The DOW dilemma, do the ends really justify the means?

[LaurieAG]

Hello Jackson33,

 

Values of national currency is complicated, I am sure you know. To compare any one must have another's to give meaning. Here we of course use the US Dollar and compared to the Euro-Pound-Canadian$ has been going down. This only means that it takes more US$ to buy that unit or something from that country or say to visit. It means very little, internally, which inflation is the usual result, with a decreased value. I do expect increased inflation in the US and higher interest rates, very soon.

 

The Canadian dollar (which has been slowly dropping against the US dollar for a couple of years now) is not a very good benchmark for comparison. In this context the sharemarket record is devalued by the current depreciation of the US dollar. That was my point about absolute verses relative currency values, what happens when the other countries increase their interest rates to maintain parity?

 

No I have not read *Noble House* by James Clavell or any of his works. Frankly I do not recall the last Novel I did read other than Louis Lamoure and stick pretty much to short stories or text books. I have seen some of the movies made from his work.

 

It's a basic lesson on shorting stocks.

 

As to the original point of this thread; Fox News announced last week, the start up of its *Business Channel*, later this year. The announcement was made by *Roger Ailes*, indicates the Newscorp/Dow deal is near or has been completed. The interesting thing here is that the WSJ, has been the backbone of the CNBC cable channel for years. Many of the commentators, even staff, work for the WSJ. GE, which owns NBC, has surprised me by not trying to jump in on the deal....

 

While the board has agreed in principle they still have to get the support of the shareholders and, as in the recent QANTAS takeover bid, nothing is a certainty until the deal is done with the owners of the shares. Also one person left the board meeting during the decision making process and two abstained from voting on the decision.

 

Considering that this thread is titled The DOW dilemma, do the ends really justify the means? I'll give you an example of what will potentially happen if the deal goes through.

 

First off there will be a gradual reduction in negative commentary about risky deals and things that may indicate instability in the market. This reduction in the negatives will be matched by extremely positive pieces that over counter the remaining negative articles so that their importance is diminished, eventually to be discarded as unneccessary. The end result will be that while the politicians are sprouting how good things are, the reality will be nothing like it for the majority, as the rich get richer and the poor get poorer.

 

While I cannot help but congratulate you on your optimism, though, you must be aware that this type of thing has happened before, and only just recently. Just as the DOTCOM bubble burst economists were deciding that two consecutive quarters of reduced growth didn't indicate a recession. How could the 'experts' get it so wrong? Or was it just wishful thinking?

[jackson33]

Laurie; Countries, especially the US raise interest rates to influence a slow down in the economy generally for inflationary fears. To influence activity or generate an economy, they will lower these rates. The same is true for tax rates, as the total monetary value remains in the hands of consumers which in most places drive an economy.

 

Am not sure I can give a reason, why you feel the Canadian Dollar has been declining. Actually its been increasing against the US$ and in the past two years this increase has been accelerated. 2000-.68, 2002, 2004-.78,

2006-.87 and today its .95 per US$ on a tear. Since the Australian $, has been increasing somewhat slower, I will guess you have been seeing your dollar vs. the Canadian. The Canadian Markets as well are in a dynamic mode, as their economy is primarily based on Oil and Metals which you know have all been very good.

 

I have read a little, from Jim Cramer's books, related to shorting stocks. During the burst in the Tech Bubble, his hedge fund had shorted virtually every NASDAQ Stock, making billions for that fund. A true to life accounting on this issue.

 

Well, the Dow/Newscorp deal, is pretty much set. The advantages I have mentioned will now go to Ailes and the new Fox Financial Channel, think start up set for Oct. 15, 2007. Personally, I believe there will be little change in the WSJ, with the Economist and Editorial Writers remaining the same. I still feel, this purchase came from Ailes and aligned to give that Channel to the upper edge over Bloomberg and CNBC, which are both already in trouble.

 

The rich vs. poor issue will always exist. Some people will never learn how to generate their own wealth, relying on government to support them. Others, simply prefer stability or fear the potential loss/risk. There are thousands of books written, all telling how simple wealth can be achieved and ALL indicating time periods. To give examples would be wrong, since every system requires knowing other factors, such as age, tolerance and income. But the point is we were all 20 at some point, could have started saving 20.00 per week in an interest bearing account and retire at 65 with over a million in that account.

 

Briefly, the Tech Bubble, burst should have been seen by everyone with Economy 101 knowledge. Many Companies, nearly all Dot-Coms, were making absolutely no money, never had and there stocks selling for 50-100.00 per share. Those that did make some money were selling at 300-1000 times there earnings, whats called *Price Earnings Racial*. In those days the 30 Dow Stocks, and all the others outside tech, were selling for no more than 20-30 times those earnings. Today, including the Tech Stocks are in this range, other than the speculative or faster growing Companies.

 

My optimism which I try to spread, is based on the fundamentals and WORLD economic growth. I seriously feel in ten-twenty years the Worlds economic standards will rise and in 100 years every Nation will enjoy what we in the Industrialized Nation enjoy today. There will be corrections and set backs, everything is dependent of Social and Political change. My biggest fear is Socialism or the return of Society back to where Government ruled with iron fist, with controls over the progress potential...

