Lately there's been a lot of bruhaha circulating about where
the Market is heading. King George has been sending a lot of horses and men all
over the kingdom. King George may not be able to put this Humpty Dumpty back
together again. Everybody is talking all around the problem as usual, including
Sam and Cokie and their ostensibly knowledgeable guests on the ABC program,
This Week. Here's the heart of the matter which nobody seems to want to talk
Qwest Says Used Improper Accounting in 1999-2001
28, 2002 Reuters -
"Qwest Communications International Inc., already under
federal investigation for its accounting practices, said on Sunday it would
restate its financial results because it improperly booked $1.16 billion in
sales and other items in 1999 to 2001. Qwest, the dominant local telephone
company in 14 states from Minnesota to Washington, also withdrew its financial
forecasts for 2002, which called for it to report up to $18.4 billion in
revenues. It said all areas of its business have been hurt by slack demand,
stiff competition and softness in regional economy."
improperly booked? Improperly used instead of the word,
illegally. How many other companies will restate? How high will these
restatements push the real P/E ratios?
Bush, Cheney: Cheshire cats of reform, As private citizens,
did they do what they now disavow?
DAVID LAZARUS, Sunday, July 28, 2002
"The irony, of course, is that the corporate-reform bill President Bush
will sign into law this week would have made his own actions as a businessman a
Closing the barn door after the horses
have gone out?
"Clinton Rips Bush on 90's Fraud
(AP) - Former President
Clinton says the bull market of the 1990s bred corporate corruption but that
President Bush's laying blame on his predecessor twists the truth. "There was
corporate malfeasance both before he took office and after," Clinton told a
Washington television reporter. "The difference is I actually tried to do
something about it, and their party stopped it" in Congress. "
The Blame Game. He is responsible. No,
he is responsible. Baloney. Bill tried to stop it? Great. At least somebody
knew about the corporate malfeasance well before the bottom fell out of the
market. How did their party stop it? Harvey Pitt? One guy stopped the
entire United States government and corporate America? C'mon Bill. That Pitt
guy must be one real mean hombre.
As anyone can see from the upper graph, redrawn from an
interactive chart at Bigcharts.com
, the Standard and Poor's index has been in a down channel
since it peaked at around 1600 early in 2002. Few Americans are unaware of
this. Most Americans are aware of how the Markets have behaved in the last
decade. The DJIA and the NYSE have shown similar patterns during the last three
years, although the peaks did not occur synchronously.
We use the SPX because it is the best Market index. The SPX
includes the broadest range of the largest 500 companies in America. The SPX is
the one broad index which includes a P/E ratio. It is a broad average value and
when utilized in the context of an entire index or market it is very useful. It
is this P/E ratio which indicates whether stocks are relatively cheap or
relatively expensive. The two blue arrows in the lower graph point to sudden
jumps in the P/E ratio of approximately 50% in each case. These sudden
increases occurred as stock prices were going down rather than increasing. They
were due to restating of cooked books. That gives an indication of how many
trillions of dollars were affected by the cooking the books underwent during
the bubble years. In fact the record high P/E ratio was recorded when the
S&P 500 had come down 40% from its peak. Had legal accounting practices
been followed, the S&P 500 and its P/E ratio would have peaked
simultaneously since the two are directly proportional.
Here's how LowRisk.com
describes P/E ratio:
"The PE ratio is one of the most
widely watched measures of valuation for both the stock market as a whole and
individual stocks. Many people use it to determine whether the market (or a
given stock) is 'expensive' or 'cheap'. The calculation is very simple. You
simply divide the price by the yearly earnings. For instance, on 10/01/01 the
SP500's closing price was 1038.55. Its cumulative earnings for the 500
companies in the index are $36.79. So the PE ratio is calculated as 1038.55 /
36.79 = 28.23. This means that if you are investing in the SP500 via a stock
index fund, you are paying $28.27 for each dollar of earnings that those 500
companies will have this year. The PE ratio does not work very well as a timing
device, but it can give you some idea of the whether the market is 'cheap' or
'expensive'. And as you can see from the above chart, it is definitely not
cheap right now, even after the large losses that the market has
The P/E ratio can be viewed from other perspectives. Each
unit of the P/E ratio represents one year of earnings.
