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The Multiples Myth
I am getting tired of the endless procession of permabulls who keep insisting that. at a 13 times multiple, the S&P 500 is cheap. The last time I heard this was in 2000, when NASDAQ multiples went from 100 to 50, on their way to 10. Before that, it was in Japan in 1990, when multiples went from, guess what, 100 to 50 on their way to 10. Some 20 years later, Japanese multiples are still at 15.
When I first entered the stock business in the seventies, typical equity earnings multiples were in the seven to eight neighborhood. If you performed exhaustive stock screens, which then involved paging through endless reams of 10-k’s, newsletters, and tip sheets printed in impossibly small type, you could occasionally find something at a two multiple, the kind Graham and Dodd wrote about. Anything over ten was considered outrageously overpriced, fit only to be sold on to retail investors. This is when the prime rate was at 6%.
The selloff we saw this week is consistent with my long term view that we are permanently downshifting from a 3.9% to a 2%-2.5% growth rate, and the lower multiples this deserves. If you had any doubts, take a look at the $24.7 billion in May equity mutual fund outflows, versus the $14.2 billion sucked in by bond mutual funds. I’m convinced that if the circuit breakers had not been installed, we would have been visited by another flash crash this week.
I shall now throw all modesty and humility to the wind, and refer you to my January Annual Asset Allocation Review screaming from the rooftop that “I’d rather get a poke in the eye with a sharp stick than buy equities,” by clicking here at http://www.madhedgefundtrader.com/january_4__2010.html . I then direct you to my piece warning that a right shoulder for the S&P 500 was coming (click here for “Bring on the Right Shoulder” at http://www.madhedgefundtrader.com/june_1__2010.html ). And finally, read the bad news that the right shoulder was in at http://www.madhedgefundtrader.com/june-28-2010.html .
Whenever I am particularly in tune with the market spirits, I inevitably get inundated with a torrent of questions about what happens next. It seems at this point that my original prediction of 950 in the SPX is looking good, and that an overshoot to 900 is possible. I think we are in a long term 900-1200 band that lower growth demands, and that we are trending towards the bottom end of that range.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two and a half years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Lets make it a long term trend to 650-950. Based on government figures and current earning, neither of which are worth the paper they are printed on, I think we are still well over valued, well over-leveraged and very much out of control on spending.
Thanks MHFT...you are sooo right on...
and glad you have a thick skin! In addition to your accolades, it might be funny to let everyone know that you stay in the Holiday Inn Express as often as possible!
The madhedgefundtrader has spent 30 years as a commercial pilot; he is a mathematician who worked on the neutron bomb; he was a captain in the military and also a naval aviator; he accompanied Saddam Hussein's troops as they marched on Tehran; he studied at UC Berkeley under Robert Reich; he wildcatted the Barnet shale for 4 years; he lived in Japan working as a financial journalist, so poor he had to live on fish heads (during the same time frame that he worked on the neutron bomb); while in Japan (for at least 10 years) he also studied karate and was so much larger than everyone else at the dojo that he was only pitted against black belt students; he dated Elvis's last girlfriend; he was US editor of Euromoney magazine; he was a member of the White House press corps; he was a director of the Swiss Bank Corp; he set up the first ever dedicated international hedge fund; he owned a house previously owned by Steve McQueen and the Sultan of Brunei; and he personally helped clean an oil spill on the Santa Barbara coast in 1969. Also, he is a nephew of Mitchell Paige, one of the most famous Medal of Honor winners.
Recently he has dined with Elliot Spitzer, Robert Reich, Joseph Stiglitz, James E. Cartwright (Vice Chairman of the Joint Chiefs of Staff), Byongwon Bahk (Vice Minister of Finance for the ROK), General David Petraeus (Commander of the US Central command), James Baker III, Robert Mueller (FBI head), Leon Panetta (CIA head), and Santa Claus.
