Did the 2008 Financial Crisis Mark the End of Free-Market Economics?

[Art]

I agree, a 7 times multiple is a usual valuation of a small mature company...IF management is part of the deal and/or there are more/better assets...in the case of a pizza shop...the "earnings" are the owners paycheck. I don't believe anyone would pay $200,000 for $20,000 in assets and a $30,000 paycheck. Maybe an unfair example?

However, 7 times still makes the point of an over-priced stock market. Some high flying fast foods have soared to 200 to 300 times...based on unrealistic future growth...which requires the company to grow faster than it should and borrow as much as possible and pay too much for locations.

To continue my comparison, the pizza shop owner with a $2,000 per month rent obligation and otherwise debt free...who earns $30,000 per year (on revenues of $150k to $200,000/year) working the business himself, would be INSANE to open a second unit with a $4,000+ per month rent and $2,500 in new debt service (to gross $300,000/yr?)...and have to hire someone to run (which?) one of the shops in order to make an additional...$30,000(maybe?) per year.

Chains do this routinely...to please the market craving for growth...their occupancy cost is often times $20,000+ per month on gross revenues (and investment) of $1.5 and operating income of 8%. One of the favorite strategies of the major chains is to do sale/leasebacks to create "earnings" and put older debt free properties (with lower occupancy costs) at risk.

Most of the larger chains that have failed...didn't fail because people didn't like their food/concept. They failed because they tried to expand too quickly and borrowed more than they could service...most of the time they made these decisions to support or increase their market value.

You should look up the history of Starbucks. If you have a good product and good marketing combined with first rate management skills there is no reason why you cannot achieve exponential and profitable growth thus justifying those early high PE multiples. A company's share price is based on the sum of it's theoretical gross profits in the future not how much it is making today.

 

[WhoWee]

I was talking about restaurant chains.

However, Starbucks is a classic example of market forces driving ridiculous growth. The EARLY high PE's is what I'm talking about...unsustainable expectations.

Starbucks needs to sell a LOT of coffee to justify their higher occupancy costs. They have stores across the street from one another in some places. Other locations (travel plazas) are the only choice for customers. The jury is still out on Starbucks...my guess...lots of locations will be available soon...or they'll need to do a complete make-over/re-positioning of the concept. Why you ask?

First, McDonald's and Dunkin Donuts have both taken a new approach to store layout/design and coffee sales...this will soon begin to cut into Starbucks sales...not everyone can afford $3+ coffee with gas at $4. Next, this is a concept that had a local market niche and took off nationally on the coat-tails of a popular TV show (Friends). Unfortunately, just like the bars and (old) coffee shops they pulled customers from...Starbucks is no longer the "IN THING"...all fads pass...Friends has been off the air for several years. Third, lots of copy cats (and upgraded concepts like Caribou)...the site competition is pushing prices higher.

One last concern...WHEN the premium real estate devalues under their stores...nobody will want the under-performing locations.

Starbucks is a time-bomb.

 

[LowlyPion]

I was talking about restaurant chains.

However, Starbucks is a classic example of market forces driving ridiculous growth. The EARLY high PE's is what I'm talking about...unsustainable expectations.

Starbucks needs to sell a LOT of coffee to justify their higher occupancy costs. They have stores across the street from one another in some places. Other locations (travel plazas) are the only choice for customers. The jury is still out on Starbucks...my guess...lots of locations will be available soon...or they'll need to do a complete make-over/re-positioning of the concept. Why you ask?

First, McDonald's and Dunkin Donuts have both taken a new approach to store layout/design and coffee sales...this will soon begin to cut into Starbucks sales...not everyone can afford $3+ coffee with gas at $4. Next, this is a concept that had a local market niche and took off nationally on the coat-tails of a popular TV show (Friends). Unfortunately, just like the bars and (old) coffee shops they pulled customers from...Starbucks is no longer the "IN THING"...all fads pass...Friends has been off the air for several years. Third, lots of copy cats (and upgraded concepts like Caribou)...the site competition is pushing prices higher.