P/E of a stock or index fund is 28, how many years would be required for the
earnings of that stock or index fund to equal the price an investor has to pay
for one share?
Guess what jelly bean? A lot can happen in 28 years. In 1998
and1999 some companies had P/E ratios of 800, 1,000 or even 1,600. Sixteen
hundred years is a long time. Some companies had only losses. How did pump and
dump professionals make the unbelievable believable? Negative earnings gave
negative P/E ratios. Negative years before earnings equal price doesn't compute
so it was just listed as NA. If companies with stock prices of hundreds of
dollars double earnings, the expected wait time can be cut in half to say only
eight hundred years. If only that 100% growth could have been sustained for a
few years... Some companies used that gullibility test method. Others cooked
the books. Dozens and dozens of paper billion dollar babies went belly up
before the silly suckers had a chance to think about how long it would really
take the stock prices to equal the earnings.
VeeJay said she can remember when all the execs of great
American companies behaved like good boys and girls. They reported losses as
losses, earnings as earnings, and profits as profits. When they didn't report
losses as losses, earnings as earnings, and profits as profits, they went to
jail. They didn't pass go. They didn't collect 200 million dollars. They didn't
laugh all the way to the bank. They weren't popular. They weren't United States
Click graph to enlarge.
The graphs directly above represent a ten year chart of the
S&P 500 on top and on the bottom, a chart of all the data which is
available from Bigcharts.com
for the P/E ratios of the S&P 500, which begins in late
Sunnyside up, over-easy, or charred and broiled?
cooked books could book cookers cook when book cookers get really serious? From
what has been revealed to the masses thus far, there was one heck of a whole
lot of book cooking going on. It was enough to have raised the ENTIRE S&P 500 from a price to earnings ratio of 19
to a P/E of 44. In terms of per cent, that would have been 131%. The
price and the P/E ratio are directly proportional. The drop in share prices
across the board from the already reduced levels served to mask the increase in
P/E caused by the massive amount of cooked book restatementing. So that had the
Market not taken a first and then a second dive to mask the effect of the
restatements, the P/E ratio of the S&P 500, the broadest index of the
largest American companies would have virtually gone off the charts and through
the roof. Approximately the 60-70 range; levels not seen since the correction
in 1929. The Market reached about 1600 with a reported P/E of about 35. The
Market then retreated to about 800 and the P/E was readjusted by restatementing
to about 35. The dollar difference, according to Mr. Robert J. Samuels, between
Market peak and late July, 2002 levels was about $8.2 trillion dollars. Ouch!
That seems awfully, awfully terrible, doesn't it? Is there more downside? It
depends on what P/E people can find acceptable enough to live with. An average
P/E spiking over 20, or in one case, 25 has heretofore been the trigger for
sudden sharp stock selloffs or crashes, followed by at least temporary
adjustment below 20 and sometimes below 15. If people can be comfortable with
an average S&P 500 price to earnings ratio of the present 35, then the
rollercoaster ride may be over.
The cookers who cooked the books knew how much they had
cooked the books. It was massive. So massive that there would have to be a
great movement in stock prices if and when an adjustment were made. The
adjustment could have been either rough or it could have been kind and gentle.
A rough adjustment would have resulted in a crash, lots of folks going to jail,
and missed opportunities to extract as much of the $8 trillion largesse as was
humanly possible. The perfect president, George Bush had a much better idea. A
kind and gentle adjustment. A frog doesn't jump out of a pot which is slowly
warmed to a boil. No crash, extraction of as much of the $8.2 trillion as
humanly possible, and only a few token bad guys are pilloried. Tate Mae is
preserved. You gotta love it. It's perfect.
So what's the big deal if the P/E is 60 or 600? It's all
just a bunch of numbers anyway, right? The fuel, or fodder, depending on one's
perspective, for the whole stock market concept ultimately rests with the
decisions made by Jane and John Q Public, the puny individual investors. The
longer they can see that they will have to wait for their invested cash to
equal the expected earnings or increase in earnings, the harder it will be to
sell them on the idea of putting that precious cash at risk. That's the problem
in a nutshell.
