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November 20, 2008


The Modesto Kid

Hey no freaking out -- they've got things firmly in hand down at the giant mass of pulsing plasma.


Do you think they mean plasma as in hot ionised gas or plasma as in blood? (How would these affect the metaphor? Discuss.) I prefer to think of it in terms of hot ionised gas - my inner Star Trek fan is pleased at the notion of the economy being An Energy Field Of A Completely Unknown Nature.

This sort of thing always makes me think of Bernard Woolley:

Jim: It is said that this is part of a hideous web of corruption, woven by western industrial countries and third world governments, that forms a blot on our modern civilisation.
Bernard: Webs don't form blots, Minister. Well, spiders don't have any ink, you see. Only cuttlefish.
Jim: Spiders don't have cuttlefish. What are you talking about?


Well, that's a new way to look at Yaphet Kotto.

The Modesto Kid

Good news: Krugman advises that we needn't panic about the stock market. "Panic about the credit markets instead."

Glen Tomkins

Why imagine that there's any bottom?

Any secondary market, like the NYSE, will have a problematic relationship between trading prices and underlying values. The only firm underlying value to stocks is the liquidation value of the company in which the stock is held. Well, nowadays most companies don't own much in the way of tangible assets that would be worth much if the company had to be liquidated. Even of this were not the case, companies today tend to supply their working capital needs by borrowing, and these loans would be paid off first should the company be liquidated, leaving stockholders with nothing.

Stocks originated, and had their actual usefulness, in an era when banking was underdeveloped, and capital from lending was scarce. They persist now as a secondary market that has grown wildly beyond all meaningful relationship with its original purpose of providing liquidity to the original investors in a corporation. That growth has been driven by a short-sighted fixation on maximizing ROI that has pyramided these markets.

We may be witnessing the beginning of the deflation of these markets. Just as the expectation of ever-increasing stock prices made purchases on the NYSE objectively (at least for the short term -- and who does long-term planning, or defines "long-term" at greater than 5 yrs!) a good ROI, so the era of deflation will give objective reality to the really lousy ROI, even the LOI (Loss Of Investment), of stock purchases. The momentum on the way down will be much greater than on the way up, and may well break through any underlying value floor to reach all the way to zero.


I think the P/E ratio is still a valid measure of a stock's "real" worth, even in these degenerate days of corporations with few tangible assets.

Glen Tomkins

The P/E ratio

No doubt that a good earnings number is nicer for a corporation to have than a poor number, and it is arguably the single best gauge of value. But, quite aside from the important limitations on ownership of a stock share actually conferring true ownership of that share of the value of the corporation, the earnings picture isn't the whole story. In the present situation, it may not even be that important, taken out of context of the company's overall finances.

How well do the earnings that corporations have to report reflect their financial standing in two areas that, especially in the current situation, are critical to their ability to continue to generate revenue in the future? How much money do they have parked in "troubled" assets? More importantly, how much does their business plan depend on credit continuing to be as cheap and available as it was as little as a quarter ago?

Even many corporations which are still pulling in earnings at a decent clip, aren't pulling it in fast enough to self-finance ventures to which they are committed, because they are running on plans that assumed a much more favorable credit picture. For a long time, and up until as little as a quarter ago, failure to take advantage of cheap and available credit, and to project that financial policy into the future, instead relying on the accumulation of earnings to pay for growth, would typically have made a corporation a slow-moving, stodgy, bad investment compared to the competition. Even the healthiest earnings aren't much of a reassurance of a corporation's soundness in this market unless you understand how the financial crisis is going to impact their business plan.

And, of course, as more and more businesses, and whole industrial sectors, go under to credit problems, whose earnings will be left coming in at a healthy clip in the near future?


Thank you so much for this topic.

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