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The 700x P/E Bull Market
Gordon Growth RIP:
From David's Market and Data Musings this morning:
"It is amazing that anyone would go long an equity market with a reported P/E multiple of 700x but that is indeed what we have on our hands. The end of the recession and the onset of a sustainable recovery, as we saw in 2002, are not the same thing. So this could still end badly but we will await confirmation signs that this is more than a very flashy bear market rally before shifting gears. As we said in our Tea session yesterday, the cost of missing out on the first leg of a bull market, between the lows in the major averages and the lows in employment, is 20% — the price to pay to sleep at night. If we are late, and we do not intend on being too late or staying excessively bearish, we will know once the most important component of the business cycle, the engine that keeps the motor turned on, otherwise known as employment, begins to turn around on a discernible basis. We shall wait for that event, then make up our minds, and if this is the real deal, which at this time seems unlikely in the context of an ongoing credit contraction, then we will at least have 80% of the bull market to participate in ... that is, if historical experience can be used as a guide.
Show me the dividend!
The dividend yield on the S&P 500 has declined nearly 100 basis points since March, to 2¾%. At one time, the yield was at a premium to the 10-year Treasury note, but no longer. Not only that, but what is depressing the dividend yield isn't just due to the market price appreciation but also owing to the fact that S&P 500 dividend payments have plunged 32% from a year ago (according to Howard Silverblatt at S&P) — the worst July since 2002. So far this year S&P 500 dividend payouts have declined $29.5 billion and on track to drop $61.5 billion for the year."
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V shaped recovery with a cup and handle
Yesterday morning I was lying in bed deflated about the lack of a positive position with my stock portfolio. She came into the room wearing only a pair of satin bow-back v-string panties. She was holding a cup of tea by the handle. My stock portfolio immediately rose sharply. All morning long I applied the funomentals I learned from ZH with the testnicals I learned from IBD. By noon time, I understood completely what J.S. Kim was teaching me. All I have to say is- what depression?
LOL
All we have is the effect of economic numbers not falling as much as before. Earnings were lower than year ago but beat estimates (what ever they are worth) due to cost cutting (mainly labor). Revenue continues to fall and even miss estimates. For this game to continue revenue will have to ramp up and ramp up dramatically to justify current earning assumptions. Starting in Q1 of '10 beating the comparabe '09 Q will become very difficult without a ramp up in revenue or even more drastic cutting of labor. Companies are waiting to see if revenue does ramp......if it doesn't look for job cuts to pick up pace.
Thank you for pointing out what should be obvious.
"What now?"
I think the appropriate question here is What Was, or What Should Have Been!
not-quite-driving-off-the-cliff is now the new normal. Are people that desperate to get back to BAU?
The idea that the sp 500 is trading at a pe of 700 is extremely misleading, in my opinion. While it may be technically accurate (I am not sure exactly where he got he number, but I won't argue it), it seems silly not to adjust earnings for all the low priced stocks with huge negative earnings. Why should the negative earnings effect of C, for example, be fully counted when the stock is trading a 3 bucks and can only go down to zero?
The S&P is market cap weighted, I haven't looked closely at the P/E numbers, but I assume they are as well, if so, it would be an accurate reflection of what you are paying for earnings on an all-up basis.
i.e. the pe is not just a straight average.
Ok, fine. Forget about the -$23 of Q4, when the banks made their biggest write-downs. Let's just look at Q1, Q2 and Q3 09, now that the banks are "profitable" again. Well, we're coming in at around 7.50 per share of the S&P per quarter. That's $30 per year. So the PE is 33. The div yield isn't effected negatively by bank losses, so how do you call that value, especially when divs need to drop 50% to be sustainable relative to earnings.
the issue, as with Roubini, is that Rosie too missed this rally - to suggest now that things are now overdone offers little solace to the few/many who bought into their ongoing bearish predictions throughout March, April, May, June and July.
Those guys aren't traders and don't give trading advice to my knowledge. If they said not to invest in this market, that was sound advice. All of these gains will be gone in 12-18 months.
Reading Roubini, he always says the same thing: The economy is a mess, fundamentals are hosed, the recovery will be late in coming and slow when it arrives. That said, yes you can find sound investments in such an economy. You can find sound investments in the middle of a global catastrophe, too. That's not the point. The point is, the economy is cooked. Investing is not about the economy, it's not what feeds people, it's not what pours tax revenues into the treasury. Investing does not maintain the peace.
Everyone is all in a twist about their investments. Well guess what, your global economy is imploded. The last time this happened on any scale we entered a 20 year period of global conflict that bracketed the near oibliteration of European industry and culture and introduced the world to Facism.
