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Chart Of The Day: S&P 500 vs EBITDA
When it comes to the corporate bottom line, there is a reason why the smart money has long since given up on Net Income, Earnings Per Share or any other such equity-specific variant: it is the one metric traditionally gamed by management teams who know that legacy investors and algos look solely at EPS (whether it has beat or missed expectations) in making kneejerk reactions whether to buy or sell stock upon an earnings release, thus setting the momentum tone for the next quarter. Instead, what fixed income investors, the buyside in general, and what little is left of "sophisticated" traders have historically focused on is EBITDA, and in some special cases, such as the New Normal, when the bulk of corporate cash goes to fund buybacks, EBITDA per share (to normalize for TEV changes over time). The reason is that EBITDA ignores such balance sheet components as net interest (a key reason why companies are reporting better than expected EPS in a collapsing interest rate environment), as well as the corporate tax rate. In short: EBITDA is the closest non-GAAP indicator to actual cash flow and/or bottom line profit as one can get.
Which is why we thought most readers would be rather surprised to learn what the result of a simple Bloomberg query comparing S&P500 EBITDA per share (BBG mnemonic TRAIL_12M_EBITDA_PER_SHARE) to the S&P looks like.
For one: not only is corporate LTM EBITDA per share not at all time highs (it is well off the record levels seen in 2008), but it is at levels last seen in January 2007.
But perhaps most surprising is what happens when on juxtaposes the S&P500's EBITDA level relative to the actual S&P. The stunning result is charted below:
If there is any good news in the chart above it is that EBITDA growth is still positive... Just barely. A chart showing the Year over Year change in LTM EBITDA shows the true story of the "recovery" - EBITDA per share growth, or true corporate bottom line growth, peaked in 2011, and has been declining ever since even as the actual number of shares has been collapsing due to the furious stock buyback activity everyone is well aware of.
At this rate we expect annual corporate cash flow growth to hit zero and turn negative in a few short months. We can't wait to see how this particular collapse in corporate fundamentals is spun roughly at the time the S&P is expected to hit 1750.
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LOL!!
where's my helmet
Honestly, I think we are beyond the point of looking for historical references or divergences or thinking something will snap or looking to regain an equilibrium.
This should mean we are very near something important. My contrarian nature is played out which should mean the true contrarian trap door should be sprung shortly.
My chart of the day.
http://blog.quantsig.net/2013/05/21/sp500-vs-btc/
LOL
@malikai
Oh wow, markets go sideways? What an invaluable secret you've uncovered.
I'm sorry you are unable to read a chart.
Give it some time.
@malikai
Is this where I express my chart-reading prowess to a troll? Help me out here, you snarky git.
e btfd is the only pertinent metric
buzzsaw99,
Maybe, but I can hardly wait for the fallout, it's going to be epic!
DavidC
Not sure what you are worried about - corporations can just layoff more people and slash wages and benefits to meet their profits....its fine.
The bottom line is the top line does not provide a basis for the levitation of the S&P 500 to all time highs.
Lay that "levitation" chart over one for the Fed monetization and it will all make sense.
Is it just that simpe? Yep.
Oooh! I see the neg-bot is trolling this one. Hmmm.
This is elegance, Tyler. So is the levitation over monetization, so is gold over federal debt.
The only reason why EBITDA per share is increasing (ever so modestly) is because companies have been repurchasing shares rather than spending on CapEx. That impact will diminish over the next 12 months. Then reality will set in.
Don't worry. Here comes Maria Bartiromo to explain that "stocks are cheap" and due to the "buy the dip mentality" the "rally has room to run."
No need for such in depth due diligence, Tyler. Just need some idiot to say something on TV and, presto, profits....EBITDA or no.
I don't watch it any longer. I'm tired of that old hag lying along with the rest.
a very rare lol
first off, the "financial" component is the big 5 banks that make
up their numbers on a napkin
second, was a CPA/CFO in another lifetime, I remember a restaurant
owner chain owner referencing EBITDA over and over, reminding him that
you can't cook the food wituout the "D"
it is hopeless, my hope is it is not humorless...
LT
stay liquid my friends
And we have lift off, lift off of the USA spaceship S&P 500 on its (Gold)maned mission to the moon.
Don't forget the tug of gravity and actual free market influences. Even a 3rd stage rocket isn't going to result in an orbital trajectory.
This may be the chart of the day, but here is the miracle of the millennium. Praise the goodness of God manifest in such grand and beautiful ways. Let Faith be your shield, and Hope be your helmet.
http://www.youtube.com/watch?v=c-pp2ODjrbM
as the old gospel song "Christian's Autombile" says:
hope is your driver's license, prayer is your steering wheel...
LT
www.zirpinusa.com
Are negative interst rates coming...instead of getting money at 0%, why not pay banks to take more money, say 1%. So for every 1,000 dollars the Fed gives banks 1,010? Bonds could be issued to TBTF banks at $1,000 and give them $1,010.
Great idea! Abolish paper money and bring negative interest rates! If that doesnt help either, confiscate deposits, paper assets, real assets ...
Interestingly, the only times the S&P seemed to revert to the EBITA line is when the Fed turned off QE (or threatened to). Thus, we are at an inflection point here, can this really go further out of whack without earnings going much higher? If earnings go much higher can the Fed argue to continue? Would seem at least a breather is in order, maybe not to 1400 but to 1500 which would be a 10% decline.
Multiples can expand towards infinity. According to the talking heads, this is the Fed's GOAL! No policy wonk seems to care about ebitda per share or any other value metric.
... and included in that is a false/misleading report of too big to fail bank declarations as well.