Real earnings. Do real earnings matter? Stocks can be traded
quickly and investors can be in and out of them several times daily. Who cares
what the silly P/E ratios are? In a commercial for Hanes underwear a fat mean
old lady says, "They don't say Hanes until I say they say Hanes." Just as
seemingly arbitrarily, someone has said that real earnings matter now. When
real earnings matter, the P/E ratio matters. That's how you know if a stock or
the market as a whole is priced right. A P/E for the S&P 500 of 20 means
that a hypothetical 20 years must pass before earnings equal price. It's
hypothetical. It's imaginary. But when the fat lady says that earnings matter,
P/E's have historically headed for the fifteen year level or lower. As of July,
28, 2002, the S&P 500 is at 850 which is equivalent to the 35 year wait
level. If the S&P 500 dropped into the twenty year range for P/E, we would
see it at around 600 or less. This then begs the question of how badly you want
to see corporate malfeasance cleaned up. The more you clean it up and get the
accounting books in order, the more the poverty effect of stocks will be felt.
The more you ignore the cooked books, the more of the wealth effect of stocks
can be experienced. In either case the NNPC taxpayers will pick up the tab.
They will either foot the bill for illegal tax dodging as they did in the
Savings and Loan Scandal. Or they will experience the poverty effect of the
bear market. Pick your poison. An S&P at 600 will have wide ranging nasty
effects that will hurt. You can bet the farm on that.
As CEOs are threatened with increasingly draconian
penalties, it is possible that more companies will follow the precedent set by
Qwest. If there is further significant restatement of accounting cookbooking,
that would push the P/E levels up yet again. This would require a frightening
fall in share prices to get back down to the historical precedent of fifteen or
twenty year levels.
Click graph to enlarge.
The chart above shows the average P/E ratios of the S&P
500 for about the last 57 years. During the time period between 1943 and 1991,
it can be seen that the value of the P/E ratio rose above 20 only three times.
The amount of time which the value remained above 20 represents less than 6% of
that total time span. 55% of that time period saw the value of the P/E ratio
less than 15.
Vee Jay likes the Washington Post very much. She
lives in an upscale neighborhood outside the Beltway in a state outside the
District of Columbia. So the Washington Post is considered to be an important
and influential source of information for her. VeeJay reads it almost every
day. She was concerned enough about some Washington Post articles to send them
to us for comment. One such article came out about July, 24 2002. Some
The Market Pendulum
By Robert J. Samuelson
"Even 15 or 20 years ago, the stock market remained an
economic sideshow. Its rises and falls often signaled economic turns, but the
market itself wasn't a large force driving the economy. No more. Roughly half
of U.S. households own stocks or mutual funds. In 1980 only 13 percent did. Now
millions of American calibrate their wealth and well-being, at least in part,
by the market. The market's fall must affect the economy, social attitudes and
national politics, but because the situation is new, no one can say just
"The biggest danger is a corrosion of consumer confidence
and buying, which have buoyed the economy. The June unemployment rate of 5.9
percent, though above the recent low of 3.9 percent in late 2000, isn't high by
post-World War II standards. If production and jobs continue advancing, they
should halt the market's slide. But the opposite could easily happen."
" Undeniably, stock losses have been huge. As of yesterday,
the market's "capitalization" (the value of all traded shares) had dropped 48
percent, or $8.2 trillion, since its March 2000 peak, says Wilshire Associates.
Of that, about $3.7 trillion occurred this year, including $2.1 trillion in
July. Economists estimate that every $1 change in stock market wealth
ultimately results in a 3-cent to 6-cent change in consumer spending: up in a
rising market, down in a falling market. People feel wealthier or poorer and,
as a result, spend more or less."
"The stock market got wildly overvalued -- making its
ultimate fall unavoidable -- because Americans became hypnotized by silly
stories of the Internet and the 'new economy.'"
