Wholesale Trade: Sales Cliff Dive

I'll file this as a "better late than never post". Reuters reported last Thursday:

U.S. wholesale inventories fell in November while sales posted a record decline, a government report said on Friday.

The Commerce Department said U.S. November wholesale inventories fell 0.6 percent after a revised 1.2 percent decline in October. November wholesale sales plunged a record 7.1 percent after falling a revised 4.5 percent in October.

Wall Street economists surveyed by Reuters expected wholesale inventories to fall 0.8 percent in November. A month earlier, the department reported October inventories were down 1.1 percent while sales fell 4.1 percent.

Looking at the rolling 3-month change in wholesale trade sales, we see levels down almost 50% on an annualized basis.



Breaking out the sales by sector, we see there was "nowhere to hide" with petroleum and autos leading the way.



The drop appears to have surprised businesses, as inventory spiked which will add to the deflationary pressures we've seen over the past few months (PPI should verify this with Thursday's release) as businesses attempt to shed these excess inventories as a discount.



Why the huge drop in sales? Consumers are less willing (or able) to borrow to make purchases. MSNBC reports:

Consumer borrowing dropped by a record $7.94 billion in November, a Federal Reserve report showed on Thursday, the latest evidence that households were unwilling or unable to take on more credit.

That was the biggest decline since the data series began in January 1943, and was far steeper than the $0.5 billion dip that economists polled by Reuters had expected.

The November decline represented a drop of 3.7 percent, the largest percentage fall since January 1998, when it was down 4.3 percent.

Source: Federal Reserve, Census

Alcoa $1.19 Billion Loss vs, Commodity Markets

AP:

Alcoa Inc., the world's third-largest aluminum company, said Monday it lost $1.19 billion during its fourth quarter as prices and demand for the metal plunged in a troubled global market. Alcoa's loss highlighted the impact of the weakening world economy on key aluminum markets, such as the construction and auto industries. Prices of the metal, used in everything from cars and aircraft to window frames and beer cans, have fallen steeply along with other commodities since mid-2008.

Auto Bubble Breakdown

Cheap financing led to soaring loans.



The same chart with the financing rate axis reversed shows the strong correlation between the financing rate and size of the historical loan value.



This created an environment in which the consumer could borrow more, but pay the same amount (i.e. cheap financing meant monthly payments stayed relatively flat after accounting for inflation).



This has unraveled in recent months as consumers not only realized they didn't need a new car every 30,000 miles, but they also found it difficult accessing cheap credit as lenders reigned in lending (i.e. GMAC refused to lend to any borrower with a FICO score under 700). The obvious result... auto sales collapsed, which in turn led to the GMAC bailout to pump the bubble back up (per PoAC):

At the start of last week, the U.S. Treasury bought $5 billion in GMAC stock and loaned GM $1 billion to invest in GMAC Financial Services LLC.

The next day, GMAC announced zero percent financing on some models of GM cars and doubled the number of potential buyers qualifying for loans.

Source: Federal Reserve

Stimulus Projected to Save 3.675mm Jobs... 3mm Too Little?

Christina Romer and Jared Bernstein have released projected jobs created / saved due to the Obama stimulus plan... a cool 3.675 million. The charts below show where these jobs are projected to come, by sector and by method (i.e. direct or indirect).

The most jobs, not surprisingly, are in construction. Other top sectors include retail (from stimulating consumption), leisure (gotta do something when laid off right?), and manufacturing.

Table 2:



How? Well, the majority are expected to be indirectly created not from the plan itself, but by the recycling of dollars / demand created from those created directly. Projections are for state relief (i.e. fund projects that would otherwise be cut) to save / create the most, followed by the protection of those jobs vulnerable in the downturn, and tax cuts.

Table 5:



The question is obvious... is this enough? According to Christina Romer and Jared Bernstein's "R/B" own conclusion:

• The recovery plan needs to be large to counter the tremendous job loss that is likely to occur

So is it? Paul Krugman says it clearly is not:

Here’s one way to look at it: R/B show the effects of the plan rapidly fading out during 2011. Yet at the end of 2011 the unemployment rate is still 6.3%. Meanwhile, the CBO estimates the natural rate, aka “full employment,” at just 4.8%. Why does the plan go away with the job undone?

