Posted on 11/10/2002 6:32:02 AM PST by Arthur Wildfire! March
Edited on 04/29/2004 2:01:36 AM PDT by Jim Robinson. [history]
Much of the stock growth in the last years did not reflect business earnings nor potential. It was all speculation chasing price movement - everyone wanting to jump onto any company whose stocks moved upward thus a rush begat a greater rush and stock value inflated far and above reality.
Speaking of Slick Willie going after Microsoft and starting the downturn I heard - can't back this up but heard that the government intentionally caused the stockcrash because too many people were dropping out of the workforce or retiring early because they were making so much in the market. This starved Social Security tax revenue to such a degree that the government decided it had to sink a lot of this fortune and force people back into the work force just so they could tax them again. I would like to hear some people around here, more informed economically that I say what they think about that.
It was "the economy stupid" that kept his miserable naked butt with Monica in the oval office.
That was his only saving factor, and of course he would do all he could do to protect it by simply cookin' the books.
It's too darn bad though that the American people were innocents caught up in his perfidious scheme. We are indeed paying a very heavy price for the pleasure, no, the displeasure of his disgraceful 8 year occupancy in the White House.
According to BEA figures, after tax corporate profits peaked in 1997. That is right Virginia, back before the Asia crisis - remember that one? When the Dow briefly broke down to around 7700, before snapping back over 9000 after the Fed rate cuts following the blow-up of Capital Management? That was the time real underlying business performance peaked. That is when the smart money got out.
The rate of after tax corporate profits in 1997 was $555 billion. Today is it $444 billion. In nominal terms, corporate profits have fallen by 1/5th since the Asia crisis. Meanwhile, the economy has continued to expand, up one quarter in nominal terms. The percent of GDP going to after tax corporate profits has consequently fallen from 6.7% to 4.3%.
The fall in profits after 1997 was not "monotonic". 2000 was better than the other years, with $523 billion turned in then, almost regaining the 1997 profits peak but not quite. The rebound from the 1998 low of $482 billion was presented as "renewed growth" by Wall Street analysts cheering on the last speculative blow off in the market. In 2001, profits fell to $471 billion, below the 1998 level. The bottom was in the last quarter of 2001, at an annual rate of $429 billion. We are up only marginally above that floor right now.
Corporate profits now are running at about the same rate as in Clinton's first term, if you average the rising trend back then. The stock market is twice as high. Back then, price to earnings was half what it is now with profits rising strongly, now it is much higher with profits down to flat.
More broadly viewed, a steady string of strong profit growth stretches from 1982 to 1997, with a slowdown in 1986. Corporate profits increased fourfold over that 15 year period, or a 10% annual rate (nominal). An additional tailwind came from falling interest rates and expansion of the initially low market multiple, established during the double digit inflation period of the late 70s.
From 1997 to 2000, the stock market climbed on hype, not underlying real performance. People came to expect double digit profit growth and 15% stock price growth. But profits cannot in the long run rise significantly faster than the overall economy, which rises only around 6% per year. And stock prices cannot in the long run outrun corporate profits. The period of disconnect was about 2 years, and allowed the market to rise 1/3 to 1/2, even while profits fell 1/5. That mismatch then resulted in the bursting bubble of late 2000 and 2001.
There have certainly been government numbers coming out during that period that made it easier to believe the rosy projections coming out of Wall Street. Productivity numbers in particular were probably fudged. That mattered because it convinced some bulls that long term economic growth might shift to a higher gear permanently. Which, combined with low long term interest rates, suggested that extreme valuations for stocks might be sustainable.
But this was frankly a straw grasped at by bulls looking for any kind of spin. Government figures showing that profits had peaked were readily available. Wall Street took to following "let's pretend" numbers instead, with numerous costs stripped out by accounting games or ignored even though reported, as supposedly "non-recurring". They were thus able to continue predicting double digit growth in their make believe numbers, even as the real ones flattened.
When profits actually fell, however, and clearly were not coming back immediately, companies that had relied on rising earnings defaulted on tens of billions in debts. Real earnings to service those debts had not appeared. Unable to throw more borrowed money at the problem, investment rates fell, and sent the initial credit shock up the line to suppliers to the most egregious overinvesting borrowers (notably telecoms and internet). As tech spending fell, the darlings of the bubble boosters were smashed, with 90-95% falls common.
Certainly some misleading government figures contributed to the whole debacle. But there was and is head-in-sand bullishness to share. Investors believed every sort of too good to be true hype and did not do their homework. Wall Street lied outright sometimes, and more often simply shoveled out the BS being fed to them by corporate insiders. Corporate insiders played every sort of accounting game to boost their stocks, and investors cheered, calling it "maximizing shareholder value". Everybody was going to get rich piling into the same 20 tech stocks, which no one would ever sell.
The fallacy of composition was out in full force as a result. In the long run, investors as a group can only receive money that companies actually earn. Everything else they just pay to one another. And in the long run, what companies actually earn is regulated by the pace of expansion of the overall economy, because the share of GDP going to corporate profits cannot expand forever. The overall economy, in turn, grows around 6% nominal, 1/2 to 1/3 of that being mere inflation.
One can therefore predict with considerable reliability that very long run returns from owning stocks will be about the level of the dividend yield on stocks, plus 6%. In the past, stocks have returned 10% because dividend yields were around 4%. Now dividend yields are 1.5% to 2%, and consequently there is no way stocks can return double digit amounts consistently, from present levels, in the medium term future. It is extremely doubtful that any of this has yet sunk for the mutual fund bulls of the late 1990s.
The primary support for the market at present is the very low level of long term interest rates. That is somewhat misleading, however, because rates are only low for the highest credit quality loans. Corporate spreads are extremely high, due in large part to high rates of default on the easy credit spewed out during the late 90s bull period.
As the economy recovers, corporate profits are likely to resume moderate growth, and to reach the 1997 level once again perhaps 3-5 years from now. The same recovery is likely to increase credit quality and gradually reduce the present wide spread on medium quality corporates. Medium quality corporates are at least as attractive at present prices as stocks are.
Over the past five years, bonds, real estate, and cash have been the places to be. A balanced portfolio would be perfectly sensible with present prices and risks. It may be a bit early, as dividend yields are still low and corporate profits have not recovered much from the late 2001 bottom. A gradual shift from the defensive posture of the past five years to 50-50 (stock vs. defensive) would be a perfectly sensible way to play the present situation.
Above all, the lesson is to do your own homework and not to believe interested hype peddled by almost everybody, not just the democrats or just the government.
They will obstruct the truth and position the opinions of future undecided's of their mindset that he was the second coming of FDR, who we all know was the greatest SOCIALIST who ever lived, thus keeping the great lie of the '90's alive long after SLICK'S dying day.
They say 33% of the folks opposed the American Revolution. It is sad, but seems to be a consistent slice of the population.
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