krogias

Two critical events in the last 24 hours: 1) AIG reports an enormous loss This is very important since insurance is the largest financial sub-sector which does not have access to the Fed's discount window, which has been used to conceal the losses or the various swap programs designed maintain the fraud that some banks are not insolvent. Given that, an honest report from AIG gives us some insight into what the REAL situation looks like in the financial industry and it's not pretty. With the strains imposed on the Fed's balance sheet by their past actions there is essentially zero chance that the insurance industry as a whole will get access. Yesterday's selloff was triggered by an SEC announcement that greater disclosure would be required in the balance sheets of investment banks. Financials dropped hard. Essentially anything that interferes with the ability of the banks to commit fraud is going to tank the sector since fraud is the only thing between some of them and b...

One of the key problems with valuation in the stock market today is the difficulty of determining actual profits are trying to compare the numbers that are reported to previous years where different standards were used. Many bulls have tried to tell me that I should buy because the S&P 500 is selling at a P/E of only 16x 2008 earnings. Well, there are a ton of problems with that statement so let's just cover the fatal flaws. First, I don't know what 2008 earnings are going to be and neither do they. They are using a guess as the denominator to get that multiple. The number we do have is the historical reported numbers and based on that the multiple is 18x, significantly higher. Second, 18x is very expensive and even 16x is far from cheap. 16x would be a normal peak multiple over the business cycle. 18x would be extreme territory normally. During the 20th century, the P/E for the S&P 500 has exceeded 18x on a sustained basis 3 times: the late 1920s, the mid 1960s and the...