As for BP, he thinks it should "roast in hell" but also suggests buying it at 29.
* * * * *
http://www.zerohedge.com/article/proof-economy-stalling
As a commercial pilot with 30 year’s experience, I can tell you ...
http://www.zerohedge.com/article/value-play-bp
Over the years, I have invested so much time wildcatting in the oil patch that I will never be wanting for great steaks at Nick & Sam’s in Dallas, ...
http://www.zerohedge.com/article/deepwater-horizon-offshore-oil-industry...
the fruit of my four years of wildcatting in the Barnet shale was many great relationships in the energy industry
http://www.zerohedge.com/article/apple%E2%80%99s-next-stop-1000
When I took a young, cocky, long haired, Levis wearing Steve Jobs around to meet Morgan Stanley’s institutional investors to pitch an Apple share offering 28 years ago, I vowed never to buy anything from the man.
http://www.zerohedge.com/article/british-petroleum-nuclear-option
Back before personal computers, the Internet, and hedge funds were invented, most mathematicians, like myself, ended up working for the Defense Department in some form or another. In my case, that involved a summer with the Atomic Energy Agency working on the neutron bomb at the nuclear test site at Mercury, Nevada in the early seventies.
http://www.zerohedge.com/article/memorial-day-tribute
So I thought it would be a good day to tell you the story of my Uncle Mitch. (Mitchell Paige, very famous Medal of Honor winner.)
http://www.zerohedge.com/article/gold-rush-iraq
I remember those days well, as I was issued a visa to accompany Saddam’s troops to Tehran, only to see it cancelled when the Iranians were able to mount a counter offensive. I still have the dessert camos and telephoto lenses need to cover the desert war, although the pants, regrettably, no longer fit.
http://www.zerohedge.com/article/my-date-elliot-spitzer
I couldn’t for the life of me figure out why New York’s former governor and federal prosecutor, Elliot Spitzer, wanted to invite me to dinner.
http://www.zerohedge.com/article/big-global-risk-reversal-hand
This month I decided to put to use former Labor Secretary Robert Reich’s course on labor statistics which I took at UC Berkeley
http://www.zerohedge.com/article/dinner-nobel-prize-winner-joseph-stiglitz
The great thing about interviewing Joseph Stiglitz over dinner is that you don’t have to ask any questions
http://www.zerohedge.com/article/my-briefing-joint-chiefs-staff
So I leapt at the opportunity to have dinner with General James E. Cartwright, Vice Chairman of the Joint Chiefs of Staff.
...his naval aviator wings matching my own...
http://www.zerohedge.com/article/buy-toyota-when-there-blood-streets
Nearly 40 years ago I was starving in Japan, living on fish heads and rice, while waiting for the financial journalism thing to start paying off
http://www.zerohedge.com/article/big-recovery-california
I studied karate in Japan for ten years, the goju-ryu school. Since I was by far the largest student, I was always matched with the best black belt to make things even.
http://www.zerohedge.com/article/why-your-next-car-may-be-hyundai
So when the recent Vice Minister of Finance for the ROK, Byongwon Bahk, passed through town, I leapt at the opportunity to have dinner.
http://www.zerohedge.com/article/lunch-robert-reich
The other day had me sharing a cold, congealed chicken salad for lunch with Bill Clinton’s Secretary of Labor, Robert Reich
http://www.zerohedge.com/article/my-briefing-general-petraeus
...on my way to a briefing from General David Petraeus, Commander of the US Central command.
http://www.zerohedge.com/article/my-briefing-general-petraeus
With just two bars on my collar, I was way beyond my pay grade
http://www.zerohedge.com/article/former-secretary-state-james-baker-iii-...
This was one of dozens of amazing insights I gained spending an evening chatting with the wily Texas lawyer [James Baker III] during an evening in San Francisco.
http://www.zerohedge.com/article/residential-real-estate-dead-money-next...