In other words, R/B and Paul all conclude that the plan needs to be large enough to offset the jobs lost, but R/B themselves project that it won't. By their own analysis, employment is expected to rise to 9% with no stimulus. Comparing employment figures from December 2007 (unemployment at that time was 4.8%, which equals the CBO "full employment" level) with the projected employment figures for 2010 using R/B's 9% unemployment figure, I project the those unemployed to rise 6.7mm from December 2007. This is 3mm higher than the number of jobs the stimulus plan is projected to create / save (the difference between the loss in employment and gain in unemployment is the population growth) or to be blunt, not enough.

EconomPics of the Week (1-09-09)

Employment
Unemployment Way Worse than 7.2% Due to Birth / Death Model
Broader Unemployment to 13.5%
Employment by President
Less Educated Hurt More... Everyone Unemployed Longer
Additional Employment Breakdown (December)

Asset Classes / Returns
The Good / The Bad: Time to Buy Equities?
The Ugly: P/E Multiple
Are Treasuries Really in a Bubble?
Long Bonds / Short Equities Redux
Huge Mortgage Rally... Thanks Government!
Another Post on Swaps????
2008 Hedge Fund Breakdown... Where's the Hedging?

Economic Data
Same Stores Sales... Down, but Not Out
ISM Services (December)
Auto Sales Continue to Crumble
Construction Spending November

Bailout Nations
Federal Reserve Bank Credit Down $125 Billion
Bank of England Cuts to Lowest Rate Since 1694.
Budget Deficit... Overly Optimistic and Still Ugly...

Gold
Fun with Gold
Global Demand for Gold on the Rise

Housing
Forget the Term Foreclosure, this is More Like Fiveclosure

Employment by President

I understand this is not completely due to GB II (the business cycle dominates a lot of this), but...

WSJ:

President George W. Bush entered office in 2001 just as a recession was starting, and is preparing to leave in the middle of a long one. That’s almost 22 months of recession during his 96 months in office.

His job-creation record won’t look much better. The Bush administration created about three million jobs (net) over its eight years, a fraction of the 23 million jobs created under President Bill Clinton’s administration and only slightly better than President George H.W. Bush did in his four years in office.

I've also added a line showing the difference between the jobs growth and population growth. Any negative figure means jobs grew at a slower rate than the population... not a good thing.

Long Bonds / Short Equities Redux

Back in October, EconomPic Data presented some amazing data that showed there had been no equity premium over the previous 11 3/4 years (i.e. no excess return for equities over bonds). With the continued sell-off in equities and a rebound in credit markets, the Lehman Barclays Capital Aggregate Bond Index has now provided an equal return to the S&P 500 over the PAST 19 YEARS INCLUDING REINVESTED DIVIDENDS / COUPONS!

Employment Recap

Phew... I think my unemployment analysis is over. Here is a recap:

Less Educated Hurt More... Everyone Unemployed Longer
Employment Breakdown (December)
Unemployment Way Worse than 7.2% Due to Birth / Death Model
Broader Unemployment to 13.5%

Less Educated Hurt More... Everyone Unemployed Longer

Source: BLS

Employment Breakdown (December)

Source: BLS

Unemployment Way Worse than 7.2% Due to Birth / Death Adjustment

The Birth Death Model once again overstates employment. In other words, things are a lot worse than the 7.2% rate presented to us. Per The Big Picture:

Since 2003, the B/D adjustment has been part and parcel to BLS' Current Employment Statistics (CES) program, the official measure of US employment. In brief, the Birth Death adjustment imagines (hypothesizes) how many jobs were created by companies too new and/or too small to participate or be found by CES. The model attempts to create what is perceived as a BLS error at the start of any recovery, when many new jobs are created but missed by BLS.

Does anyone think small businesses have really added 53,000 jobs to the financial sector over the past 12 months (and 18,000 last month)? Get ready for a severe reaction next month when it snaps back (the annual correction to the B/D figure is made in January's release - coming in February).



