least “better than expected”) and we pretend to believe them……until we don’t anymore. It’s the new “Bigger Fool” economic model. It works until it doesn’t.

  48. Gary Greenberg says:

    Normalizing earnings in the midst of a global credit contraction that has not as yet been reversed seems a little optimistic and of dubious value.

  49. “ben22: nobody ever gets it right two years in a row – except ben22 in 2008-09. You’ll end up as a legend.”

    ben22, lb is correct here, too..


    you are, as well, and also, as always, a clear Ray of Light–visible through the Miasma.

    w/this: “Ultimate landlord-serfdom phenomenon…” you’ve noted the Endgame of the current Trend, if We allow it, to continue, unaltered.

    as an aside, peep may care to spy DRYS, b4 it hits 7 1/2..

  50. arbitrader says:

    I can understand the desire to exclude significant outliers. They can skew the results. But then its easy to just cherry pick out the bad apples and leave in the positive outliers (if there are any). That is why mathematically a median is used instead of the mean in many cases (medium home price, etc.) This gets rid of the skew of outliers without the risk of cherry picking.

    It would be interesting to see what median earnings are if such a statistic is easily available.

  51. Steve Barry says:

    Wesbury just said “the storm has passed”…little does he realize that was just an early feeder band.

  52. Steve Barry says:

    I’ve never bought SRS…but man that is a pretty rounded bottom on the chart…those tend to really do well.

  53. Seth says:

    And S&P responds to Siegel here. I’m still curious about how concentrated the losses are. Maybe the S&P is way overvalued, but are there any brighter spots worth a look?

  54. constantnormal says:

    Just the impact of doing away with the mark-to-market rule should render these charts nonsensical.

    How can one make a meaningful comparison between a quarter when companies were required to value assets by what they would fetch on the open market, versus a quarter when assets were valued according to whatever story the company could make up and present with a straight face?

    The fact that S&P is STILL projecting a (substantial) net loss for the year for the S&P 500, even without the burden of reality-based accounting, should tell people something about the bottomless nature of the hole we are in.

    It’s gonna take a mighty rocket to even get us to where we can see the edge of the hole — luckily, the endless amounts of debt being poured into the economy might do the trick. The only question is, once we emerge from the hole, will there be anything left to emerge into, or will we be back at the sticks and stones stage of development, with everyday dollar transactions measured in millions or billions like yen?

    I leave it to the philosophers to debate how many dollars can dance on the head of a pin.

  55. cjcpa says:

    re: SB

    Like many have commented, it seems that the game is rigged. I would be getting into the SRS, but I think some artificial support exists. Promises to back up bonds, or some other influence that I am not aware of .

    When big mall owner goes bankrupt, and REITs surge… it just does not compute to me.
    IMO, SRS should have been a buy the last two months, and should be a sell now, having reached its target… if the market was anticipating what I anticipate.

    but I will try not to continue to post that this all does not make sense.


  56. leftback says:

    Wesbury – fantastic contrarian indicator. A remarkably stupid intelligent man.

    SB – as an expert on such famous Bottoms™ as the Leftback Low™, I find the rounded bottom of SRS appealing.
    Bear in mind we may sit around all summer waiting for this CRE thing to blow up – but blow up it will.

  57. Mannwich says:

    Meanwhile, Lawrence Yun and the NAR are at it again. Weren’t they saying these same things in ’06/’07? Do they just play tape of NAR’s greatest hits over and over again when asked for their outlook?


  58. Mannwich says:

    This part in particular jumped out at me, and confirms that it is indeed ’06/’07 all over again. Insane.

    Shaun Donovan, U.S. Secretary of the Department of Housing and Urban Development, announced that the Federal Housing Administration is going to permit its lenders to allow qualified home buyers to use the $8,000 tax credit as a downpayment.

  59. cvienne says:

    I was watching a lot of History & Discovery channel this weekend and there were all these “Armageddon” themes…

    They were talking about 666 the mark of the beast…

    That’s it! S&P hit 666 and everyone started believing it…It’s the ANTICHRIST! :-)

  60. cvienne says:


    So tell me how that works…You “use up” the $8,000 as a downpayment so then you can’t DEDUCT that later?

    Then does that mean your TAX bill is higher (like your balloon on the ARM would be)?

  61. thetanman says:


    On every rally I can remember there was a large number of people saying that nothing made sense. India up 17%, Hong Kong way down and finishes up. Somebody with a lot of money thinks things make perfect sense. Unfortunately, people with cash and savers are the fall guys. It sucks, but that’s just what they want and they usually get it.