[LaurieAG]

Hello Jackson,

 

Laurie; Countries, especially the US raise interest rates to influence a slow down in the economy generally for inflationary fears. To influence activity or generate an economy, they will lower these rates. The same is true for tax rates, as the total monetary value remains in the hands of consumers which in most places drive an economy.

 

They don't have to increase interest rates if their currency is strong and tax rate reductions for wealthy people are good, only if you are a wealthy person, not the other 80+ percent of consumers.

 

Am not sure I can give a reason, why you feel the Canadian Dollar has been declining. Actually its been increasing against the US$ and in the past two years this increase has been accelerated. 2000-.68, 2002, 2004-.78,

2006-.87 and today its .95 per US$ on a tear. Since the Australian $, has been increasing somewhat slower, I will guess you have been seeing your dollar vs. the Canadian. The Canadian Markets as well are in a dynamic mode, as their economy is primarily based on Oil and Metals which you know have all been very good.

 

That's interesting, on Bloomberg cable we get the value of the AU$ in $US (.8802) but the values shown for the $CAN is 1.0488 which is the value of 1 US$ in Canadian currency (for at least the past 4 years, they must have an error in their coding). All of the other currency values seem correct (Euro Pound Yen etc) and the Canadian translation is not in AU$. Also, the AU$ has been rising from a lower bottom, in the past ten years it has almost doubled its value when compared with the US$. Sorry, I stand corrected about the Canadian dollar, most of the global currencies are appreciating while the US$ is dropping.

 

Well, the Dow/Newscorp deal, is pretty much set. The advantages I have mentioned will now go to Ailes and the new Fox Financial Channel, think start up set for Oct. 15, 2007. Personally, I believe there will be little change in the WSJ, with the Economist and Editorial Writers remaining the same. I still feel, this purchase came from Ailes and aligned to give that Channel to the upper edge over Bloomberg and CNBC, which are both already in trouble.

 

That's a bit presumptuous Jackson. As I said before, QANTAS the first international airline to have flights that went all around the globe (with no crashes, yet, remember Dustin Hoffman in 'Rainman'), did not change hands despite the boards approval of the buyout deal. The NEWSCORP channel has probably been on the cards for a while and will go ahead regardless of the DOW bid succeeding. If you have an asset that has stood for long term integrity and is highly respected, why sell it and buy something else that doesn't? After all, one in the hand is worth two in the bush.

 

The rich vs. poor issue will always exist. Some people will never learn how to generate their own wealth, relying on government to support them.

 

Like tax reductions for the wealthy people/business? In Australia we call it corporate welfare. When the CDO's etc start falling apart will the US govt do what they did during the Savings and Loan debacle?

 

Briefly, the Tech Bubble, burst should have been seen by everyone with Economy 101 knowledge. Many Companies, nearly all Dot-Coms, were making absolutely no money, never had and there stocks selling for 50-100.00 per share. Those that did make some money were selling at 300-1000 times there earnings, whats called *Price Earnings Racial*. In those days the 30 Dow Stocks, and all the others outside tech, were selling for no more than 20-30 times those earnings. Today, including the Tech Stocks are in this range, other than the speculative or faster growing Companies.

 

Gee, in 1991 when I was studying Maths of Finance for my Applied Science degree the PE ratio was 11 i.e. it would take 11 years of dividends before a share owner would recoup the cost they paid for their shares at the current dividend rate. How long has the DOW Jones index been running? From the great depression (ever read about that one Jackson?) to the 1960's the index was below 1000 points, now it's around 14000.

 

My optimism which I try to spread, is based on the fundamentals and WORLD economic growth. I seriously feel in ten-twenty years the Worlds economic standards will rise and in 100 years every Nation will enjoy what we in the Industrialized Nation enjoy today. There will be corrections and set backs, everything is dependent of Social and Political change. My biggest fear is Socialism or the return of Society back to where Government ruled with iron fist, with controls over the progress potential...

 

I suppose they say that there's one born every minute, they might buy your shares.

 

p.s. Australia is actually a democratic socialist nation. My home state has a free hospital system and unemployment/disability benefits etc are available to all citizens. We presently have a neo right wing federal govt that rules with an Iron fist (that has just about knocked itself out recently) that has a lower shelf life than GWB's US administration.

 

BTW, the US currency and it's Chinese shadow makes a very interesting phenomena, but it doesn't seem to be exploitable like the Yen carry trade. If you don't read much you probably don't have a very good knowledge of eastern philosophy etc and those inscrutable Chinese gentlemen and women. It's simple, to get the Yuan to rise, make the $US rise.

[jackson33]

Laurie; I can only speak for myself and my understanding of financial issues.

What we call the *Fed* since the late 70's has refereed to *Inflation* as the cause for depression/recession, attempts to control this one thing by setting rates for what called *Overnight Loans*. Although somewhat mis-leading for a variety of reason, the markets in the US react to these moves. As for the strength of a currency, I would think that depends on what can be purchased with that unit, in that country.

