Thursday, June 30, 2011

Precipitating Cause of Long Term Bear Markets/Michelle Bachmann/Sold 156+ NWBI at $12.52/SUSQ/

Michele Bachmann has officially declared her candidacy for the Presidency and has promised to bring truth telling to Washington. chicagotribune Admittedly, that would be rare for Washington politicians and even rarer still for Michele, who finds its exceedingly difficult to compose a sentence with accurate information. PolitiFact found many of her statements made in a recent interview with Bob Schieffer to be lacking much, if any, correlation with the truth which is normal for Michele who excels in receiving the "Pants on Fire" rating by that fact check organization. So, the nation may be seeking leadership that tells the truth, as Michele says, but she must have been referring to someone other than herself.

Truth telling and factual accuracy are just two of those pesky Real Conservative Values that have yet to find a home in the self proclaimed conservative party. (see, e.g., article on recent GOP debate)  

I understand Michele's appeal to the "Facts Do Not Matter" crowd. It is easier, after all, to just create your own reality and then to live in that bubble. 

And, I am not going to say she is goofy for saying things like the Disney  movie, "The Lion King", was gay propaganda. AlterNet I have it on good authority that the cartoon character SpongeBob SquarePants has the same agenda, according to one of Michele's soulmates.  

And, so what if she confused John Wayne with John Wayne Gracy, the serial killer, Mail Online, or is a little mixed up when she told an audience of fawning admirers in New Hampshire that they must be proud to be "in the state where the shot was heard around the world in Lexington and Concord". CBS Boston   

Sure, her position in support of abolishing the minimum wage (Bloomberg) is criticized by those bleeding heart commies in the mainstream liberal media, but that position simply shows her patriotism and belief in liberty, not to mention her titanium spine, as does her oft repeated speech in support of the people's right to choose their own light bulbs, apparently one of the most important issues facing America today. PolitiFact on Michele's Statements on Lightbulbs

Let's all get behind her recently introduced legislation called the "Light Bulb Freedom of Choice Act"Fox Nation Yes, that is the real name of her signature piece of legislation, and the faux blondes  at "Fox News" are all for it too. I am not going to say she is a really dim bulb herself. 

As to her belief about abolishing the minimum wage laws, what can I say? If someone wants to work for $.25 an hour killing chickens in an Iowa processing plant, they should have the constitutional right to contract for those wages. Perhaps, the good Christian GOP employer could throw in a small bag of peanuts as a Christmas bonus for those extra special employees. Who besides those non-American Americans could argue with that? 

I was comforted to hear last night that Michele is confident that nothing untoward will happen by Congress failing to raise the debt limit.  CBS News  I am not really worried either, since I do not lend money to deadbeats who pay little or no interest. 

It is not surprising that Michele is moving to the forefront of the GOP contenders for President of the U.S., for she does represent the heart and soul of today's GOP.   The OG just inquired whether the RB was making much progress in buying Canada, all of it.

A case study of how the GOP misused their political power in Mississippi is set out in this  2007 article in Harper's Magazine which is also a subject of a recent HBO documentary. The Mississippi case involved a politically motivated criminal prosecution against a republican Mississippi Supreme Court Justice who did not walk in lock step with the party line.     

1. Sold 156.5828 shares of Northwest Bancshares (NWBI) at 12.52 Last Tuesday (Regional Bank Stocks's Basket Strategy)(see Disclaimer):  The 6.5828 shares originated from reinvestment of dividends. Bought 50 NWBI at 11.47 Added 50 NWBI at 11.10 Bought: 50 NWBI at 10.45  The total share profit was $170.19, bringing to total for this strategy closer to seven thousand.  Item # 3 Realized Gains Regional Banks

NWBI shares popped some last Tuesday after Standard & Poor's  announced its addition to the S & P 600.  I decided to sell NWBI based on valuation, compared to other bank stocks in my basket.  The current consensus estimate is for an E.P.S. of 66 cents in 2011 and 76 cents in 2012. With the recent decline in prices, I believe that other banks present better long term opportunities.  I now have 33 holdings in this basket strategy.

2. Susquehanna (SUSQ)(own common as LT and TP SUSPRA): I did notice that Tower Bancorp received an acquisition offer from Susquehanna (SUSQ).  SUSQ claims that the acquisition of Tower will be immediately accretive to earnings. Tower shareholders can opt for $28 cash or 3.4696 shares of SUSQ stock. SEC Filed Press Release  Form 8-K When consummated, Tower will be the second recent acquisition by SUSQ, the first being the pending acquisition of Abington.  Both acquisitions will expand SUSQ's footprint in Pennsylvania.

Unfortunately, the LB sold Headknocker's Tower shares before this offer was made, leaving a few hundred dollars on the table. Sold 100 TOBC at 23.12 "Typical Nerd Vision", RB noted with evident satisfaction.

SUSQ shares fell in response to this offer.  Sandler O'Neill upgraded the Susquehanna shares to buy from neutral after the selloff. Sandler's analyst estimates that SUSQ shares, then priced at $7.7, are selling for 8.6 times his normalized earnings estimate. (see also discussion at  TheStreet TV).

3. Onset of a Long Term Bear Market Caused by Clearly Excessive Stock Valuations/Compression of Large Cap P/E Multiples During the Long Term Bear Cycle:  In several prior posts, I discuss the reasons for the longevity of long term bear markets. The Importance of Identifying the Underlying Causes of Long Term Bull and Bear Markets

The initial impetus of a long term bear market, and a contributing cause, will be excessive prices for stocks that build up during the final phase of a long term bull market, when investors become afflicted with the "This Time Is Different" brain malfunction.

