Smoke And Mirrors Everywhere

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Thu, 10/22/2009 - 09:55 | 106697 Gubbmint Cheese
Gubbmint Cheese's picture

got gold?

Thu, 10/22/2009 - 09:57 | 106699 Anonymous
Anonymous's picture

Its intellectually dishonest to use improper numbers to justify your thesis. SP500 2009 consensus earnings estimates is 57.97 , which implies a PE of 18.6x. Off of 2010 estimates that number is 15.2x. These numbers are not horribly inconsistent with exit recessionary multiples. There's an argument to be had as to whether we are in that environment, but its understandable why the market has rallied the way it has

Thu, 10/22/2009 - 10:25 | 106732 Rainman
Rainman's picture

Speaking of honesty, is the 57.97 figure with or without the effect of hundreds of billions in mark-to-myth earnings puff within the financial sector ??

Just curious.

Thu, 10/22/2009 - 11:38 | 106845 deadhead
deadhead's picture

beautiful rainman.

i would add the off balance sheet crap coming soon to a theatre near you.

now, we know the fdic won't require capital raises for this gargantuan turdfest, but at least they will be on the balance sheet for all to see.


Thu, 10/22/2009 - 10:49 | 106771 Steak
Steak's picture

Source data:

Aww how cute, using the operating earnings as the basis for your earnings multiples.  You must be one of those teenage redbull-addled traders that the quant shops use because trained monkeys fling too much poop around the trading room.  I guess no one ever explained the difference between operating earnings and as reported earnings.

2009 as reported earnings estimate: $39.75
2010 as reported earnings estimate: $45.50

But I guess your highschool intro-to-economcs teacher and quant shop recruiter said that writedowns and charge-offs don't matter.  Well here's a little tip to the wise.  If a non performing loan is written off or you have to pay severance to a fired employee, that money isn't available to your company anymore.

Thu, 10/22/2009 - 10:56 | 106779 Cursive
Cursive's picture

Are you Steve Liesman or just channeling Steve Liesman?  I would sooner believe in the Tooth Fairy than the fictitious numbers these sell-side analysts are pushing.  Give it up man, it's a sales industry.  I know they're selling stocks and not autos, but it's basically the same once you get past the so-called glitz and glamor of Wall Street.

Thu, 10/22/2009 - 10:56 | 106780 Cognitive Dissonance
Cognitive Dissonance's picture

Why is it that when a S&P 500 company has positive earnings, they are counted towards the S&P 500 collective "e" but when they have negative earnings they are not subtracted from the S&P 500's collective "e"?

Is it becuase intellectually it's so very difficult to prove a negative or is the "system" biased towards growth and positive outlook and thus it's OK to cook the books if everyone agrees to do so?

By the way, I'm a little tired of the so called "ex items", that wonderfully vile accounting trick that's supposed to be used for truly one time "surprise" or unexpected expenses.

If you pull up these reports it's amazing what they consider one time unexpected expenses.

Just askin'

Thu, 10/22/2009 - 11:07 | 106803 rootless cosmop...
rootless cosmopolitan's picture

Aren't they subtracted? S&P reported negative per share earnings summarized over all companies for Q4 2008. This couldn't be, if you were right about this, could it?



Thu, 10/22/2009 - 11:54 | 106864 Cognitive Dissonance
Cognitive Dissonance's picture

Lot's of games are played, including using projected forward earnings instead of actual earnings. Many analysis, rating agencies and economists don't consider negative earnings as real and thus back them out of the data.

S&P does the same thing. They also report the actual numbers. It's always instructive to read the actual hard data. Go to the S&P web site and download the actual spread sheets of data if you're interested in hard numbers.,3,2,2,0,0,0,0,0,0,5,0,0,0,0,0.html

Thu, 10/22/2009 - 11:58 | 106873 Green Sharts
Green Sharts's picture

Let's say 450 companies of the S&P 500 have positive earnings of $60 per share and 50 companies lose $30 per share, resulting in S&P 500 earnings of $30 per share. If you were going to apply a P/E multiple to the S&P 500, should you use $60 or $30 for the EPS number?

Thu, 10/22/2009 - 12:21 | 106897 Unscarred
Unscarred's picture

Green SHARTS?!


Thu, 10/22/2009 - 12:30 | 106906 Cognitive Dissonance
Cognitive Dissonance's picture

And that, my friend, is the crux of the question we are discussing. How does one "fairly" measure the P/E.

Do you look back or project forward. Considering how manipulated the numbers are getting, is any forward earnings projection based in reality? Do you back out negative earnings or not? And don't get me started on how they figure the multiple.