I picked it [his house] up for a song from the Sultan of Brunei in 1998... The actor, Steve McQueen, had owned the property once...
http://www.zerohedge.com/article/dinner-fbi
I managed to catch a quick dinner with [FBI head] Robert Mueller as he passed through San Francisco on some bureau business which he couldn’t disclose.
http://www.zerohedge.com/article/my-lunch-cia
So when [CIA head] Panetta passed through town on his way home to heavenly Carmel Valley for the holidays, I thought I’d pull a few strings in Washington to catch a private briefing.
http://www.zerohedge.com/article/santa-claus-tells-all-no-holds-barred-i...
I managed to catch up with my old friend, Santa Claus, the other day, before he took off on his global gift giving rounds.
http://www.zerohedge.com/article/dinner-fbi
(quoted by an Anonymous poster, from madhedgefundtrader website?)
"In 1982 the Mad Hedge Fund Trader moved to New York as the US editor of Euromoney magazine. As a member of the White House Press Corps he covered the early years of the Reagan administration"
"In 1989 the Mad Hedge Fund Trader was appointed a director of the Swiss Bank Corp responsible for its then vast portfolio of Japanese equity derivatives. A year later he left to set up the first ever dedicated international hedge fund, which became a top performer in the industry.
http://www.zerohedge.com/article/dinner-fbi
(comment by madhedgefundtrader himself!)
As for Elvis, I was given a tour of Graceland once by his last girlfriend, who I dated later. I got to use the toilet he died on.
http://www.zerohedge.com/article/coal-lobbyists-are-taking-hatchet-natur...
After my year in the White House Press Corps
http://www.zerohedge.com/article/deepwater-horizon-offshore-oil-industry...
just a tiny fraction of the 75,000 barrels that washed ashore in Santa Barbara in 1969, which I personally helped clean up myself
http://www.zerohedge.com/article/deepwater-horizon-offshore-oil-industry...
As for BP, may they roast in hell...
http://www.zerohedge.com/article/value-play-bp
No sooner did I put out the call the buy the pariah stock at $29
... and I, uh, worked in WHMO for a year, so I got to meet Reagan ...
Dammit, this guy would make me feel like a failure, but then I realise we are both trolling the same forum here.
So ... way back when when I was in Afghanistan with Ollie, chasing the Ruskis away so that Osama could breathe the sweet air of freedom ...
LOL. I thought you were joking in your previous comment. MHFT must be 150 yrs. old.
I will commit a number of sins on this board, by issuing the following statements:
a) most stocks offer very good returns through year-end
b) most housing in the US is dirt cheap given 5/1 ARM rates
The US enjoys productivity growth of about 2.2% and population growth of 0.6%. She can sell endless amounts of IOU's for 1.75% over 5 years, below the real structural rate of growth.
Most large companies offer dividend yields above Govt bonds. The Gov't will spend more money (if necessary) to avoid a new recession. I hate Keynesianism and am a long-term bear but stocks are a good buy, and will remain so if gov't yields remain low.
With 2 Tril. of credit lines cut (and more to come) to J.Q. Public I must respectfully disagree...
To paraphrase Henry Kaufman, when it comes to future prices there are two kinds of people: those who don't know and those who don't know they don't know. Arguing about prices doesn't change a damn thing. Trade or don't trade. The price is what it is.
We long for the days of Fundamental certainty and honest accounting.
The sound of children playing as we looked in comfort at our Muni holdings.
The worry free returns of IBM while enjoying a Fresca.
The warm glow of reviewing high dividend yeilds sitting at my desk enjoying a Camel.
The Technicals optimistically head and shoulders above the rest.
----------
The US has changed, and I with it.
Mark Beck
Agreed with Rainman, and as an addendum, the assumption is that the vast majority of volume are trades based on some sort of stock valuation process, which is hilariously inaccurate. I think part of what makes Robo Trader's posts so damn hilarious is just how many people, somehow, actually don't understand the posts.