The vast majority of humans will not draw any accurate or even rational lessons from the past, and many will not be able to draw reasonable conclusions from events occurring in their adult years when there are still mens sana in corpore sano.

That indelible human trait will find a concrete manifestation in a long term chart of Professor Shiller's Cyclically Adjusted Price Earnings Ratio.  The historic average is a tad over 16.  That number hit 44.2 in 2000 and 32.6 in 1929.  The reading from 1966 was at 24.1. So the past is repeated over and over again. Elevated levels in the PE 10 are always seen at the start of long term bear markets.

The absurd P/E10 ratios are a natural process of the blowout phase of the long term bull cycle. When that blowout phase occurs, there will be a large number of companies selling at valuations that can not be supported by reasonable or rational predictions about earnings growth. This will not matter to the vast majority of humans making investing decisions. This "irrational exuberance" will apply even to the largest blue chip type of companies.

During the long term bear cycle, those blue chip companies may continue to grow earnings as their share price stagnates in a range bound movement. Some will falter and consequently be acquired or go out of business.  While the stock may have been selling at over 30 or 40 times earnings when the long term bear cycle started, the increase in earnings over the subsequent decade or so, coupled with the stagnant stock price, would cause the P/E to fall into the single digits or slightly higher. A more detailed discussion can be found in several earlier posts.  Item # 3 Large Cap Valuation Strategy (May 2010 Post); Item # 1 Large Cap Valuations (July 2010 Post).

That process of multiple compression as earnings increase will frequently result in many large companies, whose earnings have increased significantly during the bear cycle, to sell for low P/Es and to be given up for dead. When viewed in the big picture historical context, the P/E compression is a natural correction process to the ebullience prevailing near the end of the bull cycle, and that compression will for many companies go too far the other way.

When thinking about stocks in terms of these long cycles, it is impossible to predict when the worm will turn, and investors will start taking the P/Es back up. The P/E compression can continue for as long as investors lack confidence about the future.

The Shiller P/E is uncomfortably high now. The data does include earnings from two recessions, including the Near Depression period. When the 2001 recession year is excluded from the 10 year series, and assuming earnings continue to increase,  the 10 year earnings average will start to look better, and hopefully the Shiller P/E 10 will look better. I do believe that it has to be examined in context.  Shiller, for example, was waiting for a single digit number in March of 2009 before committing to stocks, which did not happen. The past may repeat itself, but not in mathematical precision.

Still, even if I have a good explanation for a temporary spike in P/E10 ratio, I am not going to develop a deer in the highlights syndrome when that ratio spikes to over 30. The stock allocation will be significantly reduced under those circumstances, based on the extensive historical record that such a P/E is not sustainable and will  mark the beginning of a long term bear market when it occurs deep into the bull cycle.

I will buy both individual common stocks and ETFs to implement the Large Cap Valuation Strategy.

The ETF, OEF, is  one of the ETFs currently owned that implements this strategy:

100 OEF Average Cost Per Share $49.19

This snapshot does not include the shares purchased with the reinvested dividend received yesterday, nor does it reflect the 51 cent per share price increase yesterday. iShares S&P 100 Index Fund closed at $58.17 in trading yesterday.

As previously noted, many of the largest U.S. companies have the lowest valuations. Bought 100 OEF at 49.61 Added 100 OEF at 49.11 Since the OEF ETF contains the the S & P 100 companies 100, it is weighted in the largest of the large: iShares S&P 100 Index Fund (OEF).  I am reinvesting the dividend.

I sold 100 of the 200+ shares of OEF late last year to book a profit. Sold: 100 OEF at 54.94  Bought 100 OEF at 49.61

I will also play this theme with the ETF DLN, which is currently owned, and VV which has been bought and sold and is no longer owned. BOUGHT VV at $41.45   Sold 102 VV at 49.43  Bought 100 VV at 54  Sold 100 of the stock ETF VV at $60.69

The decline in the ^VIX yesterday required the LB, under one of its myriad trading rules, to buy back two stock positions previously sold. I will discuss those two purchases in the next post.  The VIX declined 9.55% to close at 17.34.


  1. The S&P p/e is around 25 now, and 16 is reversion to the mean. It's at least 35% overvalued. Permabulls and the majority (momentum daytraders)claim the low dollar dictates higher p/e, which is BS. Another crowd says there's nowhere else to put your money, "it has " to go in stocks. That's BS too because the net cash in brokerages is negative after deducting margin borrowed to buy stocks. Then there's the possible con-job of using "operating" earnings to calculate p/e, which historically was not used. Record junk bond issuance has gone to stock buybacks, further distorting real earnings by reducing the number of shares outstanding.

  2. I will generally look at GAAP earnings rather than operating earnings. Many companies try to mislead investors into focusing on some non-GAAP measure which excludes a number of recurring expense items.

    The Shiller 10 P/E uses S & P 500 GAAP earnings, not operating earnings. I do not know the current number for the Shiller 10 P/E, but suspect that it is around 23 or 24 without checking. It was at 23 in May 2011.

    My point is that the number has to be placed in context sometimes since the market is forward looking. Clearly, in 1929 or 2000, the high P/E 10 numbers were signaling a massively irrational market valuation. Both numbers were generated in the blowout phase of long term bull cycles.

    The current number has a lot of bad GAAP earnings years, including the 2001 and 2008-2009 periods. The financials are particularly bad on a GAAP basis in the last recession.

    While the Near Depression numbers will be impacting the 10 P/E ratio for several years, the numbers from the prior recession are about to be dropped from the series. Still, the current number is reason for caution, though I do not believe it signals running for cover in context. The GAAP earnings numbers for the current quarter ending today will be a lot better than the ones from the Q/E 6/30/2001.

    I still have a substantial stock allocation after paring it over the past several weeks.