  62. Mannwich says:

    @cvienne: I have no idea. It’s all funny money now, right? I just wish we’d get some clarity on our own situation now so that we can sell our home now to the greater fool before the excrement hits the fan again. I’m guessing next year’s selling season may not be so ripe.

  63. Cursive says:


    Thanks for the peepshow. Much appreciated. When you think about it, that conference sounds as though it maybe more distasteful than porn. I don’t know what I would have done for two or three days listening to that claptrap. As MEH might say, they should save the Kool Aid 151 for after hours pursuits only. Furthermore, I am not so sanguine about your prospects for being a legend, as predicted by LB and seconded by MEH. If your colleagues are this out of touch with reality, it is obviously because they are rooting for the failed business model of buy-and-hold. You were probably a distasteful fly in their Kool Aid 151 this weekend and, if your forecast is correct (I agree with you, BTW), you will only morph into something along the lines of H1N1 in their eyes. Infamous and derided perhaps, but not legendary.

  64. I-Man says:

    @ Left: You know very well the only “stock pickers” on CNBC are there to pump stocks they want to dump, or are just talking the book because its great marketing.

    @ Steve Barry: Now the script has really flipped, I’m long QID too. And I appreciate a nice rounded bottom myself.

    @B in TN: Thanks for posting, been awhile since I checked in on Hussman. Looks like he took a long walk over the weekend. Poignant and clear… but as he says: “too bad no one is listening.” They will, once Survivor and American Idol are over I suspect. (snark) The part debunking the myth of a “Mtn of cash on the sidelines” is awesome. Now… why couldnt I figure that out? Dude is smart!

  65. leftback says:

    “Infamous and derided perhaps, but not legendary.”

    This assumes that the Tyranny of the Incompetent continues, and survives the Economic Singularity.
    If brokers lose 80-90% of people’s retirement savings, they eventually destroy their own market.
    By investing for a normal “lower rates recovery” during a Debt Deflation, they may do just that.

    Eventually people look to the few advisors who were right all along, and the Old Guard walk the plank.

  66. ben22 says:

    @lb, cursive, and MEH,

    Thanks guys. Lucky for me, these sessions the past few days were only a few hours at a time so they typically ended right as I was about to puke and then I’d have the rest of my day to enjoy DC. Last year at the conference I felt out of place, which I accepted, I know retail FA’s are in general, going to be morons, this year though, I felt like I was from another planet.

    I wish other people could have been there with me to hear some of this stuff. I’ve had client money sitting in cash and short term bonds for well over a year now and I sleep like a baby. The stuff I talk about on here is for my own accounts, I don’t take those sort of risks with clients money, for the most part, I work with pretty simple people, they need what they have.

    After I explained to this same person that told me I would not be right two years in a row why I was still bearish he said that “there is nothing worse than when everyone is making money and your clients aren’t” and I do get that career risk. Grantham talks about it all the time.

    My response back to him was this:

    “I really don’t think that any of my clients are thinking that way right now, less than 5% of them lost money last year, they know what happened to other people. Your clients on the other hand, if your clients are all down 30% then you now need to gain 60% to break even. How long is that going to take?”

    other FA: so what, I think the market will be back at 14,000 in a couple of years.

    “Really!” “You have been here 10 years right?”

    other FA: Yes

    “So, clients that you invested money for in 1999, do they have a negative return over that period, or have they in fact made money?”

    other FA: Yes, I have a lot of clients that lost money over that period, maybe a few are up a little bit but more of them lost money.

    me: If I go 10 years with a client, charging them a fee for asset management and they only lose, I will quit. I don’t deserve to be doing this if that happens. I will not go a decade getting paid for losing money for people.

    other FA: You don’t understand the business then.

    At that point I walked away. This is advisor has a book about three times the size of mine.

    Anyway, the reason I share this for people is b/c it might help some of you understand how the market, while it seems nuts to anyone paying attention, can in fact push all the way up to 10k despite how wrong it would seem. These advisors collectively control many billions of dollars worth of capital. I can’t imagine these attitudes are much different at other firms either.

  67. leftback says:

    It’s all about the fees, baby…

  68. I-Man says:

    @ Ben:

    I feel your pain bro-

    There isnt a place in the traditional FA game for guys like us. We are destined to trade our own accounts, go indy, or go hedge. My preference is to go small hedge some day. Just waiting for the first big speculator to come along. The days of the mutual fund FA are over. The paradigm has changed. An FA will need to understand global currency, fixed income, commodity markets, AND equity markets. Not to mention know how to short. For some reason… I doubt a quarter of us know how to do half this.