Most Americans fear the Market enough
to make some attempts at due diligence. Americans were equally fooled by cooked
books which led to false economic indicators.
"Now the danger is a swing to a stubborn and senseless
pessimism. That, too, could become self-fulfilling. People dump stocks, even
though prices now are more reasonable than two years ago."
Not senseless, Robert. Check the P/E.
The P/E is the same as two years ago, therefore prices are not more
"Consumer spending suffers, because stock-ravaged savings
need replenishing. Production and profits worsen, triggering more job losses
and stock market declines."
"The economy seems destined to suffer further setbacks,
because the boom left real problems. For instance, office vacancy rates have
soared as bankrupt companies threw millions of square feet of surplus space
onto the market. In the past 18 months, vacancy rates have jumped from 9
percent to 15 percent in Chicago and from 3 percent to 20 percent in San
Francisco, says the real estate firm Cushman & Wakefield. But all the
economic damage could be compounded if the press, politicians and public
figures in general poison the climate through a relentless demonizing of
business and a one-sided obsession with economic casualties."
"Mood matters. If the 'down' is as hyped as the 'up,' where
we're headed won't be pleasant."
Mood? Hype? If?
Deja vu baloney. When the Japanese
bubble popped, 125 million folks were told that they could achieve a 30,000 yen
Nikkei again. All that was needed was for them to spend their way out of it. It
was just a matter of mood, they were told. Almost ten years later, nobody but
nobody believes that line of baloney ever had so much as a smidgen of veracity.
Public works projects did provide a sweet honey pot for the OPC. It kept that
segment of the populace happy. It also ushered in a new era. One of deficit
government spending. Another OPC honeypot. Is real estate going to be a haven?
It certainly wasn't when Japan's bubble popped. Sooner or later everything
which costs money will be affected. Poison the climate?
"Mood matters. If the 'down' is as
hyped as the 'up,' where we're headed won't be pleasant."
as the Washington Post article suggests, we expect the down to be hyped to the
max. Robert R. Samuelson attributes the recent market moves to mood and hype.
That's his bottom line. That's baloney. And Robert J. Samuelson knows it. The
market hasn't gone down because of hype. The Market has gone down because
profits and losses have finally started to be truthfully reported. And that's
why the Market will continue its channel down.
Here's what we
Mr. Samuelson wrote, "Undeniably, stock losses have been
huge. As of yesterday, the market's "capitalization" (the value of all traded
shares) had dropped 48 percent, or $8.2 trillion, since its March 2000 peak,
says Wilshire Associates. Of that, about $3.7 trillion occurred this year,
including $2.1 trillion in July."
Do you really believe that $3.7 trillion vanished down the
toilet this year? What a rube. News Flash: In the Market one simpleton's loss
is the shark's gain. Unimaginative simpletons hold stocks as they plummet in
price. Someone else can "borrow" those same shares, selling them short, and
pocketing the loss as a gain. There are many other ways to profit from downward
movement of stocks. Short selling is just the most obvious. Movement creates
gains. It doesn't matter if the movement is up or down.
The only thing that matters is that everybody can not be
allowed to know the direction of the movement. Somebody always knows
beforehand in which direction movement will be.
VeeJay doesn't check the P/E averages of the stock
exchanges, AMEX or Nasdaq. Why? Key information is not available to
individuals. She doesn't check the P/E of indexes like the DJIA or SPX. Why?
She can't see the relevance. However, VeeJay is a relatively savvy investor.
She always checks P/E ratios for stocks. VeeJay was out of stocks and into
bonds at a stodgy 8% before Bush usurped office.
People squawking about a bear market definitely don't trade
options. Options traders are far to experienced, far too cynical to squawk
about something like that. What a perfect opportunity to have sold some covered
calls, the longer the better. Not those cheapie out of the money strikes, at
the money strikes or even in the money strikes. Called out? Wouldn't you have
loved that? Or to have bought some put LEAPS, out of the money, of course. The
QQQ was above 100 after the split. The Nasdaq was off its absurdly ridiculous
5,000 high but, was still between 2,800 and 4,000. Each put contract on the QQQ
could have cost about ten dollars for a 100 share contract, plus commission.
