Partisan Bickering

I would characterize myself as a political moderate.  My conservative friends ridicule me a liberal and my liberal friends think I’m a conservative.  Frankly, I have equal contempt for both parties.

I’ve been having a long email conversation with one of my conservative friends.  He was a Mitt Romney supporter and has hated Obama from the beginning (this friend lives in Chicago).  I have defended Obama, primarily because he’s the president and I want to give him a chance.  We’re all in this together and I’d rather hope that his administration will work until proven otherwise.

This friend sent a link to a WSJ editorial that I thought was completely unfair to Obama.  Here is a copy of my email response.


I did read that, and found it, like most of the editorials written by the staff writers at the WSJ, to be biased and unreliable.  Take, for example, this quote from the piece:

“So what has happened in the last two months? The economy has received no great new outside shock. Exchange rates and other prices have been stable, and there are no security crises of note. The reality of a sharp recession has been known and built into stock prices since last year’s fourth quarter.”

This is a flat-out lie.  Using only the economic forecasts published in the WSJ, the economic picture has worsened DRAMATICALLY in the past 2 months.  Surprises over the past 2 months alone: dismal employment numbers, record low housing starts and sales, jaw-dropping Q4 GDP downward revisions, Great Depression-level dividend cut announcements, a virtual halt in industrial output, etc., etc.  All reported in the WSJ, but ignored in the opinion piece.  And, most damaging to the markets, don’t forget the HUGE downward revision in 2009 earnings projections.

At the end of last year the consensus for 2009 S&P earnings was over $70; today it is around $50.  This is the single biggest reason for the downtrend the markets.  You buy a stock for the right to participate in future earnings.  It really is that simple.  If earnings go down, then prices go down.  If we use earnings of 50 and a long-term average P/E multiple of 15, we get a fair value of 750.  Of course, the historical record shows – regardless of administration in office – that bear markets end when the multiple is under 10, often at 7.

7 times earnings of 50 gets us to a number of 350 – a value on the S&P so low that no one wants to contemplate it.  Panic in the streets.  Buy guns, butter, and plywood to board up your windows.  This fear is what is driving the markets today.  I know.  I listen to clients all day long.  I talk to mutual fund managers.  I talk to hedge fund managers.  Earnings of 50 on a bear market low multiple below 10 is a very scary thing to contemplate.

This has nothing to do with Obama’s politics or the recent policies he has enacted.  It’s the past 100+ years of stock market history and reversion to the mean.  The editorial writers at the WSJ know this.  But, they are partisan liars with an axe to grind.  Low taxes, unfortunately, are not the solution to all economic ills.

Note that while I have found the editorial writers at the WSJ to be clearly and consistently partisan, I think the paper is one of the top 3 in the English language.  I read it every day, along with the Financial Times and NY Times.


One response to “Partisan Bickering

  1. Gordon Smith

    Very nice piece of analysis. Unfortunately, I couldn’t agree more. As for the WSJ, it is curious as to why such a great newspaper puts its worst writers on the editorial page beat and then finds only slightly better writers to round things out on the op ed page. I think it’s because 90% of their target market doesn’t read beyond the front page of each section — so it doesn’t matter.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s