  69. Cursive says:

    @ben22 12:16

    “Anyway, the reason I share this for people is b/c it might help some of you understand how the market….”

    The sharing is much appreciated and it does help to explain market behavior. I have been “early” a few too many times waiting to short the Inevitable Fall (TM), so this does help in giving me a different perspective. Congratulations to you for sparing your clients the stress of last year. I did the same for my mother’s accounts (which I control), but my brother did not heed my warnings. He is tight-lipped about his holdings and his amounts, but he did tell me he lost hundreds of thousands. Good luck to us all.

  70. Maj Tom says:

    Steve Barry – Right on…

    Have done much S&P 500 research and yes – the only conclusion is a lower S&P. At 900 by year end, the trailing GAAP earnings (excluding Q408 @ -23.45) would be around 31… Still expensive.

    If one looks at the credit explosion from 1995 to 2007 and the subsequent rise in difference between GAAP and Operating earnings – it is clear that the last 2 bubbles were indeed fraudulent or misguided representations of earnings.

    Historical from 1936 = 15.7 (GAAP, not Operating), but last 10 years average = 25. Highest trailing = 46.50 back in 2001, until Q4-08 when it hit 60.70, this quarter 122′ish, next 1697, then negative 316, and on to the 31 area…. Notice also that even the operating estimates have been creeping down week by week… (which insidiously makes the market more expensive).

    The largest input into earnings is now Health Care @ 28%, followed by Consumer Staples @ 17.86, Tech@17.64, financials are only 3.59%… Q1 06 financials contributed 27.96% – but are now just a fragment of the glory securitization years…

  71. wunsacon says:


    Thanks for that Siegel article link. I think Siegel’s case can still be made. Why? Well, using the S&P’s analogy of a single company with 500 divisions, why can’t that company shut down many of those poorly performing divisions and then come out really, really ahead?

    A counterargument to that is: if “too many” of the S&P divisions must close and fire workers, will those fired workers still keep spending in a way to generate earnings for the profitable companies? And/or will the government decide to tax some of the really profitable divisions (e.g., Exxon) to help pay for other activities (e.g., alternative energy)?

  72. leftback says:

    “This is advisor has a book about three times the size of mine” – I bet it doesn’t stay that way. Wait for the next deluge, guys – and then take your clients and walk. Meanwhile get access to the client lists of the tools you work with so that you can help those people out with investing whatever they have left. Office space will be cheap….

    Conformism is an incredibly strong force for some people. I see folks in NYC and CT and I KNOW they are down 40-60% of their net worth (even BEFORE the housing market collapses here), yet they act like everything is normal and they still have faith in the system, their broker – it’s the whole stuffed shirt, empty suit mentality. Eventually I will have their lunch, their house and their previously owned European automobile, simply because they are too trusting of their brokers and too stupid to think outside the box for themselves.

    The next leg down might, or might not, cause a real panic among B&Hers and 401Kers. What do you think?

  73. I-Man says:

    Anyone watching the Q’s?

    Tag 34 and reverse to make the “lower high”?

    I think I’ve learned a lesson in calling this “top”. From now on I’m going to focus less on the actual top, and start opening my shorts on the “lower high” not the actual high.

    This strategy would apply to all the “toppy” charts here: SPY, QQQQ, XLF, USO, etc.


  74. Transor Z says:


    Not sure I understand your point. If one of the 500 divisions is Toxic Co., that poisoned groundwater and operated a nuclear plant that “went Chernobyl,” then it might be worth noting the $100 bil liability generated by that destructive division.

  75. cvienne says:

    If this keeps up…

    ‘Sell in may and go away”

    Is going to be replaced by…

    “Short in May and continue to pray”

  76. Bruce N Tennessee says:

    “It may sound irrational to be worrying about inflation in the middle of a deflation crisis. These two curmudgeonly quotations come from China, signalling that solutions deemed obvious in one part of the world may look quite different from another with conflicting interests.

    The first, from the People’s Bank of China this week, is a clear warning that savers there could become the victims of a western economic recovery tempted to inflate off the debts incurred in the current recession, including by currency devaluations. The second, from an article in the Financial Times by Andy Xie, a Shanghai-based economist, warns that US policy is pushing China towards developing an alternative financial system to protect itself from such an outcome.