Source: BLS

Broader Unemployment to 13.5%

Source: BLS

Federal Reserve Bank Credit Down $125 Billion

Some good news ahead of the bloodbath that will be reported at 8:30 ET this morning... Calculated Risk reports:

The Federal Reserve released the Factors Affecting Reserve Balances today. Total assets declined $125 billion to $2.14 trillion. This is a little improvement ...

Source: Federal Reserve

Same Stores Sales... Down, but Not Out

According to CNN Money:

Despite a startling miss by Wal-Mart Stores Inc. (WMT), overall December same-store sales are tracking ahead of analysts' projections. Virtually all retailers have posted sales drops from a year ago, but for almost two-thirds of them the decline wasn't as much as expected, according to data tracker Retail Metrics.

Huge Mortgage Rally... Thanks Government!

FT reports:

The Federal Reserve on Monday kick-started its latest unconventional programme to boost the US economy, this time targeting mortgage-backed securities to help the slumping housing market, reports Reuters. The Fed plans to buy back as much as a ninth of outstanding, mortgage-backed bonds sold by mortgage giants Fannie Mae, Freddie Mac, and Ginnie Mae. The aim is to encourage buyers to return to the housing market or cut payments on existing home loans. The New York Fed began buying MBS guaranteed by Fannie, Freddie and Ginnie on Monday, part of a programme of as much as $500bn.

Nice rally! Now all the government needs to do is buy equities, credit, and commodities / hire everyone currently unemployed... almost there!

Bank of England Cuts to Lowest Rate Since 1694 Inception

Bloomberg reports:

The Bank of England cut the benchmark interest rate to the lowest since the central bank was founded in 1694 as policy makers tried to prevent the credit squeeze from deepening Britain’s recession.

The Monetary Policy Committee, led by Governor Mervyn King, trimmed the bank rate by a half point to 1.5 percent. The result matched the median forecast of 60 economists in a Bloomberg News survey. The pound rose against the euro and the dollar.

Forget the Term Foreclosure, this is More Like Five-Closure

First, my apologies about that headline... not enough sleep. Bloomberg details:

Almost half the homeowners who bought in 2006 now owe more on their mortgages than their houses are worth, making it difficult for them to refinance without bringing cash to the closing, according to Seattle-based real estate data company Zillow.com.

Forty-one percent of October home sales in Los Angeles and Phoenix were foreclosure auctions or financial firms trying to recoup lost loan value, Radar Logic said.

U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier to the highest on record, according to RealtyTrac Inc., a Irvine, California-based provider of default data.

Think that's bad? Try this on. Aon (hat tip Infectious Greed) details the top ten foreclosure counties in California.



Foreclosures in these counties were up a whopping 2120% in 2008 as compared to 2006.

Budget Deficit... Overly Optimistic and Still Ugly

The CBO released their latest budget projections and although expected, it ain't pretty. Off-budget surplus relates to surpluses in the Social Security trust funds as well as the net cash flow of the Postal Service, while the projected on-budget deficit is an unreal $1.34 Trillion (or $1.19 Billion net the off-balance sheet item). But that's not all. According to Interest Rate Roundup:

Here's the really fun part: The CBO estimate doesn’t even include any potential stimulus package from Congress and the Obama administration. We haven’t gotten the final details of the plan, but it could cost anywhere from $675 billion to $1 trillion. That means the ultimate 2009 deficit could end up being larger by 60% ... 70% ... 80% ... or more.

And the reported figure is based on what seems to be highly optimistic economic growth. Real GDP is projected to be a little below -2% in 2009, then snap back to 1.8% by 2010. I don't buy these numbers and Paul Krugman details why this projection is overly optimistic based on the estimated GDP Gap and stimulus plan stated (bold is me).

The new CBO budget and economic outlook is out. Above (go to the post) is its forecast for the GDP gap — the hole stimulus has to fill. I’d guess that the CBO estimate, which has unemployment averaging 8.3 percent in 2009 and 9 percent in 2010, is actually too optimistic, but even so it puts the Obama plan in perspective: a 3% of GDP plan, with a significant share going to ineffective tax cuts, to fill an 8% or more gap.