One last concern...WHEN the premium real estate devalues under their stores...nobody will want the under-performing locations.

Starbucks is a time-bomb.

If you think underlying real estate is problematic, then you should really be worried for Sears Holdings. They have recently bounced off their original trading support this summer and if real estate continues its slide you can look for further haircuts. They are real estate and retail. Ouch.

But that's not to pick on SHLD any more than the dozens of companies that will be recognizing losses due to declining property values.

 

[WhoWee]

Forget about the "bailout"...the Fed caused the problem...now we have to pay...the market is over-priced and lots of people will lose a lot of equity...all givens...move on.

Here's the real (BIG) ticking time bomb...read what Warren Buffet told his shareholders...go to...

http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid={B9E54A5D-4796-4D0D-AC9E-D9124B59D436}

The SEC chairman testified this week on the topic as well...he's very concerned about the absence of regulation...considers $62 to $183 TRILLION to be at risk.

 

[Art]

I was talking about restaurant chains.

However, Starbucks is a classic example of market forces driving ridiculous growth. The EARLY high PE's is what I'm talking about...unsustainable expectations.

Starbucks needs to sell a LOT of coffee to justify their higher occupancy costs. They have stores across the street from one another in some places. Other locations (travel plazas) are the only choice for customers. The jury is still out on Starbucks...my guess...lots of locations will be available soon...or they'll need to do a complete make-over/re-positioning of the concept. Why you ask?

First, McDonald's and Dunkin Donuts have both taken a new approach to store layout/design and coffee sales...this will soon begin to cut into Starbucks sales...not everyone can afford $3+ coffee with gas at $4. Next, this is a concept that had a local market niche and took off nationally on the coat-tails of a popular TV show (Friends). Unfortunately, just like the bars and (old) coffee shops they pulled customers from...Starbucks is no longer the "IN THING"...all fads pass...Friends has been off the air for several years. Third, lots of copy cats (and upgraded concepts like Caribou)...the site competition is pushing prices higher.

One last concern...WHEN the premium real estate devalues under their stores...nobody will want the under-performing locations.

Starbucks is a time-bomb.

Starbucks shares were $0.69 ea in 1992; even after this years market correction they are $15.00 ea with a TTM EPS of $0.63. Looks to me like it has justified it's early high P/E ratio.

The fact it may not exist one day doesn't diminish the very healthy returns many investors have already made. If one restricted oneself to only investing in companies that will last forever then one simply wouldn't ever invest in any company as they all fall by the wayside eventually. That's why buying shares is a better gamble than backing horses; with shares you can switch which horse you have your money on in the middle of the race.

BTW Starbucks went international years ago. They even have outlets in China and as Starbucks rents a lot of the space it occupies it is likely lower real estate values will benefit Starbucks as they should see lower rents.

 

[WhoWee]

I agree, Starbucks had it's run...now it's too risky. Don't be surprised if earnings drop to $.10 and shares drop to $3 or $4 by the end of next year.

Here's another perspective on the company...by disgruntled investors...

http://starbucksgossip.typepad.com/_/2007/05/starbucks_share.html

I'm a little cynical. I'm a retired industry executive and I've seen a lot.

 

[Ivan Seeking]

Difference? The S&L investments were federally insured. So the government had to pay face value for assets worth only a fraction of it. In this situation, it's reversed. The government is free to set the price of the bailout.

That has nothing to do with the point. The point is that if we are poised to make so much money by buying this paper, then why is the financial system collapsing under its weight? We should recapture some value, but how much is anyone's guess.


Here's a good one: According to CBS, McCain's solution is to... deregulate.

I wasn't aware of that aspect of his proposal, but so it is reported.

 

[LowlyPion]

That has nothing to do with the point. The point is that if we are poised to make so much money by buying this paper, then why is the financial system collapsing under its weight? We should recapture some value, but how much is anyone's guess.