    Because of its reserve currency status the US can print money, in the spirit of its former treasury secretary John Connolly, who told his European counterparts in 1971 that “the dollar is our currency but your problem”. Ireland is currently suffering from a similar British attitude. Xei says Obama’s decision to redeem mainly those who caused the recession rather than its ordinary US household victims will reinforce the pressure for competitive devaluations. This makes a 1970s-style global stagflation the likely outcome. In that case China would be forced to float its currency and create a single, independent and market-based financial system. The dollar would then collapse.”

    This is from: http://pensionpulse.blogspot.com/2009/05/w-recovery.html

    More thoughts about what could be ahead when the deflationary trends are over..it certainly appears that the porridge this go round will either be too cold or too hot…and the added worry of how the government will “help” in getting around this crisis will certainly make it difficult to invest. Like Ben 22 has been doing for his clients, I am also in short term cash bets and sleep well at night. When the deflation looks like it is going to end, I will have to leave my gentle sleep and get back in their with Ben and Lb and all the rest…pass the Tums..

  77. Onlooker from Troy says:

    Siegel is just desperately trying to validate his “stocks for the long run” thesis, just like the majority of the industry that grew up in the great bull run of ’82-’00. He’s just digging his hole deeper and making himself irrelevant. You can really smell the desperation coming off of him.

  78. I-Man says:

    Where is the Mistress?

    After some long deliberation this weekend… I decided to open some SCO today to short USO. Ahmadinejad be damned.

    USO backtesting the broken uptrend that began on 3/2 here at approx 32.50 was just too tempting for me to not pounce on some SCO here. We’ll see how it goes.

    I dont think I’ve had the opportunity to be short of so many things at once… XLF, QQQQ, USO… now all I need is to short some FXI and EEM and I’m a regular dougie kass.

  79. leftback says:

    I-Man: I am playing this level here as the lower high – looks like a fair bet for the charts in SPX and QQQQ, IYR, XLF and the 10-yr yield, but of course if we see 925-930 again we will have to tear it up and start over. The last battle may be waged up around 950 at the 200DMA, or it may be right here. We’ll just have to wait and see, so make a plan and take the emotions out of the trade, right?

  80. danm says:

    Anyway, the reason I share this for people is b/c it might help some of you understand how the market, while it seems nuts to anyone paying attention, can in fact push all the way up to 10k despite how wrong it would seem
    I would not be surprised if it does one little bit. Because you had all those faux-bears who were conservative enough to stay liquid in the first round but impatient enough to finally dip their toes in the last few months.

    But when the market drops again, you’re going to get one heck of a panic because it will have wiped out the 2 batches of investors.

  81. karen says:

    I-Man, physically I am in San Francisco, and mentally, I am disenchanted with the posts here : ) and some were picking on me the other day.. I’m quite sensitive and my feelings are hurt easily.

    So, as usual I disagree with “everyone.” I did short some gold at the end of last week but it’s not doing much and i have things to do… can’t babysit that much longer today.

  82. dead hobo says:

    So, is today a Desperation Rally or what? Who the hell is buying stocks? Just about everyone not on CNBC writes this rally is spent and it doesn’t reflect the economy. What’s holding it up? An SLP circle jerk?

    On another topic, I’m thinking of using the $1500 furnace / central air energy credit and upgrading my HVAC, even though nat gas is in glut. Plus a lot of vendors are advertising deals that should continue for a while. I have until the end of 2010 to do it. Anybody have an opinion on this?

  83. leftback says:

    “But when the market drops again, you’re going to get one heck of a panic ”

    I agree, once bitten, twice shy, should have been the watchword. I wonder how they will get them in the market for a third time? The next deep drop could produce a plunge as J Retail heads screaming for the exits – and could very well end in a Death of Equities moment.

  84. I-Man says:


    We just put in a bad ass electric furnace/heat pump. Carrier unit. It is way cool… dont know what part of the country you are in, but in the PNW they work fantastically.

    I am all electric in my house, no gas at all. But then again, electricity is cheap and plentiful here thanks to the hydroelectric power of the Columbia.

    Throw in some thin film solar panels and we’re kickin it inna fine style.

  85. leftback says:

    “Who the hell is buying stocks?”

    Banks buying banks, on the upgrade by analysts at banks. :-)

  86. danm says:

    I wonder how they will get them in the market for a third time?
    When all their HY bonds get converted to equity :)

  87. leftback says:

    @danm: That’s extremely clever. LOL.

  88. DL says:

    karen @ 1:12

    “…and some were picking on me the other day.. “

    Is it better to be looked over, or overlooked?

