Why Obama Can't Save Us

I was thinking about a little formula I and millions of others know and wanted to share it with the rest of you. I hope I can do it.

The formula is used to determine what a company's stock is worth. Here it is:

P (Stock Price) = E1Q + E2Q2 + ... + ENQN + ENQN x Q/(1 - Q)

where E2 is the earnings in period 2 (usually a quarter of a year) and Q is the so-called "discount factor" 1/(1 + R). The R represents the prevailing rate of return in the market place, or in layman's terms, the going interest rate during the time period in question. The "ENQN + ENQN x Q/(1 - Q)" part just takes the formula into the future.

OK, don't stop reading yet, it is OK if you don't get the math. The basic point is that a stock is only worth the sum of the company's EXPECTED future earnings. Where stock prices get really out of whack, is when people do a terrible job of predicting what the company is likely to earn in the future.

The tech bubble is the best example I can think of. Analysts, traders, and the guy next store all bought into the lie that dot com companies' earnings would continue to grow at a phenomenal rate, forever in to the future. So, the stock prices went up way too much. The truth was, the majority of these companies would not be able to generate earnings at all in the future. Once that reality was realized, the stocks came down accordingly. In other words - the E in the formula above fell, or in some cases never materialized at all. You have probably figured out by now that the word EXPECTED is key here. When earnings expectations fall - so do stock prices.

Currently, the stock market has realized that because or financial system is on the verge of collapse and we are entering the next Great Depression (or at least a terrible recession) companies are worth much less than Wall Street thought they were.

If stocks are overvalued, eventually they will come down. If they are undervalued, eventually they will come up. It is sort of like gravity, E=MC2, or centripetal force. You can't fight it. Or you can, but you will lose money.

Know, knowing this, do you still think Obama can create wealth? I read a ticker on CNN yesterday that said he is going to create 250,000 jobs. I would like to know how exactly he plans to do this. Is it possible that the expectations for your saviour are a little too high? You know what, I am going to create a job for you too. You can come and clean my house. I will pay you with fairy dust, because that is what our currency will be worth soon. Obama will have you building roads and bridges. To pay you he will take it out of your paycheck. Better yet he will take it out of the profits of the company who still employs your wife until they go under and she can help you build the roads and bridges. GOD - it is insanity!

Now, here is another formula I have learned over the past 8 years or so. It is even more difficult to grasp than the first, but it is essentially the same.

WORLD PEACE = IP 1 + IP 2 + ......... IPN;

where IP 1 equals inner peace for person 1. IP 2 = inner peace for person 2. N is the number of people in the world.

I am sure Obama can fix this too. Once he convinces the rest of the world that we, too, are cool.

Look, no one else can bring you peace - you have to find it within yourself.
Look, no one else can bring you wealth - you have to work to create something of value.

Obama can't bring about world peace and prosperity any more than extracting equity from a house or racking up credit card debt to buy consumables can create wealth.

Sickness does not create health. Dependency does not create wealth.

Sorry to burst your bubble.

Learn more at:
http://www.moneychimp.com/articles/finworks/fmvaluation.htm