KPIG Radio / The Profit Motive July 13

A strong start to the earnings reporting season pushed stocks sharply higher in early trade, in economic news the May Trade Deficit increased to 42.3 billion, exports and imports both increased while oil accounted for about half the total figure at 21.5 billion.

CoreLogic reports that its Home Price Index gained .9% in May and is 2.9% higher than a year ago. Good news but given the roughly 60-day escrow period for existing home sales to be recorded and the preliminary sales data post tax credit expiration and the price and sales data for July and later is very likely to prove disappointing.

I’ve stated repeatedly that credit busts are inherently deflationary, following an initial bout in late 07 and early 08, inflation returned. Of late deflationary forces are mounting again, annualized core inflation has fallen to just .9% and broad declines in the various inflation measuring indices are now common. This doesn’t stop the gold/hyperinflation crowd from pointing at the money creation data and saying watch out. But it is not just money but credit as well that must be considered when looking at inflation, this clearly shows in the data. When you have a net contraction in money and credit in the aggregate, inflation, hyper or otherwise just isn’t going to happen. Further with credit not being marked to market, essentially the bad loans or toxic assets on the banks books being marked to model, the volume of credit is being artificially maintained higher, probably far higher than it actually is.

John Hussman has another excellent piece out; he publishes a weekly letter over at the Hussman Funds that’s well worth a read. This week he covers market valuations and earnings estimates. Some highlights include, the S&P 500 remains about 40% above historical norms on the basis of normalized earnings.
Analysts, optimistic bunch that they are use the same model based on forward earnings and 10-Year Treasury Yields that predicated stocks were about 40% undervalued just prior to the late 2007 top. He covers a number of other metrics before finishing with, “Current forward operating earnings estimates assume profit margins for the S&P 500 companies that are nearly 50% above their long-term historical norms”, not a bet I would take given the current state of the economic and business cycle.