It is (possible) that the earnings could turn higher.....possible.....
haha....precisely the big bet being made during the QQQ bubble.
EBITDA, EBITDA, EBITDA...That's All Folks.
http://www.youtube.com/watch?v=gBzJGckMYO4
How could anybody junk that witty post? It must be a Teleprompter bootlicker enraged by your avatar.
Did Bloomberg get these figues from the banks historical trading data ?
Don't think I can afford the price of actual trade blotters from BBG, only the hedge funds can.
who would figure...steal the populous money and they have none left to live with.
2008 all over again.
I think it takes at least two electric shocks for a mouse to figure out the cheese is not worth it.
But with Wall St. traders using OPM, it takes sixteen shocks.
Our bearing company in Peru just got a small lift-off to its EBITDA... We completed our first real export sale ever. $1377 of Korean bearings to Costa Rica. Obviously the Bearing Guy is happy today...
"Ameru Bearing Sale to Costa Rica"
http://tinyurl.com/n4ldyzg
Congrats, DoChen.
buy on tuesdays after the dip, sometimes on fridays and the last day of the month. that is all.
Moar "beating expectations", all... the... way... down...
Everyone does realize, it's not a profit until you actually sell.
these are great charts. the only inflation out there is in securities, pay more for less yeild/intererst/total return going forward.
for Q4 estimates to match up ebitda has to hockey stick up, very soon. otherwise we are looking at lower total earnings yoy....and a p/e expansion to 20+ trailing; and 30 for shiller p/e.
at some point money managers will stop buying OR take profits to an extent. if fed pulls liquidity at same time, look for a 19% correction (no bear mkt natch!)
Tyler. In general I agree with your thoughts and support your articles but you are wrong on EBITDA. This figure is just as easy if not easier to manipulate than EPS. In addition, it does not offer a great assessment on actual cash flows given how companies can manipulate, alter, adjust, etc. (call it what you want) various balance sheet accounts to achieve desired results. Need just a bit more sales, stuff the channel with inventory (but don't account for the risk of it being crammed back down the food chain)? Need a little bit of a margin improvement, well let's change our fixed asset capitalization policy to record more repairs and maintenance expenses as capital assets (and depreciate these over 5 to 10 eyars)? I could offer dozes of other examples of how companies "manage" (for lack of a better term) their balance sheet assets to drive results so it doesn't matter if you're focused on EBITDA or EPS, if the manipulation starts at the sales and gross margin levels, both of these figures will be corrupted.
A much better measurement of performance would be based in measuring free cash flow against the S&P (as this helps eliminate some of the accounting BS that can occur across numerous classes of assets and liabilities). Not sure if this figure is readily available from public sources but it would be an extremely interesting analysis.
Remember that for years, companies and their accountants effectively managed EPS to drive results. The market caught on to this and began to focus on EBITDA instead of EPS. Again, companies and their accountants changed their focus to manage EBITDA as oppossed to EPS. The market just hasn't caught up how these figures are rigged yet.
As for the best accountants in the world, you only need to ask them one simple question - What does two plus two equal? The answer, what ever you want or need it to be.
Earnings, profit, sales, etc no longer matter.
The only thing that matters is what Central Bank A will pay for share B on given day C.
Thats why I ONLY trader off of price... everything else is a gamblers justification
I feel like this chart would matter- if the S&P500 wasnt basket of GROWTH oriented stocks...
If this was a YIELD sector like utilities... then I think it would make a larger difference...
S&P 500 reaching "top of the ascending channel". Sell-off looks imminent.
Barrons' sentiment numbers are now a ridiculous 70% + bulls for 15 consecutive weeks making this run the longest period EVER with over 65% bullish concensus. The top in 1999 went 6 weeks above 60% and that was "out there" at 6 weeks! Markets can stay irrational a lot longer then you and I can remain solvent or better stated, if someone was giving me $85 billion a month to buy my shit bonds in order to force me to buy stocks, I wouldn't be surprised to see the stock market scream higher.
NEVER UNDERESTIMATE THE REPLACEMENT POWER OF EQUITIES WITHIN AN INFLATIONARY SPIRAL.
Eventually, means reversion is in the works. When is that day, and the gains left on the table waiting? @ 4 years and counting, haven't we learned fundamentals don't matter when the CB's have an agenda? Investors should be agnostic. Trends should be exploited. That should be isolated from politics. For as an American I am pissed @ what we have created for our future.
"Eventually, means reversion is in the works."
In real or nominal terms? In real terms, I absolutely agree. In nominal, not so much.
1666 must hold !
This is interesting especially in light of recent article on the relative earnings per share. One wonders about leverage rates and how earnings per share have been propped up by the lower cost of money ... while EBITDA does not share such an effect.
I see the downer bot is active today.
1400 baby, than all in full margin!
Question:
When you say "per share" for EPS I know it's only for floating shares. This means all they need to do to increase their EPS is to buy back some shares and viola - they beat (their own) estimates by 1 penny! Is that the same for EBITDA?
None of this shit matters anymore. Just think what the first chart would look like if not for mark to myth and other BS accounting gimmicks hidden with SIVs/SPVs/ hidden crap in subsidiaries/derivatives etc.... That fvcking red line wouldn't even be visible on the chart presented.
Fvcking Thieving psychopaths!
"Multiples can expand towards infinity. According to the talking heads, this is the Fed's GOAL! No policy wonk seems to care about ebitda per share or any other value metric."
Tulips weren't about value.
Great Chart - to see where EBITDA is inflation adjust both ( with US GDPdeflator) and then see the true picture