Yes Folks, It’s time to dust off those party hats… It’s DOW 10,000 time!
Pay no attention to anything else folks. Especially not the S&P 500 P/E ratio…
As of Oct 7, The S&P P/E Ratio is 140.82
Yep, 140!!! This isn’t my data; this is directly from the New York Fed. Here’s the link:
So, remember that little thing called dot.com??? Remember all that irrational exuberance that was “the bubble”, where the P/E basic fundamentals went from the 15 range, and shot all the way up to 47…
Well now, WE’RE AT 140! The funny thing is, it doesn’t even fit on the Fed’s chart. (Look for yourself) The line goes to the top, and then there is text telling you that the P/E is at 140. It is absolutely comical.
There are no fundamentals, just fake money floating around, created from thin air, looking for a place to land. (note to the FED, when you create money, it needs to be dispersed! It doesn’t just need to be spun around the fractional reserve system of the debt, creating greed whores who will cash out bonuses of false profits from stimulus floatation. …or, you get what we have today, fundamentals that fall completely out of whack!!!)
Pricing the S&P at 140 falls into what I call unattainable true price discovery. I discuss this at length in my “Evaporflation Theory” as true price discovery (even for stocks) will soon become unattainable. You can’t mess with the economic forces of nature. Much like Mother Nature, you don’t know how this force will punch back! An S&P P/E of 140 will likely lead to missed expectations on earning. (Hmmmm does that sound good for all the massive pension funds that are looking to capitalize on this fake bull run, in order to recoup losses from there soon to come shortfalls???)
The bulls will argue against me, saying: look at the financials… their numbers aren’t bad, they’re recovering!
Let’s face it folks, when your financial institutions refinance all their debt at anywhere from 0.5% to 0.015% via the government/taxpayer loans/bailouts, and then re-loan that money out to taxpayers at 5% or don’t refinance existing taxpayers loans from their 6-10% it becomes a built in profit that borders on criminal. Until the public realizes that this simple concept: I owe the bank money. I’m now going to take money from other parts of my paycheck, and give it to the government, so the government can loan it to the bank I owe at a reeeeeaaally cheap rate… Just so that the bank I owe, can make a larger profit margin on the money I still owe them. …and after they make a larger profit, they can give themselves a bonus above and beyond the addition profits they made by cutting costs through layoffs.
All the Best,
p.s. To me, I’ve lost so much interest in economics and finance in the last year. When the financial world started to resemble something as comical as the “professional wrestling” it gets hard to take yourself serious as an analyst of that venue. For me, (or the pros like Nouriel, Krugman, Schiff) or anyone else to sit here and make realistic prognostications on what will or should happen is as ridiculous as talking about whether Hulk Hogan was really better then Andre the Giant. It’s all fake people. Whether we are fundamentally right, momentum can irrationally go another way. Even if we are wrong, governments can intervene, “manipulate/correct” or “save” the economy for whatever reason.