I will say one thing. Nearly every analysis report I've been reading lately (with notable exceptions, some of which have appeared here on ZH) appear to have started out with the desired P/E ratio and then worked backwards to create a fantasy to support it.

To answer your question, I think negative numbers/earnings should be subtracted if positive numbers/earnings are being added. But I'm biased because I'm not selling my advice to people who wish to hear only what can justify their bonuses or market calls.

Thu, 10/22/2009 - 12:42 | 106932 Green Sharts
Green Sharts's picture

In the example I gave, I think it makes more sense to use the $60 EPS number, backing out the impact of the 25 money losing companies on the index EPS because the stock of a money losing company can't be worth less than zero.

That's not to say I think the market is undervalued. I think it's considerably overvalued because it incorporates a normal economic recovery and 20%+ increases in EPS in both 2010 and 2011, a pipe dream in my opinion. And quality of earnings is a huge issue as well.

Thu, 10/22/2009 - 13:29 | 106990 Cognitive Dissonance
Cognitive Dissonance's picture

Green Sharts,

Your example makes sense. And I'm sure I could successfully argue the other side.

I do find it interesting that because we are discussing how to calculate the S&P P/E, we (the collective we) aren't talking about if the S&P ever hit a low enough number to represent true value.

Take a trip down memory lane and look at all the big market crashes. When we finally hit the "bottom" the P/E was usually in single digit territory, somewhere around 6-8, and rarely above 12 or 13 on smaller recession bottoms.

Did we ever get there this past March? If not, why not? Why are we constantly using yesterday's measuring stick to assess if today's market is fairly valued?

I'm not gonna pay a lot for that muffler.

Thu, 10/22/2009 - 13:42 | 106999 Cursive
Cursive's picture

"because the stock of a money losing company can't be worth less than zero."

Yes it can.  Your comment would be more appropriate if there had been no bailouts.  However, they've off-loaded it onto the taxpayer and the rising public debt will squash future economic growth.  We have plenty of this going on now.  The financials were over 20% of the S&P in 2007.  The S&P needs those earnings.  You can't ignore the loss of those earnings.  The TBTF banks are all worth less than zero, but continue to trade at high multiples.  I mean, even Fannie and Freddie are still trading.  I guess your reasoning is prevailing, though.

Thu, 10/22/2009 - 14:20 | 107066 Cognitive Dissonance
Cognitive Dissonance's picture

Cursive, you said....

I guess your reasoning is prevailing, though.

You have just described concensus group think. It doesn't need to make sense or be based upon logic or supportable reasoning, it just needs to be widely agreed upon and followed/acted upon.

The bailout money has elevated more than just the financials. The proof is simple. Remove it and see where the market goes. It (the bailout money/stimulus) by definition is an artificial influence on the market. The assumption is that once removed (and after the economy has repaired itself) the market will be self supporting. That is all that's being used to justify these (IMHO) high P/E rations.

I've always wondered about something. If a process of "reasoning" is actually illogical circular group think, is it really "reasoning" or simply a mass delusion. I'm not being dismissive. I've been burned too often by what I consider to be mass delusions.

But define for me momentum or "going with the flow" or any other term for a movement or actions of people supported by no reason other than they are moving.

Thu, 10/22/2009 - 14:42 | 107106 Miles Kendig
Miles Kendig's picture

The odd exception granted...

Thu, 10/22/2009 - 15:08 | 107150 Cognitive Dissonance
Cognitive Dissonance's picture


Remember this?

"I've seen the future. You know what it is? It's a 47 year old virgin sitting around in his beige pajamas drinking a banana broccoli shake singing I'm an Oscar Mayer wiener."

Thu, 10/22/2009 - 14:40 | 107100 Green Sharts
Green Sharts's picture

No, a common stock can't be worth less than zero. The maximum loss of an equity holder is the amount invested. The taxpayers can't send a bill to the shareholders of Fannie and Freddie and GM and AIG for the losses the taxpayers will ultimately incur.

With regard to lower future growth due to the financial meltdown and rising debt, I agree with you. That has to be factored into the multiple you're willing to put on individual companies and on the S&P 500. If you look at cyclical companies like banks, CAT, UPS, NUE, etc., the market is pricing them as if we'll have a typical post-recession recovery and revenues, profit margins and earnings will go back to at least in the neighborhood of what they were in 2006-07. I think there's virtually no chance of that happening in the next few years.

