Thursday, January 15, 2009

Pelosi Plan resulting SPX Earnings Using Kalecki-Levy


Beats me why Microsoft objects morph to weird colors - but they do, so will proceed with the following graphs.
First is an update of the Kalecki - Levy identity from the Minsky guys using the following input:
Nominal GDP drops down to 3.5% (Goldman Sachs)
Savings up to 7%
Govt Investment up Pelosi's $197 billion
Import/Export -4%, improves as per numbers the other day
Results in following graph (sorry to blurry don't know how to transfer graphs form Excel to blog):






I calibrated SPX earnings to what the K-L identity has been last 20 years and come up with the green line above.
All the above result in a SPX earnings of $49.
With a 12 times P/E means SPX at 788.
To correct the SPX, we require a true additional fiscal spend/stimulus of an additional $650 billion which should result in an SPX earnings of $75 and assuming the multiple expands then with this happy development we get an SPX of 1200.
I think this goes far in explaining the rally since December and also how to consider the developments of the fiscal stimulus. Do not consider any transfer payments (unemployment etc) nor tax changes. Look only at actual increased spend of the government into the economy. Doesn't matter if it is shovel ready or not - it is the market expectations that this spend will occur which counts.
I worked out the following table:
........................................Stim.........Ern........Mult.......... SPX
Obama-Biden ..............50 bil ......$30..........10..............300
Pelosi ...........................187bil ......$49 ...........12 .............588
......................................300bil .....$54 ...........13 .............654
......................................600bil ......$63 ..........14 ............880
......................................900bil ......$75 ..........16 ...........1200
Hope this helps.



1 comment:

  1. SPX has an additional problem even if 900 billion were spent and that is it's unlikely the Financial sector will provide much regardless. Also, even if we troughed in GDP in Q4 08 and Q1 09, and the plan got going fast the reduced earnings from the Energy sector would be a drag on the SPX for probably another quarter or two. On the positive side, industrials and materials would probably contribute alot.

    I guess what I would like to conclude is that the success of the Obama plan relies alot on other countries also leaning in a heavy Keynesian direction.

    G

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