If that 13 multiple in the S&P has been arrived at without discounting the ginned-up mark-to-myth earnings in the financial sector, then the entire p-e valuation exercise is meaningless.
The P is a known. The E is a mystery.
How's that BP trade working for you?
How's that BP trade working for you?
Since MHFT claims to have recommended BP at 29 (http://www.zerohedge.com/article/value-play-bp) and BP is now at 31.91, I guess it's working alright?
Not sure what you were going for.
LMAO...I was going to say the same damn thing! Although I swore I would never click on him again (hell, curiosity kills the cat), there I find my Salomon friend speaking for me. Kudos Mitch!
private equity does deals in the 3-7X EBITDA range...granted there is little liquidity so one needs to be compensated for the risk but I shake my head with some public equity valuations... just absurd... author is right
3.9% growth and a 6% prime rate then.
2.0%-2.5% growth and a 3.25% prime rate now.
Under which scenario are stocks worth more? Break out the old H-P and do the math.
Stocks are way cheap.
This has to be some sort of inside joke. Just tell us you have a charitable trust and we will get it.
http://www.jim-cramer-charitable-trust-stocks.com/
" visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two and a half years of research reports available for free."
Re truth in hypothetical self promotion:
Nowhere to be found on the site...
" visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two and a half years of research reports available for free."
Re truth is self promotion:
Nowhere to be found on the site...
On the lower right side of his page is an "Archives" box. Click on it and select a month, starting Feb, 2008. That month's research will be available to read.
So glad someone pointed this out. Is it so unrealistic to think that we might be in a prolonged period of lower P/E multiples? Equity markets move based on perception. You can do any financial analysis you want, or put current trading levels into historical context to justify a rally, but without an inflow of capital we won't go anywhere. Overall investor sentiment is negative, and will probably remain that way into the foreseeable future.
Rick - corporations have very high operating margins and an ocean of cash Your "inflow of capital" will come in the form of M&A, as corporate insiders relieve the sheeple of their hated equities at bargain-basement prices, right before Dr. Ben's Inflation Cure kicks in to make all those assets far more valuable than what the sheeple sold them for. And make the cash the sheeple put under their mattresses (because who knows what bank will fail next) far less valuable.
Look around the card table. Identify the sucker. If you can't identify the sucker, it's you.
How does M&A constitute an "inflow of capital." Will M&A activity increase? Probably, even though it hasn't as of yet. Consolidation is the natural progression in an economy that's reeling. But the effects of M&A by their very nature are long term corporate synergies. Just because corporations have excess capital at their disposable to make acquisitions, and can wait for those investments to pay off doesn't translate into a market that's going to go any higher in the interim. You're still dealing with a double digit unemployment rate, little to no GDP growth, and a reluctance to lend on the part of banks. Unlike poker my friend, it's usually the contrarians that aren't the suckers. But hey throw your cash in equities if you'd like. Would have served you quite well over the past decade...
MHFT - you post something bullish and bearish about all assett classes every few weeks/months that theres always something you can fall back on to say you were right.
In short , youre a blowhard , who adds no value whatsoever to this website. Its irritating TD has allowed you to hang around so long but you really have overstayed your welcome.
In the interest of more accuracy on ZH:
http://www.zerohedge.com/search/node/madhedgefundtrader
"I am getting tired of the endless procession of permabulls who keep insisting that. at a 13 times multiple, the S&P 500 is cheap."
It's just like every other lie told in America. My favorite is, "the more you spend, the more you save."
MHFT does not always drink beer, but when he does, it is Dos Equis.
Stay thirsty my friend.
LMAO ;-)
So a "range bound" market, is what fits to an economy with the worst: unemployment, credit contraction, and defaults from personal to sovereign in 100 years.
All due respect madhedgef.t., I do not see a match.
Don't forget all that time in Japan trading and doing karate.