The CEO of Nucor, the largest steel producer in the U.S., apparently isn't seeing too many green shoots:

"While overall steel mill utilization increased from 46% in the second quarter to 69% in the third quarter, the increase was primarily due to the end of customer destocking. Our view remains that there has been little improvement in real demand and the uncertainty in our economy is still very high. We also continue to believe that real demand is in for a long, slow recovery."

Thu, 10/22/2009 - 14:56 | 107132 Steak
Steak's picture

My favorite "tell it how it is" CEOs are of NUE, EMR, and'll get no BS out of those folk.

Thu, 10/22/2009 - 15:50 | 107227 Green Sharts
Green Sharts's picture

Andrew Gould of Schlumberger (which reports tomorrow) is another CEO who is a straight shooter.

Thu, 10/22/2009 - 15:05 | 107137 Cognitive Dissonance
Cognitive Dissonance's picture

Green Sharts, you are clearly intelligent and I respect your views. Please forgive me because I'm gonna have some fun with your words.

The taxpayers can't send a bill to the shareholders of Fannie and Freddie and GM and AIG for the losses the taxpayers will ultimately incur.

Considering what the Obama Administration just did to the Chrysler bond holders, I wouldn't be so sure about that. In one fell swoop, all the rules of the game were put on notice that they're subject to change based upon the desperation level of the masters of the universe and their pet Ponzi.

We are about to enter The Twilight Zone where anything goes and nothing makes sense.

I pledge allegiance to the Banana Republic of the United States of America.

Thu, 10/22/2009 - 18:15 | 107437 Cursive
Cursive's picture

Green Sharts,

We basically agree.  I think I read you to agree that the bank losses and taxpayer bailouts will have a significant cost to our economy.  I was also trying to point out that these losses did not stop at the corporate shell; these losses have been borne by the taxpayer in an attempt to keep the banks solvent.  I agree that common stock can't be worth less than zero, at least from simple equity holder's point of view.  But let's not forget the effect that massive leverage can have on one's portfolio.  A speculator using leverage could lose multiples of their capital.  That is what we are seeing here and it should ultimately be reflected in the multiple assigned to the P/E, as you suggested.

Thu, 10/22/2009 - 13:06 | 106963 Anonymous
Anonymous's picture

The process is akin to filling out an income tax return. Start at the end and work backwards until everything lines up. What's the problem ?

Thu, 10/22/2009 - 14:25 | 107077 rootless cosmop...
rootless cosmopolitan's picture

I was actually referring to the hard numbers published by S&P in following spreadsheet:

These data show negative earnings summarized over all companies in Q4 2008 of -$0.09 and -$23.25 for operating and reported earnings, respectively. This is why I wonder. But I think now I might have misunderstood you and you were referring to projected future earnings.



Thu, 10/22/2009 - 10:54 | 106785 rootless cosmop...
rootless cosmopolitan's picture

But you only assume he is talking about 2009 estimated earnings, don't you? If he actually talks about the 12 month trailing operating earnings up to Q2 2009 a P/E ratio of 26 is about right, according to the data published by S&P. If we take the 12 month trailing reported earnings, instead of the made up operating earnings the P/E ratio is about 140, currently. Also, if we move a quarter forward in time, excluding Q3 2008, but including Q3 2009, the numbers are still about the same.



Thu, 10/22/2009 - 10:58 | 106788 I need more cowbell
I need more cowbell's picture

Just as a curiousity, how does it actually feel to have your balls crushed thrice?

EDIT: 5 times

Thu, 10/22/2009 - 11:21 | 106820 Anonymous
Anonymous's picture

You do not read, and if you do read, you do not understand. Sorry.

Thu, 10/22/2009 - 11:22 | 106823 Anonymous
Anonymous's picture

Over the past 100 years, during every recession or depression the PE has only been ~4-6.

Thu, 10/22/2009 - 09:57 | 106701 Anonymous
Anonymous's picture

The goal of any portfolio manager is performance. S&P 666 to 1096 cannot be ignored. The bear case, thanks to ZH, is well known. Regardless of what anyone believes about the markets, the armaggedon scenario is off the table. I believe the days of "cliff diving" are behind us.

Thu, 10/22/2009 - 10:27 | 106736 geminiRX
geminiRX's picture

Yup - this confirms it, time to sell....



Thu, 10/22/2009 - 10:34 | 106748 Anonymous
Anonymous's picture

That's what makes a horse race.

Thu, 10/22/2009 - 10:45 | 106763 Cursive
Cursive's picture

Agreed, geminiRX.  Thank you to Anon for ringing the bell at the top.  Uh, there will be plenty of cliff diving to come, I only wish we could have avoided the collateral damage.

