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John Hussman Asks Why Michael Darda Shaved Off His Beard, Explains Why NIPA Profits Are Completely Irrelevant
Two weeks ago John Hussman appeared on CNBC in a segment in which he had the (dis)pleasure of deconstructing Michael Darda's permabullish argument, which has been virtually unchanged and cosmetically rehashed ever since Darda went John Holmes in 2007 at the very peak of the market (Hussman also sparred against James Altucher, but that was pure torture under any iteration of the Geneva Convention or the Basel Treaty, and we will spare our readers the result - masochists can see the clip here). 30% lower and nothing has changed. Which is why in his daily letter, Hussman has some much needed qualifiers to debunk the Darda argument which is as wrong now as it has always been. Tangentially, Hussman has a question for Darda: "just before the market plunged by more than half, [Darda] asserted
"the fundamental underpinnings of stocks are superb." He later appeared
on CNBC in January 2008 sporting a beard, asserting that all of the
recession talk was overblown, and telling a reporter at TheStreet that
he would not shave the beard "until the recession talk ends or housing
recovers, whichever comes first." As of a couple of weeks ago, he had no
beard, which was perplexing." Hopefully Larry Kudlow can ask this question of Darda (and AJ Cohen) next time he has his favorite permabullish cheerleader brigade on deck. The full clip of Hussman's unfortunate encounter with a very clean shaven, and oddly smug, Darda can be seen here.
Here is Hussman's latest deconstruction of the groundless arguments presented by an increasingly more desperate cadre of bullisht [sic] disseminators.
A couple of weeks ago, I was in a CNBC segment
discussing economic conditions. I decline the vast majority of media
requests, but I thought it was important to talk about the economic
risks we're observing. It was a debate-style format with another analyst
who essentially recapped the same arguments that he made at the 2007
market peak. Indeed, just before the market plunged by more than half,
he asserted "the fundamental underpinnings of stocks are superb." He
later appeared on CNBC in January 2008 sporting a beard, asserting that
all of the recession talk was overblown, and telling a reporter at
TheStreet that he would not shave the beard "until the recession talk
ends or housing recovers, whichever comes first." As of a couple of
weeks ago, he had no beard, which was perplexing.
Now, while I have difficulty with analysts who
repeatedly lead investors down the primrose path to abominable losses,
my defensive approach has also left enough on the table from time to
time that I don't want to throw stones. Still, one feature of his
analyst's argument was different from 2007, and the more I've thought
about it, the more I realize how damaging it could be to investors, so I
think it's important to discuss. Specifically, instead of using forward
operating earnings to assert that stocks were cheap, he based his
valuation assessment this time on NIPA profits (from quarterly
GDP accounting). Quoting NIPA profits in the context of market
valuations struck me as odd, but the segment immediately jumped to
another question. Part of the reason I don't do much TV. You can't
thoughtfully discuss the financial markets in 20-second sound bites.
Here are the basics. NIPA profits (from the
National Income and Product Accounts, compiled by the Bureau of Economic
Analysis) are a quarterly measure of economy-wide profits, restricted
to current production, less associated expenses. As economists at the
Department of Commerce and the BEA have noted (Mead, Moulton and
Petrick, 2004), this measure of earnings deviates substantially from
S&P 500 earnings. Expenses used in the calculation of NIPA profits
exclude bad debts, resource depletion, disposition of assets and
liabilities, capital losses, and any deductions relating to the
treatment of employee stock options. It also includes an allowance for
misreporting of corporate income. Many of these calculations are only
available on an annual basis, with a considerable lag, and as a result,
quarterly NIPA profit estimates and revisions make significant use of
interpolation and extrapolation.
Moreover, the NIPA estimate deviates from S&P
500 earnings not only because it excludes all sorts of expenses that are
relevant to shareholders, but also because it covers the entire
universe of U.S. companies, including small businesses, Sub-S
corporations, and mid-sized companies that are not in the S&P 500.
Indeed, S&P 500 earnings as a share of NIPA profits have fluctuated
between 38% and 85% over the past couple of decades. Except for a slight
amount of predictable mean reversion when S&P 500 net income
declines during recessions, there is no correlation at all
between divergences between NIPA profits and S&P 500 earnings (net
or operating) and subsequent changes in S&P 500 earnings. So they
aren't reliably predictive of anything.In short, the NIPA profit estimate is a frequently
revised, noise-ridden, extrapolation-based quarterly data point,
reported with a substantial lag, that excludes a host of
shareholder-relevant expenses, and covers a broadly different universe
of companies than does the S&P 500. So I've been asking myself, why
would anyone want to use NIPA profits to value the market, instead of
using actual earnings reports, or even forward operating earnings which
are already a sufficiently overblown measure of corporate performance?