  89. dead hobo says:

    I just read that FASB has changed more rules. The new one offsets the recent mark to market change. Apparently, all off balance sheet debt is going to be used to calculate reserves and may no longer be ignored. So is there much crap still being hidden off balance sheet and is another little bank stock plunge on the menu?

  90. karen says:

    oh, thank you, DL. what a boost to my frail ego.

    well, i’ll let ya all know when i go short… but it’s not here.. this time, FAZ may well get into the 2s… SRS will probably break its previous low of 19.55. I am seeing nothing in that chart that says buy me now.

  91. manhattanguy says:

    Japan AAA credit rating cut by Moodys

    Conveniently ignored by mainstream media.

  92. dead hobo says:

    Re the FASB change, was this a part of the stress tests?

  93. DL says:

    At this point, the idea of FAZ getting to @ $2.00 in the near future is not shocking at all.

    Nevertheless, if XLF were to make a quick run to $13.50 from here, it would be worth putting on a short-term short position.

  94. karen says:

    I am in shock an awe of GS at 140, tho… look like it will see 150+..

  95. manhattanguy says:

    Karen @1:40

    Today seem like a re-test of 9dma, if it fails I doubt Financials will keep going up.

  96. leftback says:

    @karen: We are in shock and awe of your trading acumen on a daily basis.
    As for your other charms, one can only imagine…

  97. Pat G. says:

    “How Much Have Profits Fallen?”

    If they hadn’t cut costs (laid off people) profits would have fallen much further. However, any sword is two-sided. Less money to Americans who are mostly debt laden translates to a consumer who only buys what is necessary. That’s a vicious cycle.

  98. ben22 says:


    I appreciate the comments, hope some of mine are a help as well. My client allocation is one of the reason’s I’m able to come here a lot during the day. Our ideal allocation and strategy is capital preservation right now, lots of cash. I don’t have discretionary control over any account so despite the fact that I’ve been bullish on here for a couple months, my clients have almost entirely remained out of the market. There isn’t much management or work to do when that’s your strategy. I don’t need to be there at the bottom anyway, I didn’t ride this all the way down. I’ll lose some clients as a result of this but I don’t care. I know it’s coming. As I’ve been saying, retail wants to buy the banks so they can double or triple assets in a few months.


    I’ve come to the same exact conclusion. I’ve thought about hedge, or just going RIA and setting up my own shop.


    I think when this countertrend rally is over it will be a nightmare of a downturn and will cause the panic you asked about. This idea of “the storm has passed” on the way to higher ticks is going to set us up for it.

    I predict that before this is over the desire to hold cash instead of equity will be at all time highs. This will be able to be seen in the Investors Allocation Survey, among other places. I noted here weeks ago that the allocation to equity never recovered since 2000, sure part of that could be due to the market being down and as a result the % in equity is lower in an account, however, I think there is more psychology at work here, the idea of “stocks for the long term” should be shredded before this is over.

    I think valuations, the topic of this post, for stocks, will be far lower than even bad bear markets in the past. I think the next downturn will produce many violent rallies of 20%, much like we had seen from 10/07 through this March, drawing people/advisors/pensions and hedge funds back into the market each time. This would all be fitting for a Wave 3 down, which is what I think is coming next the more I study EW Theory.

    People ask about the PPT during this downturn and my response is that they are powerless and the bags of credit they hold are too small. If they were really as strong as some think, or in control like some think, we would NOT have been down over 60% from the peaks. I just don’t think it would have gone that far. When the credit deflation truly takes hold it will happen fast, and I think we are right at the brink of that now. One look at the chart above, whether you want to include financials or not, shows that the profit decline happened like the flip of a switch. As I’ve been saying, as more and more people recognize that the deflation is here, it will be violent and quick. Anything the Fed, the Treasury, or the Adminstration can do from there will only be reactionary. They cannot get ahead of this, as they never understood it from the start. When I hear them say they have done enough, which I think they will before this countertrend rally is over, I’ll be going all in short in my own accounts, this should come when we have higher prices and when there are way more than just one Franklin on this board.

  99. aperian says:

    @ cjcpa

    if kobe stopped paying his credit card bills and your class had to pay $100 million than you would care! it is crazy to drop aig or citi…they are the economy. they are all the jobs. if you want to take them out then take out their profits over the last ten years..then our economy never recovered from the 2000 crash……….

  100. DL says:

    karen @ 1:12

    See? It’s not all uniformly bad. (See leftback @ 1:47)