11 Responses to “Pay No Attention to the 140 Behind the Curtain!”
Just some points to add…Most market people that I talk with have a hard time fathoming how the S&P P/E Ratio could possibly be at 140, if not for the anomaly of the recent markets. (AIG / C / etc… Q4-08) I argue the P/E would be even worse if not for the anomaly of government interference! The “Red Herring” is the earnings reports that show earnings!The ONLY way earnings are coming out positive are through cutbacks and reduced spending. I’m here in the thick of it. I see it, I hear it. There are virtually NO PRODUCTIVE EARNINGS that are taking place right now. and when YOU realize that the bulk of these cutback earnings leads to another round of losses through macroeconomic losses based on a shopped out consumer less economy being over in debt and now laid off, you see that there are no earnings…. just stimulus.Making predictions on our current market is pointless. The fundamentals no longer apply. Defend the ponzi market all you like. At some point natural laws will take over, where a fractional reserve system was not meant to carry so much leverage. With risk ramped up to where it is, those earnings you are depending on will prove to be as shallow as a “recovery-less recovery”.That’s deflation for you. (Yes deflation! Don’t confuse the crashing dollar which in turn makes dollar priced assets increase in value.)All the best,Miss America
Nice to see you here again. This time it IS different. From the beginning our Professor has told us this is a solvency crisis not a liquidity crisis. I’ve probably never understood that correctly. To me solvency means assets in excess of liabilities. But, sorry Professor, insolvency is no barrier to operations. Banks operate from the time they open the doors as insolvents. From the first day they cannot match current assets to current liabilities. The barrier to operation is always cash flow. When we don’t have enough cash to meet our obligations somebody shuts our door.Clearly, the Fed’s charm-school educated Depression studied egg-heads and their oligarch masters believe they can keep the operation going by creating cash (liquidity). But I know that when they conjure up mo money in a FOMC séance there have to be other repercussions. Maybe I don’t know all the repercussions. But one of them is that the value of the currency is undermined. Because the value of (fiat) currency is all perception anyways. And when one sees his equity diluted, his savings plundered, squandered, he starts looking for alternatives. The fact that there seem to be no good alternatives, or that he can’t identify them, may keep him quiescent to a point. But eventually he’ll throw in the towel. Tipping point. When that time comes it’s already too late. Are we there yet?Another thing is that the FOMC séance puts mo in at the top. I don’t know exactly who thought that would be lent on to the real economy. That trickle down stuff was pretty much disproved a long time ago. Capital trickles up. Only up.And the question Economicminor asks is whether we’ve reached the limit of future earnings and cash flow to meet the debt obligation we already have. Or, that we can expect if we continue to pour more debt in at the top. In spite of the “good news” about the DOW, the real economy is shrinking. Our ability to service our debt is being eroded.So, your comment about definding the Ponzi market is spot on. TPTB are defending – by using the media to disseminate miss-information such as DOW 10,000 being an indicator of recovery – a Ponzi currency. That can only be defended – not to the unlimited ability of the money presses – but to the limited tolerance of savers. There is a breaking point. Are we there yet?This top down approach isn’t working. The best that can happen is that the next bubble pops leaving us with still more debt to overcome with fewer resources. And nothing is being done at the bottom. Well, cash for clunkers… I guess I forgot about that.The overwhelming problems is that this new money, when poured in at the top, stays at the top in the form of speculative, rent-seeking, investment in the same tired, parasitic, rent-seeking sectors instead of being used to create new businesses, jobs, opportunities, and wealth. It destroys wealth instead of creating it.
What would the P/E look like if you took out all companies that were kept alive by the Fed or supported by the Fed? Has anyone done that yet?We probably need to look at this from a bifurcated perspective. Obviously, those keep on life support by the Fed shift the ratio but by how much?I still agree with you that for the others that are not growing the top line and cutting expenses to squeeze a better bottom line are there. And they will not improve with this so called ‘jobless recovery’ but looking at a ‘revised P/E’ would be very helpful.Thanks for your continued imputs.
The Fed’s chart is not clearly labeled, but it seems to measure current price to most recent reported earnings, a ratio of dubious value. Nobody rational buys stock in a company on the basis of what it has already done; you buy it for what you expect it to do in the future. And if lots of companies are operating around their breakeven points, small improvements in revenue or operating margin can lead to large increases in earnings. In other words, if lots of people think corporate earnings are on the mend, forward P/Es (which people care about) will be much lower than current P/Es (which nobody cares about, and which appear to be the thing the Fed has graphed).One additional point — according to Bloomberg, current P/E on the S&P500 is about 20, and forward P/E about 14. Those numbers are much more believable to me than the Fed numbers which, frankly, look like a data error.Michael SternMerrin Capital Management
No data error, this Fed 140 PE, just dry as reported earnings rather than juiced “operational earnings”.http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