 

Everything I hear, tells me the Dow, purchase will happen. Both boards and stockholders have agreed to the terms. Also we have no idea when talks first began, to compare with the rumored Fox Financial Channel. Being what you would call a conservative, having followed Roger Ailes for many years along with Fox/Newscorp, I gave you the best scenario's to help understand their moves.

 

Not trying to insult, P/E and dividend have nothing to do with each other. Many good stocks purchased in the 80-90's, would have shown no income if held to today. Most in fact reinvest or buy back stocks to increase their stocks value. Dividends generally are paid well below 5%, which would take 20 years to recoup the original value. Current and future estimated P/E's indicate in short, expected growth potential. Many good Companies or those said to be worth investing in today, have current P/E's well past 20-1. Google and Amazon a couple.

 

Correct, the 1000 Dow was around a long time. Remember however what makes up the Dow components have changed over the years. When this Dow 1000 was, our GDP was about 1-2 Trillion. The current GDP about 14+ Trillion and we have a 14000 Dow figure. The P/E has remained about the same or about 17-18. You may have used another P/E but not the Dow.

 

The Chinese, wish not to let their money float on the open markets, probably to keep prices in foreign markets cheaper. They do sell a great deal of product in the US. As for the political sides of these issues, I will refrain from. I have enjoyed passing on my opinions to you, on this thread and have noted its being read by others. However this will be my last post on the thread and wish it to be cordual...Thank you for the opportunity.

[LaurieAG]

Hello Jackson,

 

I too have enjoyed our frank discussion and will probably catch up with you on other threads in the future.

 

Everything I hear, tells me the Dow, purchase will happen. Both boards and stockholders have agreed to the terms. Also we have no idea when talks first began, to compare with the rumored Fox Financial Channel. Being what you would call a conservative, having followed Roger Ailes for many years along with Fox/Newscorp, I gave you the best scenario's to help understand their moves.

 

I haven't heard anything about a stockholders agreement. If they did agree I would expect that there would have been an announcement made to the market by now.

 

Not trying to insult, P/E and dividend have nothing to do with each other. Many good stocks purchased in the 80-90's, would have shown no income if held to today. Most in fact reinvest or buy back stocks to increase their stocks value. Dividends generally are paid well below 5%, which would take 20 years to recoup the original value. Current and future estimated P/E's indicate in short, expected growth potential. Many good Companies or those said to be worth investing in today, have current P/E's well past 20-1. Google and Amazon a couple.

 

The P/E ratio/multiple means Price to Earnings ratio, externally that is price of share vs the earnings made by the share per annum. Not many people get access to the intimate financial details required for an internal P/E (COGS?), even more so when these figures are deliberately obfuscated. In the 80's and early 90's people mainly invested in 'bricks and mortar' because the others were called 'junk bonds' then. When, like many of the (now defunct) 90's dotcom startups you refer to, there is no dividend, you don't actually have a P/E ratio.

 

Correct, the 1000 Dow was around a long time. Remember however what makes up the Dow components have changed over the years. When this Dow 1000 was, our GDP was about 1-2 Trillion. The current GDP about 14+ Trillion and we have a 14000 Dow figure. The P/E has remained about the same or about 17-18. You may have used another P/E but not the Dow.

 

The difference between external and internal ratio's and the information required to calculate the ratio is much the same for a company as it is for a national market. You must also include the futures markets and the (up to 50 trillion when US interest rates were increasing in regular .25 point increments) impact that they have on the other parts of the national economy.

 

Take what happened in Australia during 1997 for example. During each of 4 days trading there was turnover on the Sydney Futures Exchange (AU$) that was greater than the total amount traded during the whole year on the ASX. The total was equivalent to the amount gambled (casino's lotteries etc) in the US during 1996.

 

It could be argued that these amounts are minor compared to real market trading in shares but there is a down side that only appears when you look at the whole picture. A couple of years later our Reserve Bank (our US Federal Reserve equivalent) revealed that they had lost $4 billion in supporting our currency. That's big bikkies if it's half of your annual surplus/profit (and especially if you lose it over a very short period).

 

Thank you for the opportunity Jackson. Don't take the following poem personally, I wrote it around 10 years ago. You might note that I support fair trade not free trade, because as the poem shows, things work both ways and they always have.

 

'The plea of BeiBionn'

 

You can have your magic beans Jack

your children are hungry and we need the cow back.

 

The lack of just terms and equitable or fair pacts

expose all crooked beanstalks to concerted attacks.

 

Unless obsessive cycles are stopped in their tracks

our towns will again be as flat as tacks.

 

You have been too trusting Jack

your childrens futures remain black

while current problems compound through lack.

 

Struggle earnestly against the pack

repudiate rights to depreciatingly retract

as giants fortress lie ripe for sack.

 

For only fair shares of the golden goose Jack

will save beanstalks and giants from the axe.

 

I'll just finish off with what the papers said today. While one expert said that the present market should be left to the professionals and the reckless, another article gave a 20 year old quote from a financial whiz (who is now spending time in jail). Apparently a recession is where everybody loses (including the brokers) and a correction is when only the stockholders lose.