Skip to comments.The "Fiscal Cliff" Story You're Not Hearing from the Mainstream Press
Posted on 11/26/2012 1:13:04 PM PST by blam
The "Fiscal Cliff" Story You're Not Hearing from the Mainstream Press
Stock-Markets / Financial Markets 2012
Nov 26, 2012 - 08:16 AM
Dan Ferris writes: Investors are scared...
In fact, they're even more scared today than they were in late 2008.
That's hard to believe... In 2008, the market was down close to 50% from its late-2007 highs. The housing market was crushed. Bear Stearns, Merrill Lynch, Lehman Brothers, and AIG had all gone out of business in one way or another. Officials from the Federal Reserve and U.S. Treasury were running around like chickens with their heads cut off... bailing out losers in the financial industry.
It felt like the end of the world.
For many investors, it feels like the end of the world... again. And that gives investors who can remember just one important idea about the market a tremendous advantage...
The media has whipped investors into a frenzy over the "fiscal cliff." The "fiscal cliff" is a shorthand term for the government spending cuts, tax increases, and a reduction to the U.S. federal budget deficit that unless Congress does something to stop it will automatically go into effect at midnight, December 31.
Of course, fear sells, so I'm not surprised the media is playing it up so much. But you'd be insane to pay much attention to it. It's a smokescreen.
Instead, pay attention to the trend I told you about last year. My managing editor once told me it might be the most important concept our readers will ever learn:
To succeed in the stock market, you must believe that shopping trumps politics... That's the simplest (and maybe the crudest) way to say that what happens in the business world is more important to your daily life and the daily lives of everyone in America than what happens in the White House or the Capitol.
The amount of shopping for hamburgers at McDonald's is more important than the debt ceiling debate. The amount of shopping for beer at the local convenience store is more important than any contest for the Republican presidential nomination. And the number of shoppers occupying the aisles of Target and Wal-Mart is more important than the number of protestors occupying Wall Street.
Don't believe it? Think of all the horrible things that happened in the 20th century: the Great Depression, two World Wars, and the end of gold-backed U.S. dollars. Despite all that and more, U.S. stocks as tracked by Dimson, Marsh, and Staunton in their excellent book, Triumph of the Optimists appreciated about 1.5 million percent.
Last year, the big bogeyman wasn't the fiscal cliff... it was the debt ceiling. President Obama called the debt ceiling issue "financial Armageddon." Treasury Secretary Tim Geithner called it a "catastrophe." Federal Reserve Chairman Ben Bernanke said it was "calamitous."
But I told you it was just "The Great Debt Ceiling Hoax."
And what happened? Well, investors got scared... Stocks bottomed out in early October 2011... And the market is now about 26% higher than it was then.
To put an end to the phony drama of the debt ceiling hoax, President Obama signed the Budget Control Act of 2011 into law on August 2, 2011. That law created what's now being sold to us as the "fiscal cliff."
So guess what they'll do this time? The most likely outcome is that our government will create another law to prevent the so-called fiscal cliff from ever arriving. But even if it does... it will never be as important as the idea of buying great companies at good prices... and then holding them for years, while collecting ever-increasing dividends.
No matter what happens with the "fiscal cliff," people will continue to drink Coke. They'll continue to use computers powered by Microsoft software. They'll continue to eat burgers from McDonald's. They'll continue to use IT services from IBM.
If you want an idea that'll help you cut through the noise and make great, winning bets when everybody else is panicked, this is it.
Business trumps politics. It's been true for at least a century now... and it will continue for at least a few more.
Entitlements consume 56% of the total 2010 Federal Budget....
Medicare: 12 %
Since they are increasing at slightly under 10%, this means a growth doubling every 7 years.
Questions for you non-math types.....
--What is 2 x 56%?
--Where in the 7-year doubling period are we, exactly?
--How do you fund all the rest of government, the departments, the agencies, and services, if entitlements consume 112% of your total budget, of which almost half is ALREADY on borrowed money?
Ahhh, the Real Cliff.
Hey Dan Douchelord, you might want to study up on that sequence right there. Because your paper ain't gonna be worth jack if history repeats itself...
The jackals in the press as well as the government like to scare people so they’ll consume their product.
Math trumps business and politics.