FT, nice to hear from you.It really takes a lot of effort to write anything these days. I hate just doing the “pile on”, since there are now thousands of economists watching the angles these days. I just don’t feel like adding to the noise. …that is unless I see something that bothers me enough, that doesn’t seem to get the proper attention.I think quite a bit about that “breaking point” you mention, but am always left as baffled as I am whenI think about something like “how big is the universe?”I say this because… Is there a breaking point? Every time we approach it (or even pass it) it seems as though that “point” can just be moved back, adjusted, modified, altered, whatever. In the twilight zone of modern economics, finance and politics, the vertical and horizontal, it seems, can and will be adusted to whatever it needs to be adjusted to, to keep our society operating in a way where those with power don’t loose their power.Until there’s some sort of spark, (or uprising, assination, etc…) which I obviously don’t want to see, this won’t change. (I have things fairly good, so natuarally, I don’t want that to change) …but inside me, I want some sort of balancing of society to magically happen to level off the injustice and inequity that seems to have taken over like a virus in the last 10/20 years. …and it’s just not likely to happen. All the magic wand waving won’t do a thing, so unfortunately, I don’t see any good outcome ever arising that doesn’t involve action and pitchforks. It’s kinda sad, because I really think this could get fixed if all the greed whores could just take their hands out of the cookie jar long enough to realize the inevitable course that they are setting.The unfortunate end to trickle down economics. (the wealthy, of all people, should know that when something seems too good…. you finish the sentence)All the best,Miss America
Thanks for some of the technicals Mike.I’m not oblivious to this being hindsight oriented. Q4-08 throws this chart out of whack, along with AIG, Citi, etc…What needs to be understood is that historically, we’ve never seen anything like this. It’s not a data error, but rather a proof to how severe the 2008/2009 year were… …and for us to be “rebounding” the way we are is just colossally unrealistic, especially based on the unrealistic expectations of future earnings.Anyone with a real macro economic sense understands that we have been experiencing deflation. It’s almost mind numbing to conceptualize how on earth we co possibly be facing deflation when soooo,ooo,ooo,ooo,ooo much liquidity is being added to the system. We see the stimulus/bailout/printing press/fed creation #s and we react with obvious fear of massive inflation. (Inflation indexed bonds sell like hotcakes) …but yet… we’re not facing inflation!!! (just dollar crash, against goods, bought and sold in other currencies) We’re not facing that inflation because debt destruction, combined with our obligations (and interest on those obligations) is outpacing money creation, which is compounded by the fact that there is no real growth.So with that knowledge of deflation, no growth, earnings doctored through cutbacks (which are very short lived earnings, and are also earnings that cause more pain down the line), any theory of expected gains/earnings are woefully optimistic in the face of this rally that has put a 55% increase on the board since a short time ago, where we were faced with such an insolvency crisis that it took massive government intervention like never before.I don’t think this is an anomaly… but rather the 14 – 20 P/E on future earnings (I see 35-40 as the high end optimist) are not taking into consideration proper risk for failure at so many spots within the S&P 500.Sorry for the pessimism.All the best,Miss America
Precicely LS.I realistically think at the current S&P levels, we will se P/E ratios of around 60-70 once the anomoly of Q4-08 is out of the equation.I think the rosey projected operating and as reported estimates of earnings over the next year (not being far off their norm) are FAR TOO bright.Hypothetically, if you plug in more realistic numbers like we saw from 2000-2003, you will see a whole other picture.All the best,Miss America
Regarding earnings before extraordinary items as “juiced” seems unwise. Financial institutions are writing off loans now, and these writeoffs flow through to the income statement as decreased earnings, or losses. However, in projecting the future prospects for a company, it would be imprudent to assume that a company that wrote down a lot of assets this year will do the same next year, and the year after that. Consider the extreme case — once an asset is written down to zero, it can only provide good news thereafter. The more aggressive the current writedown, the *better* we should expect future performance and the lower we should expect future risk to be.If we exclude extraordinary items, current P/E on the S&P500 is about 20, and forward P/E something like 14, which you may deem unattractive, but which ratios are surely no grounds for panic.Considered another way, the 140 P/E doesn’t mean “investors are irrationally exuberant”; it just means “companies just wrote down a lot of assets,” which should come as no surprise to anyone.Michael SternMerrin Capital Management
Sorry, I don’t buy this company nice talk about operating earnings, and it already saved me lots of money. At the end, it’s the real earnings that count, and as you say, they are recognizing their previous losses now. Nothing guarantees me that they won’t generate new losses in the future. Their business model of exploiting their consumers and their country is outdated, and so far they didn’t show any intention to change it.
Wow, great read everyone, thanks!I arrived a little late on this one, but it is so nice to find the opinions and education that made RGE such a great place in times gone by, is alive and well in this corner of the site.Keep ‘em coming MA.