Here's a good one: According to CBS, McCain's solution is to... deregulate.

I wasn't aware of that aspect of his proposal, but so it is reported.

He's probably also signed up for lowering the capital gains tax too as part of this bail out. All those Country Club Republicans selling shares in the market downturn must be running up quite a tax bill and need the relief.

 

[WhoWee]

IS Obama for America? Is he really what we need right now?

I think he makes people feel good...he does have a celebrity quality...he's a like-able guy. I'd play basketball or golf with him.

However, his rhetoric doesn't hold water and given his previous comments about sitting down with anyone...the Russians, Iranians, Koreans, Chinese...ever the Europeans will eat him alive. Remember what happened when Kennedy met with Kruschev and showed weakness...we're lucky we survived those 13 days that October.

Barak Hussein Obama knows all of the right buzz words and tells everyone what they want to hear...but let's face it...not only can't he deliver his programs NOW (given the "bailout") as he stated 2 days ago...but he won't be able to "phase it in" either...the funding was NEVER available...just more undeliverable promises.

The only reason he's still in the race is the PRESS won't let him lose. Wolf Blitzer made me so angry with his leading questions (of Obama) yesterday, I wrote to CNN and told them they need to start reporting the news...not creating it...shame on CNN.

Obama needs to quit playing games and telling us what we want to hear and level with us...tell us what he can really hope to do...then he deserves my vote.

Right now, I say Yes to McCain and No No No-Bama...sorry.

 

[LowlyPion]

The only reason he's still in the race is the PRESS won't let him lose. Wolf Blitzer made me so angry with his leading questions (of Obama) yesterday, I wrote to CNN and told them they need to start reporting the news...not creating it...shame on CNN.

The same could be said for the Fox News 24/7 propaganda channel for McCain and Palin. When Palin makes a total fool of herself they talk about how unfairly people are picking on her. They talked about what a brilliant strategy McCain had pulled off in disrupting the bailout so he could come into pull things together. Apparently without realizing what a fool the man made of himself demonstrating his power to divide more than any BS thought that he had any bipartisan skills to bring the country together and lead.

I'm thinking you haven't sent any letters to Fox complaining about their absurdly biased treatment of the entire race.

 

[OrbitalPower]

Latest Bill O'Reilly meltdown on the radio factor:

hDou01X5d28[/youtube] Threatens ...is is how many on Fox News apparently debate.

 

[WhoWee]

Actually, I don't watch Fox...mostly Headline News and CNN when the entertainment show comes on...Soledad O'Brien and Carol Costello are far worse than Wolf. Both women try to slant news stories...not just the election...they're always pushing their own opinions/agenda...whatever they may be.

Regarding the "Palin interview"...CNN/HN has probably aired her nonsense about Alaska being close to Russia about 60 times in the past 2 days...it's ridiculous.

 

[WhoWee]

Obama just can't bring himself to admit his additional spending isn't possible. Unfortunately, the public still believes he'll magically deliver.

Who doesn't want free health care and lower taxes and free education? It all sounds great...but in the real world SOMEONE has to pay...or are we just going to borrow a few Trillion from the Chinese?

For the first time in my life, I'm really worried about the future. I don't trust Obama!

 

[Art]

Obama just can't bring himself to admit his additional spending isn't possible. Unfortunately, the public still believes he'll magically deliver.

Who doesn't want free health care and lower taxes and free education? It all sounds great...but in the real world SOMEONE has to pay...or are we just going to borrow a few Trillion from the Chinese?

For the first time in my life, I'm really worried about the future. I don't trust Obama!

In the debate Obama when asked about the repercussions of the $700 billion bail out said it would limit what he could do as president. He then said this coupled with falling tax revenues would mean he would have to prioritise his goals and proceeded to list those he believed to be the most important but as he rightly pointed out he couldn't be precise in relation to exactly which of his plans would be cut or reduced as he doesn't yet know what the budget will look like.

