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Let me remind everyone that all commentaries on politics, economics and investments are about the behavior of the participants, leaders and the led. For the past dozen years, Americans have displayed clear signs of blind faith in one particular human institution - the so-called stock market, which was turned into the Scam Market via the Scam Options fraud that was initiated by collusion between the Corporate Chieftains and the regulators, the Congress and the SEC, who are supposed to protect the investors. Those who still have faith in the current Scam Market, despite all the abuses that has come to fore, are Scam Lovers.

It is that time of the year in America - the turkey time - when the family and friends gather to feast on turkeys on the Thanksgiving Day. It is also a time when one can figure out who the real turkeys among the family and friends are; these are the Scam Lovers, as we shall see shortly. You may also find some inflationists in the gathering who foresee a very high inflation to rectify the current debt problem in America; these are hams. And what if you have someone who is a Scam Lover and an inflationist? That is an entirely different animal - an ostrich. As a matter of fact, I am planning to feast on ostrich steaks this Thanksgiving Day (there is local ostrich farm that supplies the super market where I shop). Let me first provide the evidence that Scam Lovers are turkeys, a term in America that is used for someone who is not too smart.

Currently, the yield on S&P500 is 1.8%; the headline inflation rate, including all items, is 1.4% and the core inflation rate is 2.5%. The yield on risk-free 6-month US Treasury Bills is 5.1%, i.e., higher than the sum of the two. Under these economic and market conditions history shows that it is idiotic to be in Scams and not in T-Bills for any age group because risk-reward is prohibitively in favor of the T-Bills. Add to this the highest level of uncertainty about the Fed policy in years (some calling for rate hike and some calling for rate cut in 2007H1), highest risk of recession in years, and the potential risk of Iran situation and you are talking about one of the riskiest time to be in Scams at the current price levels. Everything would work out perfectly geopolitically, for the US economy, and the Scam Market? That is not a smart way to invest, is it? It is not even a smart way to gamble when the odds are so poor.

I have heard from and read comments in some forums from many that stocks are fairly valued because of the high levels of the currently reported earnings. Wall Street's propaganda machine must be working well.

Graphic Illustration#1: Scam Lovers Have No Appreciation of Cyclicality In Earnings

Fig. 1 says it all. Oh, we wouldn't acknowledge that earnings could fall until after they have fallen? We wouldn't acknowledge that there could be a recession lurking until after we are already in one? That is the staple of Scam Lovers' hold-and-hope mantra. Us bears are early, I would grant that, but Scam Lovers are always late in anticipating the downturns in the earnings and the economy. Let me quote always-colorful Alan Abelson, "...exiting early could be costly, but exiting late could be disastrous."

There are well-known and time-honored strategies that were developed to deal with the cyclicality in earnings. One is Price to Peak trailing 12-month Earnings Ratio (PPE). Historically, a PPE of 15 is high and the current PPE of 18.77 is outright in danger territory. The second one is averaging the earnings for the past ten years to give a better measure of stable earnings rate. Prof. Shiller has popularized a version of this that is widely accepted.

Corporate Earnings Bubble!

Oh, BTW, there is a Corporate Earnings Bubble that is the worst of all times. How do I know it? First, the corporate earnings as a percentage of the GDP is the highest ever. Second, and most importantly, there IS a causal relationship between the rise is Consumption Debt and corporate earnings. That is why there is such a Debt Push in America. We have just witnessed the greatest Consumption Debt binge in US history over the past four years. When the Peak Debt arrives, likely soon, and the Consumption Debt outstanding starts to go down all hell will break loose for the US economy and corporate earnings. Like early 1930s, a decline of 80-90% is not only not out of the question but more than likely to be exceeded. Propaganda machine keeps Scam Lovers' minds off of such potential outcomes. Don't worry, be happy.

Graphic Illustration#2: Scam Lovers Are In Denial of the Fact That Valuations Were Rarely This High Before 1996 (The Irrational Exuberance Level!)

Fig. 2 shows the valuations using Prof. Shiller's methodology. It was this figure, as of mid-1996, that was presented to the Fed and Greenspan's comment of irrational exuberance in December 1996 was based on that presentation.

Have a happy Thanksgiving and enjoy your turkey, or ham, or whatever, or whoever!, is there. I am looking forward to ostrich (any recipes would be most welcome).