Podcast: Job Creation, Cantor Fitzgerald and Keynes

The government’s report on hiring, which showed no gain in jobs in August, provided fresh evidence that the recovery has fizzled without ever gaining momentum.

The report increases the pressure on President Obama as he prepares to deliver an address next week about job creation, on Republicans who have a starkly different approach to economic revival, and on the Federal Reserve, whose policy makers have been divided over what to do next, Shaila Dewan says in a conversation in the new Weekend Business podcast.

While the new data was worse than expected, several economists said the problem is not that companies have been laying off their employees, though there was an uptick in announced layoffs, but that they have delayed investing in new workers.

The 10-year anniversary of the Sept. 11 attacks on New York and Washington is approaching, and perhaps more than any other company, the brokerage firm Cantor Fitzgerald came to symbolize the horrors of that tragedy. Almost one-fourth of the people killed in New York City that morning worked for the firm. In a podcast conversation, Susanne Craig talks about the strategy of Howard W. Lutnick, who ran Cantor then and still does today. Mr. Lutnick has defied those who said that he and Cantor were finished, and he has rebuilt his firm.

In another podcast conversation and in the Economic View column in Sunday Business, Robert J. Shiller contends that the surge of stock market volatility over the last month cannot be explained by conventional means. He turns to the work of John Maynard Keynes, who once compared the stock market to a beauty contest. Keynes described a newspaper contest in which 100 photographs of faces were displayed, and readers were asked to choose the six prettiest. The winner would be the reader whose list of six came closest to the most popular of the combined lists of all readers. The best strategy, Keynes said, is to select those faces that you think others will think prettiest. Better yet, he said, move to the “third degree” — by picking the faces you think that others think that still others think are prettiest. Translated into the current market, investors appear to be trying to outguess one another.

　You can find specific segments of the podcast at these junctures: Shaila Dewan on the jobs report (23:36); news summary (19:23); Susanne Craig on Cantor Fitzgerald (17:23); Robert Shiller (8:05); the week ahead (1:05).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Stocks Are Still Expensive

DAVID LEONHARDT

Thoughts on the economic scene.

The main problem for the stock market is obviously the economy. But it’s not the only problem. Stocks are also under pressure because they are fairly expensive right now relative to earnings.

Thoughts on the economic scene.

My favorite way to look at stock prices is to compare them to corporate earnings over the previous decade. By this measure, the price-earnings ratio for the Standard & Poor’s 500-stock index over the last 50 years has been 19.5. At 2:45 p.m. today, the ratio was 21.1.

So stocks would have to fall another 8 percent from their current level to return to the 50-year average.

This version of the P/E ratio is not the most popular one. You’re more likely to see a ratio based on one year of past earnings or on a projection of future. But the 10-year measure has several advantages over the other versions.

It was first recommended, as far as we know, by Benjamin Graham and David L. Dodd, in their classic 1934 textbook, “Security Analysis.” Mr. Graham was an important mentor to Warren Buffett. More recently, Robert Shiller, who correctly called both the dot-com bubble and the housing bubble, has argued for using a measure like the 10-year ratio. The data in this post comes from Mr. Shiller’s Web site.

In their book, Mr. Graham and Mr. Dodd urged investors to use a price-to-earnings ratio — that is, stock prices divided by average annual corporate earnings — based on at least five years of earnings and, ideally, closer to 10. Corporate profits may rise or fall in any given year, depending on the state of the economy, but a share of stock is a claim on a company’s long-term earnings and should be evaluated as such.

Future earnings are even more flawed than short-term past earnings, because Wall Street projections have a pretty weak track record.

Of course, saying that the 10-year P/E ratio is historically high is by no means guaranteeing that stocks will fall. Stocks can remain historically expensive or cheap for many years.

But the 10-year ratio does have a pretty good track record. In 2007, when many Wall Street traders and economists were claiming that stocks were still a great buy, the 10-year ratio knew better. Likewise, it helped predict the market’s rebound in early 2009, when optimists were not easy to find.

That stocks remain expensive is one more reason to be concerned about the economy.