 

[WhoWee]

Let me get this straight...Obama would have his hands tied on spending because of the bailout. But, he would cut taxes for 95% of all taxpayers...which will add to falling tax revenues. Then, he will spend as much as he can on the things that are most important to him? But, he won't be able to figure that out until he has the (control of the) cash in his hands.

Did I understand completely?

I'll bet if GM would give me their checkbook I could make the workers happy.

 

[Art]

Let me get this straight...Obama would have his hands tied on spending because of the bailout. But, he would cut taxes for 95% of all taxpayers...which will add to falling tax revenues. Then, he will spend as much as he can on the things that are most important to him? But, he won't be able to figure that out until he has the (control of the) cash in his hands.

Did I understand completely?
.

It seems not.

Obama did not say he would cut taxes for 95% of US citizens. What he said was they would, 'not pay a dime more'

He will increase tax revenue by eliminating the rich man's rebate handed out by Bush.

He will save money on some programs such as Iraq through reduced military spending there and by asking Iraq to pay some of the security costs from their own $79 billion surplus. (Personally IMO Homeland security is another area which has seen spending explode uncontrollably and so is ripe for a little rationalization and thus saved tax dollars)

He has also hinted strongly at closing some of the tax loopholes which allow large corporations to get away with paying little or no tax. He will then redistribute the money saved to his priority programs at home and not as you say 'by spending as much as he can', but as much as each program needs or as much as the kitty allows; whichever is the lesser.

See it's simple really.

Unless of course you believe the current administration is already spending tax dollars so wisely no improvements are possible??

 

[WhoWee]

Is that another misleading statement by a politician

OR

Is Obama trying to wiggle out from under another un-deliverable promise?No difference in my book between Obama's latest "takebacks" and the Bush I's "read my lips"

 

[Art]

Is that another misleading statement by a politician

OR

Is Obama trying to wiggle out from under another un-deliverable promise?No difference in my book between Obama's latest "takebacks" and the Bush I's "read my lips"

You've lost me. What misleading statement? If you mean the one about, '95% not paying a dime more', then you are the only one I know of who was mislead as his words were pretty unambiguous to most folk (maybe all minus one) .

How you translate what he said as being a promise to cut taxes for 95% of the people is beyond me

I'm curious, if a shopkeeper for example told you there was no charge for something would you then feel cheated because he didn't give you any money as well as the freebie??

 

[edward]

Is that another misleading statement by a politician

OR

Is Obama trying to wiggle out from under another un-deliverable promise?


No difference in my book between Obama's latest "takebacks" and the Bush I's "read my lips"

You seem to be forgetting the topic of the thread. Within recent weeks everything has changed because of the bailout. I doubt that any politician can now deliver on financial promises.

Will McCain pay for anything by decreasing taxes for the wealthy??

 

[WhoWee]

Take a walk to the nearest street corner or coffee shop or any local McDonald's and talk to the "average person" on main street.

Actually, start with retirees of steel mills or auto plants who lost pensions or benefits (or the employees) at any McDonald's (I live in Ohio...a key battleground state)...they (lifelong Democrats) are still counting on their $1,000 check from Obama and they ALL believe that 95% of all taxpayers will receive a tax cut.

I didn't misinterpret anything...I know exactly what he said and I know exactly how the "average person" interpreted his statements...so does he.

Obama can't deliver on his promises and won't admit it...he STILL maintains that he'll spend as much as he can.

 

[LowlyPion]

Latest Bill O'Reilly meltdown on the radio factor:

Threatens to beat up senators, threatens to stock them, and threatens to break someone's finger.

This is how many on Fox News apparently debate.

Sounds like Barney Frank and Chris Dodd are off the Christmas Card List.

 

[Art]

Take a walk to the nearest street corner or coffee shop or any local McDonald's and talk to the "average person" on main street.

Actually, start with retirees of steel mills or auto plants who lost pensions or benefits (or the employees) at any McDonald's (I live in Ohio...a key battleground state)...they (lifelong Democrats) are still counting on their $1,000 check from Obama and they ALL believe that 95% of all taxpayers will receive a tax cut.

