"Profit's to Earnings Ratio"

Posted by Bob Schultz at 3/5/2009 10:04 AM
Categories: uncategorized
    Yesterday, President Obama stated, "Profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective on it,”

    The President was likely speaking to the "P/E" ratio which is used to measure companies against each other.  But P/E ratio does not stand for "Profits" and "Earnings".  It stands for "Price/Earnings".  This is the measure by which a stock price is compared to the earnings per share of that same firm.  

    Hence, a firm that has a stock price of $5/share, and earns $.50/share has a P/E ratio of 10 (5/.50).  Alternatively, a firm that trades at $40, and has profits of $2/share has a P/E of 20.  The lower the P/E ratio the more attractive is the stock price.  

    Obama's gaffe is laughable if it weren't so frightening.  It's indicative of his ability to pontificate on a subject in which he has little or no background or understanding.  

    In fact, Obama's background offers a disturbing vision of how he views America. The majority of Obama's adult life was spent on the South Side of Chicago.  This section of the Windy City is a dichotomy of liberal elites, safely ensconced in their Hyde Park enclave, surrounded by the misery and despair of the Chicago slums. 

    While the two neighborhoods could not be more economically diverse, they share many commonalities:

    1. There are no manufacturing firms, or companies that employ a large workforce.
    2. Few if any new businesses are ever opened, in either neighborhood.
    3. The few residents that do start an entrepreneurial venture, quickly move to other locals, where the taxes are lower, and the streets are safer.   
    4.  And, finally, and most importantly,  the residents only see relief and economic opportunity come from the outside - in the form of grants for the University, or government relief for the inner city residents.  

    This final commonality is the most dangerous one, and one to which President Obama seems to have embraced.  Looking at the world through South Chicago eyes has given the President a huge blind spot to the core of America's Economic engine - small businesses.  

    That failure to understand the basic principles that build a business, a neighborhood, a community and a nation offer little hope for restoring America's economic future. 

    His programs and ideas, so far, clearly point to an America that not only turns its back on small business, but drives it from the community.

    America's future can already be seen in a drive through Chicago's South Side;  a place where the difference between "Profits/Earnings Ratio" and "Price/Earnings Ratio" really doesn't matter.
 

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