So yeah, may be a good time to worry what's coming 18 months down the road, but I'm not worried about the yield as much as the scale of the violence.
cougar
not traders agreed - I think someone (Roubini) once said something to the effect that and economic forecast without a market forecast was for amateur hour -- in other words why do we read / watch them??
Yes but...let us not forget when Roubini first started
saying this. It was 3 years ago. Relative to the stock
markets then 12-14,000 dow and now 9,000 he's as right as rain. Short term trading is up to how the individual
feels about their own trading abilities.
One can certainly overlay the graphs of the markets
now with 1929-30 and argue that this is a very similar
bear market rally doomed to fail. Nuff said.
They wisely are keeping their eyes on the big picture and not worrying about a forced short covering bear market bounce in the dying days of America.
I suggest you do the same.
The few/many who bought into the truth are always going to appreciate the truth, and if they feel like daytrading this bounce or just sitting aside than so be it.
How does he get 700x? Press is full of estimates all over the place from 32x to this astronomical number. What are the acceptable/reasonable/prudent variants? What is the ZH consensus?
I think 700 is an exaggeration - but its not far off. Here is the data from S&P:
http://tinyurl.com/5zrsfl
It says 134 as of June 30th, it's got to be about 150 or more now.
S&P's Silverblatt says it will be infinite on a TTM basis as of Sept 30. Negative 12 month earnings are expected for the first time in history.
You can find the S&P earnings data anytime by googling "s&p 500 earnings". S&P puts up a big excel file for free.
Seems like most commentators are just pretending that this isn't happening.
"It's just a flesh wound."
For anyone doubting the SP500 700s P/E. Don't doubt anymore. here is the link right from Standards
http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
P/Es are in the 20s on an operating basis and 700s on a reported EPS basis
even SP says P/E will be 30's at current levels in 2010 if targets hit
this is not sustainable- tripps
The most important line in that doc is, "...consumer spending is key." After stimulus, cost cuttting (aka higher unemployment), replenishing inventories, you are left with consumer spending. And so goes the rest of the globe.
Mazarin,
There are two EPS numbers... the EPS as reported, ie the actual EPS, and the operating EPS, which excludes everything and anything that the companies classify as not normal. The financial industry and mainstream media have managed to make the operating EPS the standard.
Don't you love the "ex-charges" numbers? Like laying folks off is not "normal". Or paying taxes. Or fines for being a monopoly (even though that monopoly power helped generate your profits).
I love the fact "normal" is still used. Soon to be replaced by "NO BAR" (Normal. Oh, based on anticipated recovery)?
Exactly. All that matters is the bottom line. Charlie Munger says that whenever you hear "operating earnings" you should translate that in your mind to "bullshit earnings."
When you read about bear market PEs well under 10 in the 1930s and 1970s, that was on net earnings (as reported). You can also bet that accounting was a little tougher in those days, so those were real earnings. The propagandists want you to compare today's operating earnings multiple to those old figures.
Actually, if there was a way to discount all the bogus earnings due to financial shenanigans and mark to fantasy you probably would arrive at 700!
Don't forget to justify the 700 PE the market is "discounting" GDP growth of 10 % for eternity, full employment for everyone, a cash for clunkers eternal extension, making homes less affordable programs opening up to Goldman executives, and a corporate repreive for reporting the truth for the unforeseable future.
To think IP and Alcoa were 5 bucks four months ago. What the heck was the market "discounting' at 666 ?
Now cnbs is dangling the carrot in front of joe six pack who sold at the lows to put whats left of their decimated account balances from March into the Tony Dow Jones so the now exclusive Wall Street mafia families can unload the bloated stocks and get short.
Mafia would imply Wall Street was owned by Italians, guess again.
Market going up on dollar bearish GDP report. Is that sane, who knows anymore.
Can someone please short more FAZ? My family needs to buy its fifth Mercedes.
Anon, I don't think there are many bears left. Several bears I have followed for years have flipped and gone to the bull camp months ago because of the money printing and those who are bearish can see this is the same bubble pattern as the prior two. We are in the "F you pay me" mode where they are forcing the sheeple to buy high. We have 30 minute bear markets.
When the Fed chair pins short term rates at zero and says they ain't moving any time soon and joe six pack is getting negative returns in cash while their hair dresser just made 40 % in two weeks in CAT they are enticing the greater fools to buy a 50% rally into a horrific economic backdrop.
The devil channel actually said they are "waiting" for the retail "investors" to get back in. Same old sheet and its gonna end badly once again. This market is more dysfunctional then the Osbourne's.
+1. Best post on the thread.
Good article here about rising oil prices which are based on nothing:
http://www.cnbc.com/id/32235452
that number he quotes for the dividend yield looks like the ttm number.
Go to bloomberg, SPY <equity> DVD, their estimate based on current dividend payments is 2.09%.