I didn't misinterpret anything...I know exactly what he said and I know exactly how the "average person" interpreted his statements...so does he.

Obama can't deliver on his promises and won't admit it...he STILL maintains that he'll spend as much as he can.

And I'm sure all of those people you mention will receive their cheque as promised as they all are in the categories being targeted for relief by Obama.

All married couples making up to $90K p.a. will receive the $1000 and nobody making under $250,000 will see their taxes increase. So what's changed??

 

[WhoWee]

How can Obama POSSIBLY give everyone a check for $1,000?

 

[mheslep]

...Obama did not say he would cut taxes for 95% of US citizens. What he said was they would, 'not pay a dime more'

OBAMA: ...What I’ve called for is a tax cut for 95 percent of working families, 95 percent...
OBAMA: My definition — here’s what I can tell the American people: 95 percent of you will get a tax cut. And if you make less than $250,000, less than a quarter-million dollars a year, then you will not see one dime’s worth of tax increase.

http://www.clipsandcomment.com/2008/09/26/full-transcript-first-presidential-debatebarack-obama-john-mccainoxford-ms-september-26-2008/

 

[edward]

How can Obama POSSIBLY give everyone a check for $1,000?

The same way Bush passed out money for his economic stimulous package. And from the same source that McCain will get his $2,500 per person $5,000 per family medical benifit, borrow it!

 

[WhoWee]

Again...how can possibly allow ANYONE to borrow money foolishly...Bush's $600 most likely benefited China and the oil countries...a lot of people went to WalMart and bought gas.

As for the McCain proposal...I think we'll have to actually pay for our own health insurance to get the tax credit...I could be wrong?

 

[Evo]

My health insurance costs close to $6,000 annually, luckily my employer pays for most of it. Under McCain I would be screwed if I lost that. And taxing me on that? Is he nuts? Sure, rich people won't be affected, normal Americans will.

Also, do you remember Obama mentioning that the war in Iraq is costing $10 billion a month? “If we’re spending $10 billion a month in Iraq, that’s $10 billion a month we don’t have to deal with our problems here at home,” "in Iraq, where we’re spending $10 billion a month while Iraq has a surplus of nearly $80 billion.”

http://www.msnbc.msn.com/id/26906271/

If McCain intends to keep blowing $10 billion a month on the war according to him.

 

[mheslep]

The same way Bush passed out money for his economic stimulous package. And from the same source that McCain will get his $2,500 per person $5,000 per family medical benifit, borrow it!

That is revenue ~ neutral with the current employer based deduction.

 

[mheslep]

My health insurance costs close to $6,000 annually, luckily my employer pays for most of it. Under McCain I would be screwed if I lost that.

Why? Wouldnt you expect your employer to pay you the $6k as salary?

 

[WhoWee]

My family plan costs just over $14,000 per year and unfortunately I pay 100%. I really want a tax break.

Just a little personal story...when I broke my wrist 2 years ago, I had to wait in line about 3 hours at the emergency room behind about 17 or 18 people that had no insurance (state benefit cards they told me). We all talked for a long time and they said they had colds, coughs and fevers...no accidents among them. It turns out they don't go to a doctors office...they go to the emergency room for faster service.

They weren't required to pay a deductible for treatment or for prescriptions...but I did. I also paid a deductible for x-rays and the follow up treatments. My out of pocket was at least $500 for the incident...WITH insurance. They paid NOTHING to use the ER for colds and coughs...PLUS free Tylenol and cold medicines.

How fair is that? Should everyone have access to affordable health care...YES THEY SHOULD...but it has to be fair.

As for the war in Iraq...we need to charge the businesses who've rushed into make their millions for security...GE and Siemans got a $7 B contract this week. The Iraqi government also needs to either step up and take control or also pay our expenses...the new leadership wouldn't even be in power if we didn't put them into power...they need to pay for us to protect them.