Real GDP is projected at 4% each year from 2011-2014 and 2.5% each year from 2015-2018. This in a world in which the U.S. economy will no longer be levered up. Please note that all of these 2011+ projections are higher than what was projected back in September in growth terms, but they are based on a lower beginning value (and total GDP is down in each year than was projected in September).

Even with these optimistic numbers, the U.S. projects $400 billion a year in deficits for the next 10 years. We have to pay for this somehow (i.e. borrow), which goes completely against my case in a previous post that Treasuries may not be in a HUGE bubble (though I do think they are over the longer term).

Fun with Gold

Update: These ARE NOT charts of cumulative or relative return. They simply show how many ounces of gold were required to buy the S&P 500 or a home at each point in time against how much the S&P 500 or a home cost in dollars. The post doesn't say the word 'return' once and for any snap shot of cost at any point in time, rental earnings, dividends, or opportunity cost are irrelevant.

So, we all know housing and equity markets have been hit hard after many years of gains... in dollars that is. How would each market look in terms of the hardest of currencies... gold (note that October dates were used as that is the last Case-Shiller print and the long-term trend is what I was looking for).

The housing market is interesting. From 1987-1997 the housing market went nowhere in dollars, but started to see the beginning signs of the boom, in gold, beginning in 1997. From 1998-2005, we saw a bubble form in both dollars and gold, but that's where we see a huge divergence. Gold rallied hard starting in 2005, "predicting" the fall. It now takes roughly the same amount of gold to buy a home as it did back in 1997... dollars are another thing altogether.




The equity market is even more interesting (to me). Since 1994, the S&P 500 has roughly doubled in dollars. In gold, the market has gone... well nowhere.

Global Demand for Gold on the Rise

Bespoke has an interesting post showing how much gold has rallied in recent years relative to silver. Gold Research and Statistics details where the demand has come from:

Gold demand, in tonnage terms, rebounded strongly in Q3 after several quarters of weakness. Identifiable demand totalled 1,133.4 tonnes, up 170.1 tonnes (18%) on the levels of a year earlier. In US$ value terms, this represented a 51% rise to $31.8 billion, an all-time record high and a 45% leap from the previous record set in Q2. The recovery in demand was triggered by a fall in the gold price, which coincided with sharply escalated levels of economic and financial uncertainty.

After briefly testing levels above US$950/oz early in the quarter, the gold price fell back, briefly touching levels under $750/oz in mid-September. Nevertheless, the average for the quarter, at $872/oz, was 28% higher than Q3 2007’s $680/oz.The biggest contributor to the increase in total identifiable demand in Q3 was identifiable investment, up 137.5 tonnes (56%) relative to year-earlier levels. Jewellery demand rose 45.5 tonnes or 8%, while industrial and dental demand declined 11%.

It will be interesting to see what happened in Q4. My guess? Demand for jewelry is down a ton, but demand from bar hoarding and ETFs is up dramatically.

Source: World Gold Council

ISM Services (December)

Bloomberg reports:

U.S. service industries contracted in December for a third consecutive month as consumers retrenched and the housing slump worsened.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 40.6, higher than forecast, from a record-low 37.3 the prior month, figures from the Tempe, Arizona-based ISM showed today. Readings below 50 signal contraction, and this month’s reading is the second lowest since records started in 1997.

Source: ISM

The Ugly: P/E Multiple

In response to yesterday's EconomPic post detailing the "Good and the Bad" of the equity market, reader "dblwyo" comments:

You should have gone ahead with "The Ugly" on future outlooks to complete the trifecta :) ! You might also want to re-visit Graham-Dodd's valuation formula where PE = (8.5 + 2 x G) x (4.4 / Y), where G = earnings growth and Y = AAA bond yield.

Great idea... for those unfamiliar with the Graham-Dodd P/E formula (or interested in seeing a full matrix), go here. Also, before I dive in... be forewarned that it is just a model. As Paul states over at Infectious Greed:

I don’t buy trough P/E, or recession length, or relative valuation, or interest rate, or sectoral rotation arguments, or… you get the picture. I love data, but I’m increasingly close to being an outright nihilist when it comes to over-reliance on historical financial data without any truly coherent supporting rationale.