Good point. And divs have a long way to fall relative to earnings. Earnings need to double pronto or divs need to fall 50%.
disgusting
short the stock market.
As for the dividend payments, you can get that off Bloomberg as well, again with the DVD function. The S&P dividend (ttm) dropped from 2.8 per SPY at peak a year ago, to 2.48 per SPY this quarter, or a 15% decrease.
Again, all as per Bloomberg.
For quarterly divs, he is right, June 2008 was .66922 per SPY, this June .51819, or a 33% decline.
Actually the number is 768 based on "as reported" earnings. If you go to Standard & Poor's website you get the numbers in a spreadsheet for earnings. Silverblatt reports this will be the first year ever yoy with a negative earnings number (if the estimates for the rest of this quarter and 3rd quarter are correct).
Actually the number is 768 based on "as reported" earnings. If you go to Standard & Poor's website you get the numbers in a spreadsheet for earnings. Silverblatt reports this will be the first year ever yoy with a negative earnings number (if the estimates for the rest of this quarter and 3rd quarter are correct).
Before you argue that the 700 number is incorrect, why don't you look at the facts. Here's the spreadsheet...
www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
Do you really believe that mainstream media is telling you the truth? Geez
I thought one reliable barometer was, things are looking bright when we start seeing significant numbers of insiders buying back a lot of their company stock
So unless they piled in prior to the Obama bottom, either they're not seeing a solid turnaround or this barometer is no longer valid
Oh well, just watch the S&P 500 at around 1010-1015
Insider buying was big in March, but it has dropped by over 50% since then.
V shaped recovery with a cup and handle
Yesterday morning I was lying in bed deflated about the lack of a positive position with my stock portfolio. She came into the room wearing only a pair of satin bow-back v-string panties. She was holding a cup of tea by the handle. My stock portfolio immediately rose sharply. All morning long I applied the funomentals I learned from ZH with the testnicals I learned from IBD. By noon time, I understood completely what J.S. Kim was teaching me. All I have to say is- what depression?
Here's another article that says the same thing.
http://news.goldseek.com/TrendInvestor/1248787086.php
The technicians' normal rationale is #4 - but the sideline question is, who's really at the wheel?
Some really good posts. Cougar_W and Speculator are correct about Roubini, he is not a trader. Roubini is actually just predicting what the data posted on Calculated Risk shows is coming our way. GDP can be manipulated by government spending. But when railroad traffic is down 18% and truck traffic is down by 18% then the actual economic activity ( business) that pays for the way we live is really closer to being down 18% also. The government does not have enough money to prop up the economy much longer. Roubini has said that he thinks we are in danger of a double dip W recession in 2010 or 2011. Robert Prechter and Glen Neeley have predicted another big leg down in the second half of 2009. So it is just like the bubble that burst in late 2007, we know what is coming, but predicting the exact time is not possible. Too many people in the government using too much of our money to forestall the inevitable to be able to predict exactly I think.
it is very short sighted to look at EPS or PE on a very short time period because fluctuations can be so huge that the numbers can be meaningless. example: a firm earned $1 EPS in 2008, trades at $10, has grown EPS at 6-8% for the past 5 yrs, and there is very good likelihood that they can grow EPS by 6-8% for the next 5-7 years...BUT...due to an extraordinary event, the 2009 EPS might only be $0.10. The 2010-2015 EPS is highly likely to resume its 6-8% growth from the $1 EPS level again. Do you really think the right way to look at the valuation of the stock is to say it's trading at 100x and that people are crazy for paying 100x for it? Sorry, it just doesn't work like that.
no, i don't think SPX EPS is going to return quickly to 2007 levels (about $85).
any serious and competent analyst will look at
the data from different angles....near term
results tend to be more heavily weighted than
far term....it's art and science to interpret
the data.
don't dive into the shallow end or use the deep
end for a foot bath.
People-
If you do invest, make sure you say "show me the money".
Only invest in companies with strong cash flow that have sustainable dividend growth. People are buying into shares of liabilities passing themselves off as equity shares. All the insiders are selling, but you know more than they do????
If you invest in general in a market valued at 700 times you should see a therapist - you are certifiably insane.
Good day.
why is no one talking about the 11% increase in fed spending to boost the GDP #?
why is no one talking about the new change in GDP reporting that started today to boost the past gdp #S??????
come on td!!!!!!!!!
Your Friend Tripps
The PE spreadsheet on the S&P website has been updated. Amazingly between 7/23 and 7/31 the As Reported Earnings Estimates have almost doubled for Q2 from $7.27 per share to $13.72. PE now stands at 127.58 for Q2 based on this new estimate. Surprisingly, operating earnings estimates only increased by 12 cents per shares. It's magic... numbers magic