Commision charges are negligible if you buy or sell a bunch of contracts in a
single trade. Today those QQQ put LEAPS would be way, way in the money;
depending on the strike price. QQQ last traded around $22. VeeJay can see why
we were so bullish on put LEAPS back then. Hillary did a similar thing with
commodities futures, turning one thousand dollars into one hundred thousand
dollars. But futures are not as simple as options. And commodities futures
require a lot more insider information. VeeJay has never wanted to experiment
with options. Not even to sell calls against stock she owned. Go figure.
On the brighter side, channels have ups. Why? So that put
buyers and short sellers can get better entry points. Who day trades the short
side of stocks? The same crowd that buys put options. Like the put LEAPS on
American stocks before Bush was appointed. OTM options can make penny stocks
out of any stock. Pleasant is a relative term. It could depend on the entry
point of one's short position. It could depend on how many three year put LEAPS
one scarfed up in 2000 and 2001. Those who did so should be worth millions
today and more if they have more time to expiration on some of their put LEAPS.
How many people are inside that cozy crowd? It was widely known that short
interest on stocks was at the highest level in sixty years before Bush was
appointed. It was no secret.
Short interest. Have you ever wondered about short interest?
If you knew that, you'd have some darned valuable information. That's why you
can't get that information. Sure, you can go to Yahoo Finance and look up the
short interest on any stock. You will see the short interest from last month.
Great. That's worthless. BigCharts and other websites also have lists which are
also worthless. It doesn't help to know what the residual short interest total
was for last month. Sudden lucrative movements happen within time scales of
much less than a month's duration. A cumulative total of residual short
interest gives no trace of evidence as to the shorting activity which had taken
place. The most important point on any chart is always, the next point. Who
knows what the short interest is right now and all the time? The guys who keep
the records. The Market Makers and Brokers, the guys who work the pits, and the
guys who bankroll the commissioned day traders and give them marching orders.
It's their business to know their business. Because if they didn't know their
business, they'd be out of business. They don't guess. Are they going to tell
you their valuable information? What do you think, stupid. Of course not.
The market always goes where nobody expects or necessarily
wants it to go. Otherwise everybody would always win in the stock markets. It's
real simple. Everybody doesn't always win in the stock markets. A bear market
is a sweet honeypot for the OPC. It's a place where sharks make out like
bandits. Get it? Is it possible that any of the $2.1 trillion "lost" in July of
2002 found its way into the bank accounts of hypocritical Democrats pretending
to be concerned about the bear market and its effects? What do you think,
Remember the Savings and Loan honeypot? Peanuts. The Savings
and Loan scam was trivial by comparison. This Stock Market honeypot beats the
pants off of that. $8.2 trillion up to the peak and $8.2 trillion down and all
the interim ups and downs. Now that is a sweet honeypot, indeed.
We asked the Market savvy Kabu Sensei whether he thought
that anyone knew the Market would take a significant 50% drop. His answer was
short and unequivocal. "Certainly," said he. Who? "For starters book cookers
knew, of course, in addition to the other groups who direct Market activity
daily. So you can see that nobody of any importance has to go to jail. What
for? For being obedient? For helping in a truly herculean undertaking? For
doing their job? Their job was all and severally to contribute to the world's
largest SHORT SQUEEZE. Step one,
create dummy companies, get long, hype the upside to the max, cook the books.
Step two, get short stepwise for the ride down. Step three, uncook the books,
hype the downside to the max. Takes ten years to set up and execute. Spans the
tenure of both a Democrat and a Republican president. Everybody gets involved
but nobody knows what happened. Corporate malfeasance is 'cleaned up.'
what an absolutely immense pay off!"
Wait a minute. Huh? That's just plain goofy. This gigantic
Market bubble was nothing but a great big humongous SHORT SQUEEZE? Who planned it? It couldn't have
been the Democrats. They really care about the little guys. We can't buy into
We asked Dick what he thought about getting out of stocks and into tennis.