Now that I've given proper warning... lets go to what this formula tells us.

Current yields on AAA corporate bonds are a little over 5%, down from over 7% just a few months back as rates and spreads have rallied. This is great for the P/E multiple, as we multiply (4.4% / AAA Bond Yield) against the first component of the formula, thus a lower yield increases the P/E multiple and a higher P/E multiple = a higher price of equities. Why this 4.4% rate? Back to RBCPA:

The original formulation was made at a time when there was very little inflation, and growth could be assumed to be real growth; the AAA corporate bond interest rate prevailing at the time was 4.4%. In later years, the formula was adjusted for higher current interest rates that contained an inflationary component.

Assuming a 5% earnings growth rate for the next five years (I do not think we will have 5% growth for the next five years for reasons detailed later), the current AAA corporate yield predicts a 15x P/E multiple, much lower than the current P/E ratio implied by either backward or forward looking earnings (roughly 19x and 22x each based on S&P earnings estimates).



But what annualized earnings growth should we expect over the next five years? Not 5% according to dblwyo for the following reasons:

If the economic outlook is for 2-2.5% growth on average over the next five years (IMF) at best and we presume a 5% yield a PE multiple of 10-12 becomes appropriate. Given that the markets were held up by leverage applied in one form or another (buybacks, housing ATM,et.al.) consider a go-forward regime where a 15 historical average PE is inappropriately optimistic!

Agreed, but I'll let each of you use any figure you want... the next chart shows what inputs are needed for the model to spit out the "inappropriately optimistic" 15x P/E multiple or the unreal 22x forward P/E .



With the current 5.2% AAA Corporate Bond Yield, earnings need to be at least 5% to justify a 15x P/E multiple (as detailed above), which would still imply equities are currently overvalued by 30%. For current equity valuation (22x), we need 9% growth... FOR EACH OF THE NEXT 5 YEARS. A more likely outcome that gets us to our current market valuation is for AAA corporate bonds to continue the recent rally. However, based on a 2.5% earnings growth rate, the rate needs to approach a measly 2.5% AAA yield. Highly unlikely...

2008 Hedge Fund Breakdown... Where's the Hedging?

Naked Capitalism points out the troubles ahead for hedge funds (the crazy thing is the poor returns all around may save them):

It is hard to work up much sympathy for newly-less-well-off hedge fund managers, given how rich the good times were. Nevertheless, they face continued pressure from redemptions, and (for most) high water mark provisions mean that they will probably get no or little in the way of upside fees (the 20 of the "2 and 20" formula) this year.

In the past, when that happened to hedge funds, they often imploded, as did Julian Robertson's Tiger Funds, because the staff decamps to funds where the funds aren't in a performance/fee hole and they stand to share in fat performance fees. But with the whole industry contracting, and many funds suffering fee pressure, mobility is not likely to be great.

Source: Barclays Capital

Auto Sales Continue to Crumble

Great info as always from Auto Blog:

The U.S. auto industry hasn't experienced a worse year of sales in recent memory, so it's fitting that 2008 should close with December sales data that's no better than the previous disappointing months.The only green you'll see below is next to MINI, which beat out December 2007 sales by only four vehicles. Every other automaker and its brands sold fewer cars this past month than the year prior.

That's right, the MINI is the only brand up year over year in December, up a whopping 0.1%!



Full year 2008 vs. 2007 figures are slightly less horrendous.

Month over month sales (do not use month over month for anything except relative performance as sales are extremely seasonal) show some high-end brands did "relatively" well. Holiday present perhaps?

Are Treasuries Really in a Bubble?

A Barron's video posted at The Big Picture warns to 'Stay Away From Treasury Bonds'. I'll agree that Treasury bonds look awfully rich and I have no intention of going long, but I do feel there is danger to outright shorting treasuries in this environment (though as I post this, 30 year yields have blown out 20 bps today). First lets look at some data that shows at a minimum long bonds (i.e. 30 year Treasuries) appear rich.