Reality trumps liberalism,
and that really p1$$3$ them off.
A lot of that 26% was because people were investing on hopes that Obama would be a one-termer.
What I find interesting about this entire discussion going on...is that it’s really about getting us through approximately twelve months, and then we repeat this entire episode again, and again, and again.
There will be four fiscal cliffs to run through over the next four years.
Meanwhile, entitlements will likely escalate each year in that four-year period. By the time that things get really messy...around 2016...it’s hard to envision how you crawl out of this pit. You’d have to downsize the Pentagon to half it’s size, or just gut Homeland Security completely...to make the government function after that point.
The real emphasis here...ought to be getting the national economy back onto a upswing and feeling like it’s 2003 or 2004. But we can’t even manage to do that.
But notice how the left/MSM has tried to commandeer the term "fiscal cliff" and apply it to some insignificant event on Jan 1. Typical diversionary tactic to avoid, downplay and obscure the truth about the real abyss lying in wait.
The Gods of the Copybook Headings with terror and slaughter return!
Agreed: the deeper truth can be found at http://finance.yahoo.com/blogs/breakout/profit-growth-stalls-stocks-fall-kee-185859559.html
As weak as the markets have been for the past two months, Wall Street’s bullish bias is fully intact, as traders, strategists and money managers still overwhelmingly maintain an optimistic long-term outlook for the stock market. And rightly so, given that Mr. Market has proven the bulls right again and again for more than 100 years. In fact, as I write, the average analyst is expecting a 10% gain for the S&P 500 next year, even though earnings aren’t expected to grow half as much.
The difference, or extra return, can only come from one place, P/E expansion, or a higher price-to-earnings ratio, which is simply Wall Street’s way of saying investors will be willing to pay more for a dollar’s worth of earnings next year than they are today. It’s also why strategists continually argue that stocks are cheap, especially when they sell off.
But what if stocks actually aren’t cheap and the notion of P/E expansion doesn’t pan out? That’s the case Tom Kee, CEO and editor of Stock Traders Daily, makes in the attached video.
“People are talking about the multiple on the market and saying it’s low compared to historic numbers,” Kee says, adding that his research shows current earnings growth is tracking at 2.8%, which is less than half the pace of the historic long-term average of 7.1%. “So my question to everyone is: Does the multiple of the market need to fall to reflect slower earnings growth? I think the answer to that is yes.”
If he’s right, then next year’s price targets would be in serious jeopardy.
“The true picture is that the Dow Jones Industrial Average on both an earnings and revenue basis is contracting, and no one seems to recognize that except for the big players in this market,” Kee says, predicting that we are in for slower growth and lower markets. “What I’m looking for is continued deterioration in earnings growth, and that brings those multiples into question and, ultimately, risk appetite into question.”
And so it’s only fitting that a guy who sees ‘’meager’’ earnings growth at best next year is on watch for multiple contractions, which is simply Wall Street’s way of saying investors will be willing to pay less for a dollar’s worth of earnings next year than they are today.
Relax, I'm sure Obama has a plan to sell our remaining carriers and support fleet to China. That'll help somewhat. /sarc
The author fails to acknowledge the printing press of dollars from the Fed. The printing press has an unlimited yield. No investment strategy can out earn fraud.
I think we will follow a similar but not exact model of the soviet union. It went broke and NOBODY wanted to put it back together again. No one will want to put the USA together again, so the states will become the the major govt just like the countries in USSR.
If true, the state we live in will be a consideration in how well we do.
They have their own now:
This is a stupid, stupid article. Economies are not good or bad, strong or weak according to how many people are buying Big Macs. Politics absolutely can matter more than your daily experience.
That being said, he’s right, the “fiscal cliff” is a red herring. How much you wanna bet Washington will be frightened into raising taxes and not drastically cutting spending—and therefore effectively staying the same—from now until the end of the republic?
“Business trumps politics”
This is true in the sense that there will always be a black market. You could buy cassette tapes and blue jeans in the Soviet Union and whiskey during Prohibition. But that’s not what thus article is about. We’re talking about the economy as a whole moving up or down a few arbitrarily assigned percentage points. That absolutely could happen as a result of the so-called cliff. So the article is wrong.
It has an indefinite yield, not unlimited. No one knows its exact limit, but there is one.
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