Thu, 10/22/2009 - 11:36 | 106842 Anonymous
Anonymous's picture

Too bad you gomers were saying this at Dow 8200. I'll write from the Fire Island beach house I just bought.

Thu, 10/22/2009 - 13:50 | 107015 Cursive
Cursive's picture

Oh, great.  More yahoo board flaming.  You can't substantiate your argument so you resort to sounding superior because of some a posteriori stock picking prowess.  Let me be the first to tell you that your fantasy of buying a Fire Island beach house is roughly equivalent to the fantasyland of this stock market.  Please, whatever you may do going forward, buy and hold.

Thu, 10/22/2009 - 14:11 | 107052 Anonymous
Anonymous's picture

Hey you highbrow take your attitude and your thesaurus and join the legions of ZH fans who continue to delude themselves.
Maybe you should consider joining a cult or at least get out more.

Thu, 10/22/2009 - 10:30 | 106742 mdtrader
mdtrader's picture

They simply transferred the debt problem from the private sector to the public sector. If this causes a crisis with the currency and or in the bond market, it will make the banking and credit crisis look like Disney World.

Thu, 10/22/2009 - 10:41 | 106759 Cognitive Dissonance
Cognitive Dissonance's picture

"I believe the days of "cliff diving" are behind us."

Please define "cliff" and "diving" for me.

A 10 minute google search will undoubtedly bring up thousands of quotes of official and professional pronouncements that the worst is behind us.

These assurances are usually uttered immediately after the "recovery" from the last "cliff diving" episode. My question is, how did that work out each time?

Thu, 10/22/2009 - 11:01 | 106793 Anonymous
Anonymous's picture

The most common sentiment expressed on this blog is skepticism of the marketplace. I am entitled to my opinion,as is anyone. I think the S&P's are ok here and that is that. The markets are subjective. I get what I need from them as should you.

Thu, 10/22/2009 - 11:44 | 106852 Anonymous
Anonymous's picture

P.S. Stop googling and watch the tape. Traders trade.

Thu, 10/22/2009 - 12:38 | 106928 Cognitive Dissonance
Cognitive Dissonance's picture

Who the hell is Broccolini and where do you think you are? :>))

The most common sentiment expressed on this blog is skepticism of the marketplace.

That is by far the greatest understatement I've read on this blog in a few weeks.

I am entitled to my opinion, as is anyone.

I wholeheartedly agree that you are entitled to your opinion. I'm asking you to explain it, not surrender it.

The markets are subjective. I get what I need from them as should you.

And that's the beauty of the markets. There are always two sides to the trade and you my friend, if you've been a bull, have been on the correct side to date. Cheers.

Thu, 10/22/2009 - 12:58 | 106954 Anonymous
Anonymous's picture

One in a row for me. Enjoy the weekend.

Thu, 10/22/2009 - 13:03 | 106959 Anonymous
Anonymous's picture

Broccolini is a term of endearment.

Thu, 10/22/2009 - 13:48 | 107011 cougar_w
cougar_w's picture

[correct side of the trade]

Let me just remind some of you that if this tanks as badly as it seems set to, then in 10 years hence they won't be marveling that someone was on the correct side of the last trade. They'll be pointing out who imploded the global economy, leaving 500 million former-middle-class penniless, and driving 2 billion others back into the Stone Age for perhaps the remaining duration of human existence on Earth.

I know, who cares. It just seems sad is all. I'll be quiet now.


Thu, 10/22/2009 - 10:03 | 106702 Divided States ...
Divided States of America's picture

If this really turns out to be smokes and mirrors and I lost money via shorting the stock market based on my own perception in the face of the Government, Banks and Media spreading propaganda to depict an economic picture thats more sanguine (green shoots) than reality, is there a way I can start something to gather enough support and recoup some of my losses back? Kinda like those people who made money in the Madoff case having to give back some or all of their gains to those who lost it all. I mean we are basically talking the same thing here, a big ponzi scheme, just on a much larger scale.

Thu, 10/22/2009 - 10:01 | 106703 casino capitalism
casino capitalism's picture

All the right points. I particularly like the comment about comparing earnings to "estimates" instead of yoy.  I have been irritated about that for a while - blatant manipulation.

Thu, 10/22/2009 - 10:01 | 106704 Anonymous
Anonymous's picture

The plug has been pulled, Tyler. Monday was the high. It won't be seen again until sometime in spring when we actually do get the recently hyped melt-up.

Thu, 10/22/2009 - 10:03 | 106706 Rainman
Rainman's picture

Excellent report. A Good read. The dollar trading volume chart is a real eye opener.

Thanx, Tyler.

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