30 year treasury yields have rallied dramatically over the past 25+ years, but the most recent rally is unprecedented over that time.



In terms of pricing, long bonds have rallied more than 30% in the past 3 months. Supporting the case that these bonds are ready to sell off... long bond prices have historically sold off ("mean reverted") following smaller, yet similar rallies.



However, it is important to remember that the current market is not "normal" and mean reversion is not a certainty. Off the top of my head, I can think of many reasons why long bond yields may not only stay at current levels, but may actually continue to rally.

1. Real yields are not abnormally low (a deflationary environment makes those puny yields much better in real rather than nominal terms)
2. The Fed can (and will likely be) purchasing Treasury bonds to keep rates artificially low; likely starting in the 5-7 year space, but possibly out along the curve
   
3. The economy can continue to get worse / companies will default in the coming year at substantial levels, creating the possibility of another "flight to quality"

As Larry MacDonald states in his post Shorting The Bond Bubble? Hold On:

Shorting government bonds would thus appear to be a no brainer as risk appetite responds to signs of an upturn in economic growth and inflation worries arise anew. But what might not be so obvious is the timing of the trade.

Lags in the impact of stimulus measures could mean deflationary news will linger for awhile yet. More importantly, the Federal Reserve has stated it is committed to buying Treasuries to keep interest rates low until the crisis and economy stabilizes. China too will likely be a buyer of U.S. Treasuries as part of its strategy of suppressing the yuan to enhance the competitiveness of its exports.

So watching from the sidelines may be the strategy for now.

Update: My post was all set to go when I saw Credit Writedowns had an eerily similar post. Always nice to be in good company.

Construction Spending November

Per Interest Rate Roundup:

The latest figures show construction spending was down, but not out, in the month of November. Total spending declined 0.6% against market expectations for a decline of 1.4%. October's decline was also revised to just -0.4% from a previously reported drop of -1.2%.

The residential market continues to be a lead anchor, with private residential spending down 4.2% -- the biggest decline since July's -6.2% reading. Private nonresidential spending, on the other hand, increased 0.7% after a 0.4% decline in October. Within the private nonresidential sector, spending on lodging was up 0.7%, spending on office property rose 0.9%, spending on transportation projects jumped 3.2% and spending on power facilities climbed 5.3%.

Looking at the longer trend (year over year rather than month over month), residential construction has gotten absolutely crushed. One area of huge growth has been manufacturing, which I have no explanation for. It looks like the media is confused as well. See if this commentary by Zacks makes any sense:

Construction in manufacturing also increased by 61.5% over the past year, as the manufacturing sector had been struggling during this economic recession, as evidenced by the ISM Manufacturing announcement on Friday, a 28 year low.

Source: Census

Another Post on Swaps????

I admit it... I've posted WAY too much about swap spreads, but in my last post on the subject of the 30 year swap spreads (defined here), I received this comment:

Not sure why this is considered good or bad. Seems indifferent to me as banks are basically an extension of the Fed balance sheet and federal government for all intents and purposes now. This doesn't have any impact on credit to the real economy. Just filling in holes of the banks balance sheets.

How's this for importance? For the past 8 years (I could only find data going back 8 years) 30 year swap spreads have followed equities with alarming regularity (I smoothed the changes by averaging the change over the past month):


HOWEVER, over the last month, 30 year swap spreads have rallied significantly more than the equity market.



Will swap spreads lead the market higher or should we view this recent rally in credit markets as short-lived? Or should we ignore it altogether. Interesting post at Infectious Greed about just that. According to Paul:

The risks of financial history are higher than ever though. We have more data, better analytical tools, and more people crunching the data, so we can expect to see data on pretty much anything we want to see. There will always be someone tearing apart something to find something interesting, so something interesting will be found. My friend James Altucher has always been great on this subject, ripping holes in pretty much every data-driven rule of thumb by which people claim to trade and/or find market tops and bottoms. They mostly don’t work.

Agreed.

Time to Buy Equities?

The Good

The Big Picture details performance of the S&P 500 in the five years following each of the 10 worst performing years for the S&P 500.



In each instance, the following 5 years brought varying, yet positive, annualized returns.