As for the average Iraqi citizen...oh well...better that you borrow money to pay us than for us to borrow money to protect you.

Again, enough is enough and fair is fair. We don't have any money. If we insist on being the world's policeman...then someone needs to pay for our expenses. Otherwise, we need to stay home and police our own borders.

 

[Ivan Seeking]

A great Round Table discussion on ABC's This Week. Watch Newt Gingrich turn liberal democrat.
http://abcnews.go.com/Video/playerIndex?id=5903025
http://abcnews.go.com/thisweek

 

[Ivan Seeking]

Obama needs to beat this one to death. I'm glad to see that he got my email.
http://edition.cnn.com/video/#/video/politics/2008/09/29/sot.obama.what.economy.cnn?iref=videosearch

 

[mheslep]

http://edition.cnn.com/video/#/video/politics/2008/09/29/sot.obama.what.economy.cnn?iref=videosearch

What leadership? Couple days ago he expressed hope that the bailout would get through and now he torpedoes it. Then he misleads on the causes of this financial problem when its important that all understand the reasons it came to pass. Lying drivel. I used to have some respect for this guy. No more.

 

[edward]

What leadership? Couple days ago he expressed hope that the bailout would get through and now he torpedoes it. Then he misleads on the causes of this financial problem when its important that all understand the reasons it came to pass. Lying drivel. I used to have some respect for this guy. No more.

Lying drivel on both sides.

 

[mheslep]

Fed Chaiman Bernanke last year on the looming risks posed by Fannie and Freddie
http://www.federalreserve.gov/newsevents/speech/Bernanke20070306a.htm

"...The GSEs’ second line of business is the main focus of my remarks today. It involves the purchase of mortgage-backed securities and other types of assets for their own investment portfolios. This line of business has raised public concern because its fundamental source of profitability is the widespread perception by investors that the U.S. government would not allow a GSE to fail [and the perceptions were correct], notwithstanding the fact that--as numerous government officials have asserted--the government has given no such guarantees. The perception of government backing allows Fannie and Freddie to borrow in open capital markets at an interest rate only slightly above that paid by the U.S. Treasury and below that paid by other private participants in mortgage markets. By borrowing at this preferential rate and purchasing assets (including MBS) that pay returns considerably greater than the Treasury rate, the GSEs can enjoy profits of an effectively unlimited scale. Consequently, the GSEs’ ability to borrow at a preferential rate provides them with strong incentives both to expand the range of assets that they acquire and to increase the size of their portfolios to the greatest extent possible."

Do GSEs actually do any good by making residential mortgages available / lower cost? No:

"The GSE portfolios have been the subject of much controversy. First, analysts disagree about whether the GSE portfolios serve any public purpose. The GSEs themselves argue that their purchases of MBS provide additional support to the mortgage market, particularly during periods of financial stress. In contrast, research at the Federal Reserve Board and elsewhere has found that the GSE portfolios appear to have no material effect on the cost or availability of residential mortgages.2"

"A second element of the controversy surrounding the GSE portfolios arises from the fact that they are not only large but also potentially subject to significant volatility and financial risk (including credit risk, interest-rate risk, and prepayment risk) and operational risk. Many observers, including the Federal Reserve Board, have expressed concern about the potential danger that these portfolios may pose to the broader financial system; that is, the GSE portfolios may be a source of systemic risk (Greenspan, 2005a). Systemic risk is the risk that disruptions occurring in one firm or financial market may spread to other parts of the financial system, with possibly serious implications for the performance of the broader economy."

From McCain, 2005:
http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190

"...I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, [which failed] to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole."

Bush Administration, 2003, which led to the Senate bill above:
http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&&scp=3&sq=%202003%20fannie%20freddie%20labaton&st=cse

"The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago."

Barnie Frank in response to the administration proposal:
http://www.taxfoundation.org/blog/show/23617.html

The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the Federal Government doesn't bail them out. But the more pressure there is there, then the less I think we see in terms of affordable housing.