The only answer I can come up with is that NIPA profits are an even more
overblown and misleading measure, allowing the continued assertion that
stocks are undervalued.
To give you some idea of the distinction, the
following chart shows S&P 500 earnings (TTM) versus NIPA profits,
scaled so that each series begins at the same value in 1963. Notice that
in 1963, both measures would have (by construction) given you the same
P/E multiple. But presently, the NIPA line is over 60% higher than the
net earnings line (the same is true for 10-year averages), so any P/E
based on NIPA profits is substantially and misleadingly low. Again,
earnings reports for the S&P 500 companies are directly available.
The NIPA figure does not even cover the same universe of companies as
the S&P 500, and excludes a whole host of relevant expenses. In
effect, by using NIPA profits, you gradually skew the profile of
valuations over a period of decades so that what would normally
represent clear overvaluation today is transformed into something that
looks soothingly appropriate. It is not.
We are grateful that people like Hussman exist, and to at least try to stop the toxic Kool Aid from flowing and destroying the net worth of all those who naively follow the status quo cheerleading lemmings, most of whom have not had an original idea in the past decade, whose advice was wrong then, is wrong now, and will continue to be wrong with virtually 100% certainty.
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A call for help!
Google/Blogger playing with my emotions/head again.
Heres the skinny.
My blog written 2 years ago
www.GoldmanSachsExposed.blogspot.com
It is accessible thru that link.
But when I drop that link into my newer blog www.WallSTOnion.blogspot.com
along with a messgae of encouragement to Obama;
the link takes you to a parking page owned by Blogger.
What the fuck is going on?
I will confess I have been blogging under 2 ids.
No takers yet?
Surely there are some tech wizzes humming about this site.
I'll check back at 5pm to check on the question I imparted above. I know some of you have jobs..
LOL awesome
Michael Darda is a complete and utter douchebag.
very punchable (and always smug - TD).
Darda a Beard for the Value Trappees, Trappers, Trappists that Hussman, Schiller and Shilling outed. Prices can go higher or earnings lower.
PE's usually astronomic at market bottoms...
Alec Baldwin is John Hussman's doppelganger.
Thanks Tyler. Great piece.
Best of luck to James on his S&P 1,500 forecast.
lol at this bulltard saying it's like '93
Everyone enjoying the late afternoon melt up on no volume? At what point does Goldman run out of suckers? Just proves that traders are about as smart as people who sit at roulette and craps tables.
Halliburton up almost 7%. They must've got a batch of brand new orders for their 'seld-m-break' concrete forms. Have the Norwegians/Venezuelans stepped up off shore drilling operations?
Apart from Kudlow, who I always find terribly annoying, I thought Darda did an excellent job defending his points. Hussman raised several excellent points too, but your biased presentation of this debate was not warranted here.
I have to question whether Darda is merely a useful idiot for certain entrenched interests (Fed, TBTF, Large Greedy Corporations), or if possibly he is something of a PR plant charged with the mission of cheerleading the myth of US economic power & supremacy. We must remember that he cut his teeth at Polyconomics, the mouthpiece of Supply Sider Jude Wanniski. Back then he was not much more than a pretty face with a fig leaf of grounding in economics. Since then, he has honed his camera presence. But the cool, smug demeanor (notice the resemblance to Josh Birnbaum of Goldman Sachs and Patrick Bateman character in American Psycho?) that emits his jargon-laid Fedspeak is simply not fooling those who take the time to listen and consider carefully what he is saying. Darda is emblematic of the mediocrity that is rife in the financial industry. For people like these, the truth is something to be gamed, evaded, manipulated, disregarded, hacked-up.
Yep. He can be smug because, as Hugh Hendry might put it, he's out skiing while others suffer the consquences of his ignorance.
Not to mention that, these days, arrogance and ignorance are regarded as an even more desirable combination than pb and chocolate, oreos and milk, and asses and holes. I picture this ubiquitous and loathsome cocktail as akin to mixing sulphur, methane, and the BO of about one billion decomposing AA washouts.
Leo, read Hussmans letter this week. Please.
Darda is just an employee. A salesman for an agency equity business. He has to say that nonsense.
There are some here with a man crush on Hugh Hendry. And that's fine, I can kind of see that.
But Hussman is mine. OK? He writes to me, every week. ;-)
Perspective:
"the fundamental underpinnings of stocks are superb."
If you make money selling stocks (brokerage fees), then this statement is very true. Same with the NAR and convincing you that the housing slump has bottomed. Commission is a strong tool used to make people say things they really don't believe.
I don't know how much money Darda has made using his "stoicy than God" visage, but God does not keep changing his appearance, because the All Mighty have conviction, Mikey, you fraud.
XAUUSD / XAUEUR / XAUAUD bearish warnings issued since July 1 continue . . .
http://stockmarket618.wordpress.com/about