Because corporate profit margins are volatile, Shiller’s solution is to use a “normalized” P/E, which adjusts earnings to the average profit margin for the S&P over the last 10 year period.

Applying this brilliant valuation metric, the S&P is still about 30% overvalued. Read more about it here:

http://www.businessinsider.com/blackboard/cyclically-adjusted-pe-ratio-cape

http://www.businessinsider.com/the-crash-in-context-stocks-are-still-30-overvalued-2011-8

http://online.barrons.com/article/SB123940701204709985.html

See the links posted under comments for an enriched discussion on this issue.

And for entertainment to go with the theme of nationalization,  listen to Max Romeo’s ‘Socialism is Love’.

Let the Big 3 beggars (GM, Ford, and Chrysler) go bankrupt. These companies have been mismanaged for years and can’t compete against foreign manufacturers which make superior products.

The role of the government should not be a panacea for failing big business with one exception: banks. Credit is the life blood of the economy, and the government would stand to lose more by not bailing out the banks because of FDIC insurance.

All hope is not is not lost with corporate bankruptcy for manufacturers. Major companies often survive after filing Chapter 11. It’s the shareholders, pension plan beneficiaries, and creditors who stand to lose the most. Some say the Big 3 won’t survive if the government doesn’t bail them out. I say a bailout would be like keeping someone in comotose on life support knowing the chances of freeing him to a normal life is next to nil.

Reprint from May 7, 2008

SPEECH WRITTEN FOR BARACK OBAMA

We work for a more beautiful America.

A country where no full time worker lives in poverty.
America, the beautiful.

A country where no student cannot afford a college education.
America, the beautiful.

A country where its children can reach their full potential because the finest educational resources can be found from the richest to the poorest districts.
America, the beautiful.

A country where no patient worries about inferior health care or catastrophic financial losses due to lack of health care insurance.
America, the beautiful.

A country where no veteran regrets sacrificing life or injury during war because his country honors him all the days of his life from the day he enlists.
America, the beautiful.

A country whose enemies need not fear torture or unjustifiable invasion or unwanted occupation.
America, the beautiful.

A country with an equitable tax system and a workforce equipped to compete in the global economy with free and fair trade.
America, the beautiful.

A country not dependent on foreign oil, but reliant on domestically produced renewal energy to empower its industry and consumption.
America, the beautiful.

A country with the world’s most pristine forests, rivers, oceans, and fresh air to breathe even in its urban areas.
America, the beautiful.

A country not controlled by lobbyists, but by a diverse people united in purpose to increase peace, justice, freedom, and prosperity for all mankind.
America, the beautiful.

We work for a more beautiful America.
America, the beautiful.

(written by ‘pastamanvibration,’ inspired by Barack Obama)

To begin 9 U.S. banks will get a total cash infusion of $125 billion. It’s a good deal for taxpayers. No one pays a lower rate for the cost of capital than the federal government (the US pays low interest rates for issuing Treasuries). Since this will result in positive cash flow, I’d call this an investment for taxpayers. This investment will provide a dividend yield of 5% for the first 5 years and 9% thereafter on Preferred Shares. Banks are projected to be more financially stable in 5 years to buy back the Preferred Shares rather than pay the 9% dividend.

All is not great about the revised plan, however. The Bush Administration still intends to buy $100 billion of those worst mortgage-backed securities. You didn’t think Wall Street wouldn’t get its “cake and eat it too”, did you?

So here we are today with the U.S. government reassuring us, “Twelve o’clock and all is well!” with its new M.B.O. solution under George W. Bush, a graduate of M.B.A. boot camp and thus an even greater proponent of M.B.O. than Clinton. But all is not well…the Wild Westesque $62 trillion Credit Default Swap Market is still entirely unregulated…the mythical “lender of last resort” U.S. government remains heavily dependent upon foreign investors who will someday sneer at the world’s largest single country economy by deeming it unworthy of credit. In the meantime, America plugs up the holes of a huge dam with the toothpaste of more credit, akin to supplying drugs to a drug addict suffering severe withdrawals. When will it all implode? I wrote in an earlier post that the Mayan catastrophic year of 2012 may mark the year America declares bankruptcy. I sure hope I was wrong. Until then because of the overnight explosion of the Federal deficit, I see little chance of Obama, whom I presume to be a shoe-in to win the Presidential election, to succeed in overhauling healthcare or any of his ambitious plans of change for the betterment of the American people.

(Forward to 12 seconds to hear this apt Gregory Isaacs tune: “Thief a Man”.)

