The (unfortunately under-rated) Dylan Ratigan is hosting Kudlow & Company tonite, and one of his guests was Ben Stein.
I’ve been on several shows with Stein, and he’s a nice guy, but . . .
One of the other guests suggested that earnings were decellerating, which Stein vociferously disagreed with. That is, to be blunt, ignorant.
Since peaking in Q3 2003, year over year S&P500 earnings gains have been decelerating. From nearly 30% Y-over-Y, straight down for the next 6 quarters to just under 10%. The past two quarters have seen minor improvements — thanks to energy — to push Y-over-Y earnings back over 10%. But back out Energy and the decelerating trend remains intact.
Further, there is an argument to be made that earnings are meaningless — or at least not the most significant impact on stock price. Why? Most of the gains we have seen in prior Bull Markets are due to P/E expansion, and not earnings gains. Thats purely a function of psychology (more on this tomorrow).
UPDATE: August 30, 2005 5:26pm
Actually, my title is excessive — Stein did say something that makes a whole lot of sense: Investors should buy a diversified basket of Indices or ETFs that cover stocks, bonds and commodities. Thats good, simple, low cost advice for most people.
BTW, here is my favorite of Ben Stein’s work:
Economics Teacher: In 1930, the
Republican-controlled House of Representatives, in an effort to alleviate the
effects of the… Anyone? Anyone?… the Great Depression, passed the… Anyone?
Anyone? The tariff bill? The Hawley-Smoot Tariff Act? Which, anyone? Raised or
lowered?… raised tariffs, in an effort to collect more revenue for the federal
government. Did it work? Anyone? Anyone know the effects? It did not work, and
the United States sank deeper into the Great Depression. Today we have a similar
debate over this. Anyone know what this is? Class? Anyone? Anyone? Anyone seen
this before? The Laffer Curve. Anyone know what this says? It says that at this
point on the revenue curve, you will get exactly the same amount of revenue as
at this point. This is very controversial. Does anyone know what Vice President
Bush called this in 1980? Anyone? Something-d-o-o economics. "Voodoo" economics.