Well now that MHFT is going with the downtrend, he conveniently ignores the long recommendations made in the very recent past. How are they doing now?
What recommendation and outlook will you have when we have a bear market bounce. Will you recall this post?
A funny guy - treating everyone here like they're dumbasses.
http://seekingalpha.com/article/194417-is-market-cheaper-than-shiller-pe...
This was written in March when the median Dow 2010 PE was 12.7.
Click on the table and note individual PEs as low as 6.4.
Now around 11 times earnings, 9% the highest earnings yields in 60 years, three times 10 year Treasuries and 1.5 times Corporates.
Would you rather be with lemmings in Bond funds or earning growing dividends from corporations with $1.7 Trillion cash?
In no way are PEs where they were in 2000 or even 1989.
Re "I shall now throw all modesty and humility to the wind,"
You may indeed be the MHFT.
Excess permabear pride may go before the fall from grace...
I think we are talking about a 'Black swan ' risk where return of capital is shaky, forget about return on capital, aka, late 2007
Are we in such a situation now?
Ask a greek, Spanish HNI- answer is yes
Past performance[last few quarters] may not be a good indicator to predict future returns
Enuf said
C'mon, Commander McBragg ... you do that every time you post! ;-)
Evil twin brothers make it easier to be in two places at once!
The title of the post is appropo, I think.
Don't forget a career in the "oil patch" which has led to sky box seats at Dallas Cowboy games whenever needed! THis man is.........amazing.....!
MHFT: the "Sybil" of Wall St.
http://en.wikipedia.org/wiki/Sybil_(book)
Amazing. You've worked on Wall St since the 70's, you were a commercial airline pilot for 30 years (see previous post) and I believe you stated a few weeks ago that you were also an engineer in the 1970s (in the military?).
How DID you do it?
What, haven't you done it too? I was an aerospace engineer in the 80s, ín various finance and banking jobs on the Street since the late 80's, and have been a commercial pilot too. I thought everyone here followed that sort of career path.
The madhedgefundtrader has spent 30 years as a commercial pilot; he is a mathematician who worked on the neutron bomb; he was a captain in the military and also a naval aviator; he accompanied Saddam Hussein's troops as they marched on Tehran; he studied at UC Berkeley under Robert Reich; he wildcatted the Barnet shale for 4 years; he lived in Japan working as a financial journalist, so poor he had to live on fish heads (during the same time frame that he worked on the neutron bomb); while in Japan (for at least 10 years) he also studied karate and was so much larger than everyone else at the dojo that he was only pitted against black belt students; he dated Elvis's last girlfriend; he was US editor of Euromoney magazine; he was a member of the White House press corps; he was a director of the Swiss Bank Corp; he set up the first ever dedicated international hedge fund; he owned a house previously owned by Steve McQueen and the Sultan of Brunei; and he personally helped clean an oil spill on the Santa Barbara coast in 1969. Also, he is a nephew of Mitchell Paige, one of the most famous Medal of Honor winners.
Recently he has dined with Elliot Spitzer, Robert Reich, Joseph Stiglitz, James E. Cartwright (Vice Chairman of the Joint Chiefs of Staff), Byongwon Bahk (Vice Minister of Finance for the ROK), General David Petraeus (Commander of the US Central command), James Baker III, Robert Mueller (FBI head), Leon Panetta (CIA head), and Santa Claus.
As for BP, he thinks it should "roast in hell" but also suggests buying it at 29.
(see my repost below for sources to all this information)
resipsaloquacious
"I believe you stated a few weeks ago that you were also an engineer"
Both George Carlin and Ringo Starr were engineers while maintaining their other active careers.
I am not sure your examples helped your point. But fair enough, let me clarify: I believe MHFT said was working as an engineer. i.e., employed as one. I am fairly certain, Carling and Starr were not actively working as engineers while in the middle of their more popular careers.
good post!!!!!