• First, Hank Paulson denied there was a huge, financial problem.
• Then he said it was contained.
• Now he says we need to act very quickly or suffer enormous consequences.
• This so-called financial expert is dead wrong again, this time with a plan to benefit careless bankers at the cost of $700 billion to cash-strapped taxpayers.
• Please do not approve the Paulson bailout plan! We cannot afford it without printing too much money. For a brief history on the dire consequences of printing too much money look at Zimbabwe of today or Germany in the 1920′s.
• Paulson’s medicine is worse than the disease. Please take time to deliberate on this matter affecting generations of Americans and consider alternative plans, such as following the successful Swedish model explained here.

Within one week the US government has: 1) taken on about $700 billion of complex debt securities (pending Congress’s likely approval) which should be difficult to unwind; 2) granted FDIC insurance for up $100,000 per Money Market account; and 3) approved a change of status to bank holding companies for the largest investment banks –Goldman Sachs and Morgan Stanley. Unlike the preceding bailouts with Fannie Mae, Freddie Mac, and AIG where the US government gained nearly an 80% equity stake, the US government will take on much risk with zero equity in exchange for guarantees and removal of bad debt off the Balance Sheets of financial institutions. Gone is the development of a massive SWF (Sovereign Weath Fund) model which I had hoped Paulson had in mind. The idea here is government bailouts through the SWF should cost the shareholders, who should be content to trade 50-80% equity to save the corporation as an alternative to a 100% loss due to corporate bankruptcy.

While I agree the billions of dollars of bad debt has to removed from the Balance Sheets of financial institutions to put an end to the credit freeze, the scale of passing on the moral hazard on to taxpayers may be too unbearable even for the world’s economic superpower. Now some of you will say, “America won’t go bankrupt! It can print money to solve its debt crisis.” To that I would reply, “Remember Germany in the 1920′s.” Effectively, this would put America in a rut potentially worse than defaulting on its treasuries. America would not be the first to default on foreign debt. A few years ago Argentina defaulted on its foreign debt, and, incidentally, without disatrous results for itself.

Getting back to the business-as-usual scenario of today…the US government is on a life support system substantially financed by foreign investment, particularly US bonds purchased primarily from the non-allies of China, Russia, and Arab states in the Gulf region. These countries can pull the plug, but cannot afford to do so until their economies are less dependent on exports to a dwindling American market. So for the next few years its safe to say their good money will continue to chase bad money (US treasuries).

In times like these it’s best to prepare for the worst. How do that is another topic.

Any private equity fund would drool over the terms for the AIG deal. The US government will be paid 11.5% interest on its $85 billion 2-year loan in addition to an equity stake nearing 80%, courtesy of AIG’s reckless management, whose bet on mortgage derivatives took on massive losses. There’s a very slim chance of AIG defaulting on this government loan. It’s problem was illiquidity, not insolvency. AIG has more than a trillion dollars of assets from which to sell and $78 billion in stockholder equity. More importantly to global stability, AIG is a major counter party for CDS (Credit Default Swaps) trades. CDS is an invisible giant of a market to the masses. It’s market size is an inconceivable $62 trillion. CDS are derivatives which bet on the default risk of debt. If a huge counter party like AIG fails to honor all its positions on trades, the mammoth market for CDS would implode.

Without a takeover of the GSEs (Government Sponsored Enterprises — Fannie Mae and Freddie Mac), housing would have fallen into a much deeper crisis and flush the global economy down the toilet with it.

The idea of GSEs was ill conceived to begin with. Two masters cannot be served…in this case, the masters being shareholders who want profits maximized and Congress with its political objective of more home ownership.

Socialization of capitalism was needed to stabilize the global economy. However, I suspect much of AIG’s assets will be sold back to the private sector. America at heart is a capitalist society and only turns to socialistic measures during desperate times. The question is…Will this massive US government intervention repeat the same mistake as its RTC (Resolution Trust Corp.), which bailed out the Savings and Loan industry in the late 1980s and early 1990s? RTC had cost taxpayers billions with its bulk sales of assets, which essentially subsidized real estate investors.

I doubt the federal government will be so stupid this time to sell its newfound, enviable assets at fire sale prices. U.S. Treasurer Hank Paulson, who is the former Chairman of Goldman Sachs, is shifting the thinking in Washington from bailout at taxpayers’ tremendous loss to development of a shrewd SWF (Sovereign Wealth Fund), which only a topnotch Investment Banker can inspire.*

The irony of it all is the US government enriched itself with these acquisitions (or confiscations?) because it had lacked oversight to regulate an anything goes capitalism which got us into this fine mess.

These are truly historic times.

*Read my comment for an updated opinion