SP 500 Still Overvalued by 46% as Dividends Plummet at Record Pace

We have not reached a sustainable bottom yet in US equity prices despite the infomercials and chief strategist's exhortations to buy them while they are cheap on the financial news channels.

Stocks are valued based on their returns, and those returns are based on real cash flow and profits paid out to shareholders as dividends or stock buybacks to boost share prices.

For too many years US companies have essentially robbed Peter to pay Paul, servicing short term profits by offshoring US jobs, manipulating their balance sheets, and appropriating the savings of the world through the US reserve currency mechanism.

We've just about run out of track on that line, and are heading for a hard stop at a much lower level. At some point the market will perceive that the economy is improving and that the outlook for corporate profits is positive. Stocks will reflect this about six months in advance.

But there will be no recovery until the banking system is reformed and restructured, and the median wage begins to increase enough to support both savings and increased consumption.

Making additional debt available first as a cure is nonsensical, because the debt we have cannot be serviced and must be written off. To do so is Ponzi economics, which is what Greenspan was practicing, and why the decline has been so precipitous.

The longer we avoid making the necessary changes, the more we risk an involuntary default.


Bloomberg
Dividends Falling Most Since ’55 Means S&P 500 Still Expensive
By Michael Tsang

Feb. 23 (Bloomberg) -- The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century.

U.S. equities returned 6 percent a year on average since 1900, inflation-adjusted data compiled by the London Business School and Credit Suisse Group AG show. Take away dividends and the annual gain drops to 1.7 percent, compared with 2.1 percent for long-term Treasury bonds, according to the data. (And don't bother factoring in anything for that old-fashioned concept called 'risk' - Jesse)

A total of 288 companies cut or suspended payouts last quarter, the most since Standard & Poor’s records began 54 years ago, when Dwight D. Eisenhower was president. While the S&P 500 is trading at the lowest price relative to earnings since 1985 and all 10 Wall Street strategists tracked by Bloomberg forecast a rally this year, predictions based on dividends show shares are overvalued by as much as 46 percent.

“It’s a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price,” said James Swanson, chief investment strategist at MFS Investment Management in Boston, which oversees $134 billion. “Dividends have been a cushion in bad times. If they go to zero it’s a disaster.” (The real disaster is that the US is running out of greater fools. - Jesse)

Twenty-five companies in the S&P 500 saved almost $17 billion by cutting or suspending outlays this year, more than all the reductions from 2003 to 2007, when the index returned 83 percent. On a per-share basis, S&P 500 companies may trim payouts 13 percent this year, the biggest drop since 1942 ...

US Considers a 40% Ownership of Citigroup, Diluting the Common Shares

Citigroup is the prime candidate for receivership.

The only reason to continue this charade, other than to inspire us with confidence in the opaque duplicity of this Administration, is to preserve the shareholders who would almost certainly be wiped out, and the bondholders who would get a high and tight haircut, in the kind of restructuring that Citigroup requires as an insolvent institution.

Larry Summers and Tim Geithner are promoting this crony capitalist approach to preserve the wealth of a few at the expense of the many.

Wall Street Journal
U.S. Eyes Large Stake in Citi
By David Enrich and Monica Langley
February 23, 2009

Taxpayers Could Own Up to 40% of Bank's Common Stock, Diluting Value of Shares

Citigroup Inc. is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup's common stock. Bank executives hope the stake will be closer to 25%, these people said.

Any such move would give federal officials far greater influence over one of the world's largest financial institutions. Citigroup has proposed the plan to its regulators. The Obama administration hasn't indicated if it supports the plan, according to people with knowledge of the talks.

When federal officials began pumping capital into U.S. banks last October, few experts would have predicted that the government would soon be wrestling with the possibility of taking voting control of large financial institutions. The potential move at Citigroup would give the government its biggest ownership of a financial-services company since the September bailout of insurer American International Group Inc., which left taxpayers with an 80% stake.

The talks reflect a growing fear that Citigroup and other big U.S. banks could be overwhelmed by losses amid the recession and housing crisis. Last week, Citigroup's share price fell below $2 to an 18-year low. Bank executives increasingly believe that the government needs to take a larger ownership stake in the institution to stop the slide.

Under the scenario being considered, a substantial chunk of the $45 billion in preferred shares held by the government would convert into common stock, people familiar with the matter said. The government obtained those shares, equivalent to a 7.8% stake, in return for pumping capital into Citigroup.

The move wouldn't cost taxpayers additional money, but other Citigroup shareholders would see their stock diluted. A larger ownership stake by the government could fuel speculation that other troubled banks will line up for similar agreements.

Bank of America Corp. said Sunday that it isn't discussing a larger ownership stake for the government. "There are no talks right now over that issue," said Bank of America spokesman Robert Stickler. "We see no reason to do that. We believe the goal of public policy should be to attract private capital into the bank, not to discourage it...."

Why Is This Bubble Different From All Other Bubbles?

This Bubble is different from all other bubbles not because of its size, which is truly enormous, but because home ownership is much more broadly held by the public and more integral to the real economy than all the other bubble components which the lunatic Fed has nutured in the US in the last 100 years.

This is going to leave a mark.

The Word for This Week

Demagoguery refers to a strategy for gaining political power by appealing to the popular prejudices, emotions, fears and expectations of the public — typically via impassioned rhetoric and propaganda, and often using nationalist or populist themes, usually singling out a group or groups.

Also see Demagogue

The word for this week, and likely for this year, and the next.

No, not demagogue or demagogy. The Word for the Week is "them."

Why should we help them.

We are being dragged down by them.

Blaming them feels good. It makes one feel as if they were successful, not part of the problem.

It wasn't us, it was them.

They caused their own problems. They caused our problems. It is unfortunate but they would be better off somewhere else, out of sight, no longer an impairment or competition for scarce resources.

They are the scapegoats, usually singled out by the group or groups that caused the problems, and even those who benefited indirectly, made some money out of the bubble, less deservedly than they might like to imagine.

They are the weak, the poor, the defenseless, the different, the other.

And the circle of the ones that are considered them spreads wider and wider.

Because even those shouting and waving their fists in the crowds against them are also them to someone else higher in the power structure. Useless eaters is a relative objectification of the human.

And then someone will come and take them away, where they do not wish to go.

And then comes the descent into madness and destruction, for all.


One might ask, "But Jesse, you have inveighed against the Bankers on numerous occasions. How is that different? Aren't you a demagogue too, with just a different opinion?

No. All banks are not bad. All who work at banks, even the biggest Wall Street banks, are not bad. Even all those who turned a blind eye to what went on around them are not bad, just weak, distracted, overwhelmed.

But there were prime actors in this tragedy. The first objective is to stop it, to reform the system, to end the imbalances. And it would be disingenuous to not notice that the big Wall Street Banks, and the rating agencies and accounting firms, were at the epicenter of the financial crises for the past ten years. They were the lobbyists, the financial engineers, the architects of fraud, the enablers of many frauds going back to Enron and beyond.

Cui bono? Who benefited the most?

It was not so much the poor slob acting foolishly on bad advice. It was the joker taking millions off the table time after time by gaming the system, and actively promoting the bubble culture and deep capture that knocked out the regulatory process and the rule of law.

And then the law can deal with individual transgressions, and the emphasis here is "individual." Not a lynching of the bystanders. A serious investigation with individual accountability and equal protection.

That is not demagoguery. That is justice, because it is based on law and individual actions.