It is about Modigliani and Miller’s Propositions in financial economics and said that you can value a company by dcf or earnings and it is pretty much the same.

Can someone help clarify this for me?

Thank you,

Roger

Thanks for the link, that guy is right on. I’ve been cheering for high oil prices for a while now, since Americans seem to act only when extreme pain is inflicted. We need to get off this oil addiction, it’s obvious the price will continue to go up, it ruins the environment and most important of all, it finances tyrants and terrorists. There is no single silver bullet, but all the alt energy techs should be thrown money at and forget the “market forces” crap, some things supersede ideological “purity”.

Check out this guy:

http://energyvictory.net/…

Biodiesel, solar, wind, thermal, wave, nuclear, whatever, do it all. And Janszen is right on about needing to take this economy off the financial services dependence. John Boggle has been saying that for years. Of course, nobody listens.

Next time you hear oil being blamed for the inflation ask yourself one question — if oil is inflationary why hasn’t the price of gold gotten weaker against oil? Oil is rising due to inflationary monetary and fiscal policies. Inflation: government printing money and expanding credit. Also, when the greedy oil companies are blamed by our politicians then ask yourself this question: big oil gets 10% from a barrel of oil, the government takes 17% from a barrel. Who is calling whom greedy? (Thanks to Thomas Sowell for that rhetorical question)

Does it really matter? Not to me…

Warren Buffett isn’t an economist he’s simply a democrat in an election year.

Your $400/barrel and alt-energy infrastructure build scenario sounds exactly like what Eric Janszen (iTulip.com) is pushing for, as outlined in his Harper’s interview.

http://www.harpers.org/ar…

Lastly, with regards to Coach and Joe feel free to comment on this. I think they are just too tough to figure out as with most fashion retailers that have been overly popular. Can you tell me with confidence that the public will be buying Coach purses etc. 5 years from now as they were the past while? I think you really have to figure out normalized earnings and that is tough with fashion retailers….they should be thrown in the too tough to figure out pile. i.e. The Gap

Thanks again for the post. Always a joy!

I’m bit surprised that you seem to have a particular view on inflation. It’s not so much that your view is one way or the other, it’s just that you seem to have a pretty strong one. I think a sound case can be made for both views. An overly simplified outline of these often entail the following points:

On the inflationary front, you have high commodity prices, driven by:

1) low U.S. interest rates,

2) a weakening dollar (which, notably, is pegged to the Yuan and to many currencies of oil exporting countries),

3) strong demand from emerging markets, and

4) continued high utilization rates

Deflationistas and those who feel inflation is not an issue point to:

1) a similar housing and credit boom in Japan in the 1980′s that’s led to a decade and a half of below trend growth and declining prices,

2) a contained money supply – at least according to the crude data that is available – and

3) the tendency for commodity prices to decrease and utilization levels to drop as growth slows and demand slackens

I don’t quite buy the Japan parallel and have a tilt towards the inflationary view, with inflation being sticky at its current elevated levels for the next year or two. After that, the risk is very much to the upside, particularly if interest rates stay this low (because the Fed’s balance sheet will likely be completely sterilized by then).

Having said that, I feel that any macro call like this is marginally better than a coin flip at best. The real value comes – as you’ve alluded to – in understanding the risks that inflation can impose on an investment. Playing out these sorts of scenarios can help an investor find companies that have real pricing power.

Which brings me to a question that plays off of Sujie’s post.

I’ve recently made an investment in a beat up Swiss consumer discretionary company whose products cater to the extremely affluent. This company has a number of wonderful characteristics that I won’t get into at this point (given the already lengthy character of this post), but, from an inflationarily (sic) defensive perspective, <i>have you ever looked into the pricing power of ultra luxury goods during periods of economic weakness?</i>

And again, thanks for framing enjoyable discussions in a slick forum.

Take care,

Noah

What makes you think, “regular Joe American doesn’t give a damn,”?

I know a lot of people who care and understand about rate changes – not very many of them know a lot about investing.

What evidence is there to prove otherwise?

Also about the trade deficit:

If a doctor spends more money paying for food at a restaurant then he does caring for the owner he technically has a ‘deficit’ with that restaurant. He doesn’t owe them any money – he already paid it he just pays them more than they pay him.

Does this mean he will go bankrupt? Of course not, his other income most likely more than makes up for this defecit.

In the same way trade deficits with China and other countries are partially offset by trade surplusses with Australia.

Each country specializes in certain ares, in China labor is cheaper, and if American companies use that cheaper labor to price American products lower, US consumers are better off at the end, because they have more money left over after buying products.

Also, If the trade deficit is going to kill the American economy, why would say Montana’s economy not be killed if it had a massive trade deficit with California? The same principle applies; if Montana imports more prodicts from California than it exports to it.

Finally, trade deficits can not stay negative forever: because US dollars are used to pay – regardless of when it is converted US comapnies sell their products for dollars in the US – for products or services outside of the country, those dollars must eventually come back into the US economy – they don’t just disapear.

The ‘falling economy’ can be fixed with one solution: the Fair Tax <fairtax.org>

The Fair Tax eliminates all income, estate, capital gains, etc. taxes and replaces them with one sales tax.

Currently, an average of 22% of the price embedded in all goods and services comes from taxes different companies had to pay in the making of the product. Under the Fair Tax all of the embedded taxes will be stopped and a 23% sales tax added.

Prices may be artificially high for a while, but eventually competitive pressures will cause the price to fall back to around the current price – in other words all Americans will stop having to pay taxes by default and take home ALL the money they make and can choose when to pay taxes.

Studies have shown this method would also produce the same amount of tax revenue.

Without taxes Businesses could stop worrying about how taxes will affect their income and spend more time innovating and creating products that produce more revenue and allow them to hire more individuals.

Wealthy Americans could stop putting all their money into non-taxable accounts that doesn’t allow their money to work and invest them in businesses which also improves the economy.

Finally, a monthly stipend is sent to all Americans to cover basic needs, so the poor would be positively affected as well.

Glenn: I agree – workouts allow us to invest with much more information and a clearly defined entry and exit point.

Garrett: Interesting article, with two caveats: (1) what is the long-term effect of people investing in treasuries at 2.2% while inflation hangs at 3%, and (2) our problems may not be in full force yet (if they come) so they won’t reflect in a short-term chart.

The answer to (1) is simple: A sustained negative savings rate and deeper credit problems, which will ultimately lead to…inflation.

As for (2), the chart seems to show that the monetary base has remained slightly steady. You know the saying: Past performance is not indicative of future results. The problems we face in the future (if they materialize) may not show up in a monetary base chart for some time.

Sujie: You are right. That’s why it is so important to value businesses and try to buy at substantial discounts. I’m not talking about a blind asset allocation shift; rather, look for opportunities in these areas and other “recession-proof” places.

Don’t worry about what the institutions are doing. If nothing else, Buffett has shown that the institutions have missed billions of dollars of opportunities over the years – opportunities he found by turning over rocks in every market.