The Bad

John Mauldin's recent Newsletter '2008: Annus Horribilis, RIP' traces earnings estimates for calendar year 2008, revealing that estimates were far too optimistic ($92 in early 2007, down to a current $48 projection). Projections for 2009 are even lower, currently sitting at $42.



Putting those earnings estimates in the chart above, against the value of the S&P 500 Index at the time of each estimate, we can see how the price to earnings multiples "P/E's" have shifted / grown over time. The latest earning estimates puts the trailing P/E at ~19x, while the forward P/E ratio is even higher, at roughly 22x.



As John Mauldin points out:

That doesn't look like value at all, when the historical average is closer to 15.

The obvious question becomes, how low can earnings get and what is a proper level for the S&P given those levels?

In 2001, as-reported earnings were $24.67. Operating earnings in 2002 were $27.57. Does anyone think the current recession will be milder than the last one? Or shorter?

And it gets worse. Core earnings, which take into account pension and other under-reported liabilities, were less than $16 in 2001, and so P/E on a core earnings basis topped out at 71, and on an as-reported basis were as high as 46!

So lets be optimistic and say the current $42 earnings projected is the worst case scenario. Putting the historical 15x multiple average on those earnings (along with earnings, who knows where the multiple will be) gets us to 630 or a drop of another 33% (or about 15% less than November lows), while a multiple of 18x gets us to around 750, or a 20% drop.

While I actually expect the rebound to continue in the near term for technical reasons, fundamentals sure don't look attractive.

Update: Posted 'the Ugly' side of equities (i.e. P/E multiples) as requested.

EconomPics of the Week (New Years Edition)

Opinion
Happy 2009
Information Warfare and the Wall Street Journal's Demise
California: Too Big to Fail?
In Excel this is called a Circular Reference Error...

Music
Is the Album Dead?
Is the Album Dead (Part II)?

Returns
Equities: Another End of Month Rally
Harvard Endowment's Historical Returns
Equity Forecasts: Bullish and Highly Uncertain

Economic Data
ISM Manufacturing Below Expectations
Case-Shiller Price Index (October)
"Scariest Housing-Related Chart Ever"
Euro Approaching Parity with Pound Sterling
Real GDP Per Capita
Japanese Industrial Output Down to Levels Seen 5 Years Ago
The Emerging... 'Emerging Market' Crowd Out
Armageddon Index Crushed, but an Improved Outlook

Is the Album Dead (Part II)?

Following this morning's Albums Sales Breakdown, here is another chart showing just how fast sales have declined across all genres.



Surprising to me was the drop in classical music. I would have guessed incorrectly that the classical base would not have shifted away from physical CD's.

Source: Yahoo!

ISM Manufacturing Below Expectations

ISM sinks again to 32.4, well below expectations. ISM reports:

Economic activity in the manufacturing sector failed to grow in December for the fifth consecutive month, and the overall economy contracted for the third consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business®.

In December, none of the manufacturing industries reported growth.

Take a look at new orders and pricing... yikes.

Equities: Another End of Month Rally

As I laid out in last month's post Pension Plans, the Equity Market, and Irrational Behavior that equity markets have rallied at the end of each month, right when pension plans tend to rebalance to equities. The trend continued in December.

Is the Album Dead?

Looking at top 10 album sales from 2008 vs. 2000, we see sales 1/3 the level from those just 8 years ago.

Click for ginormous chart



The Big Picture asks:

How many of these do you own the CD of? How many do you own legally? How many have you borrowed or downloaded?

The bigger question inferred... is the album dead?

Source: NY Times / EW

Harvard Endowment's Historical Returns

We've detailed Harvard's Endowment's struggles in recent months. New expectations are the reported 20+% decline was highly optimistic. Looking at Harvard Endowment's historical returns, we can guess why the deflationary environment we've experienced would cause the portfolio so much pain.



Harvard's endowment has become increasingly reliant on capital gains vs. income over the past 20 years, with income returns accounting for less than 2% of total returns in 7 of the past 8 years. In an environment characterized by asset deflation and equity market collapse (i.e. the past 6 months), capital gains get crushed.