This page has been archived and commenting is disabled.
The Magic Of Forward P/E Multiples In One Chart
As readers may or may not recall, one of the main arguments the bulls had in early 2008, a month after the recession had already begun (according to the NBER's retrospective conclusion over a year later) to justify that the S&P 500, which had recently hit all time highs of 1546, was not in a bubble is that the projected EPS for the following year, 2009, were 120, which meant the multiple was an oh so very cheap 12x. The same analysis with the even nearer, 2008, S&P EPS which at that point were expected to print just below 100, suggested the S&P at around 1500 was a "healthy" 15x multiple. Unfortunately as the events of 2008 showed, not only did the financial system nearly implode, but earnings, both actual and projected, cratered. The result is that the 2009 EPS which was initially forecast to be $120 ultimately ended up being half of that, or $60 (see chart below), which also meant that the forward multiple of a "very cheap" 12x or so ended up being, drumroll, just a tad bubbly 24x!
Which is why we urge anyone using the naive argument that stocks now are cheap based on forward multiples to observe the following chart, which shows that S&P 500 2013 EPS, projected to be just below 110, are now just above what the S&P was supposed to earn in early 2008 and well below the then projected 2009 EPS. Where it gets more amusing is that the current estimate for 2014 EPS is precisely where 2009 EPS were supposed to land.... before those particular earnings ended up being crushed in half.
Finally as we will show in a subsequent post, 2013 EPS on a GAAP basis are currently precisely $100 with another $10.25 coming from adjustments and other write-offs. Which means that on a recurring Net Income basis, assuming Q4 earnings are roughly in line with expectations, the S&P 500 is currently trading at over 18x GAAP earnings, or as the same people who in 2008 said "the market is not in a bubble" would call it, "cheap."
»
- 12321 reads
- Printer-friendly version
- Send to friend
- advertisements -
Everything is a bubble, but the algos have been following JPY breakdown (programmed as lower JPY = higher SPX).
Looks like there is another major leg down for JPY.
https://pbs.twimg.com/media/BaQLU0bCcAAtEz1.jpg:large
And the driver of the recent Yen plunge: "Frustrated" Liquidity Addicts Demand Moar From BOJ As Nikkei Rally Stalls, Abenomics Founders And "Hope Fades" from November 13.
EURJPY has exploded by 700 pips since then, meaning the next QE by the BOJ is already largely priced in.
This is JPY short carry-trade: borrow in JPY (short) and invest in NKY and SPX (long)
Kyle Bass has predicted USD/JPY to go down to ~200 from the current ~100 level.
Jpy is going to retrace next week. If jpy went to even 120-130 that would cause massive devaluation inflation. That's not the kind of inflation that Abe wants.
You really should think about what the world would look like if the yen went to 200. I like Kyle Bass and his thesis is based on Japan blowing up. That's the only way the yen gets near 200. Every E/M and BRIC on Earth would be on Japans ass. They're already pissed off that the yen is at these levels.
Abe wants?!?
I don't think that what Abe wants really matters, similar as it didn't matter what Weimar Reichspräsident wanted. USD/JPY at 130 is just a matter of time.
When Japan blows up, USD/JPY will spike up to thousands.
BTW, do you know what Weimar Republic Debt/GDP was in 1920? (Answer: 72% vs. present Japan's Debt/GDP of 220%)
When Weimar started monetizing, initially inflation was low, tax revenues increased, and foreign central banks, including that of Sweden, began to buy large Mark amounts speculatively. However, after some months inflation accelerated uncontrollably...
http://upload.wikimedia.org/wikipedia/commons/8/8f/GermanyHyperChart.jpg
If your pushing housing or stocks you have to boast about it being cheap. You can always come up with a reason for them to buy.
If the PE is 4000 and it keeps going up because it a momentum stock tell people it has a huge growth potential and demands a premium for the growth.
There's A $10 Billion Plan To House 40,000 People On A Huge Boat
Read more: http://www.businessinsider.com/theres-a-10-billion-plan-to-house-40000-people-on-a-huge-boat-2013-11#ixzz2m3RK2Uux
Does someone have this ex financials?
Both then and now financials were rocking (and now this time no one knows, if ever, when and if the printing press can be stopped) so this analysis is more meaningful looking at then universe without the zombie squids etc.
i was hoping for ex financials for the exact opposite reason. Financial earnings are a loan loss reserve fueled vapor. Insiders are looting the big banks for bonuses and yet "investors" don't seem to care. Nothing screams bubble louder than accounting gimmicks and cooked books being bought as if they were real i.e. sustainable for the long haul. Legal expenses are the final nail in this farce. To the FAZmobile!
This time is different.
They said that in 2008? Crazy bastards, what got into them?
With all this free fed money it's easy to get stocks going higher. Better chances to momentumize stocks to get traders and retail to boost them ever higher.
With unlimited money all sorts of animal spirit tricks can be utilized.
How’s that Goldman globalization workin’ out for ya?
25% of Spanish Would Consider Leaving Spain for Economic Reasons; But Where Would They Go?
The employment and pay situation in Spain is so bad that 33% struggle to pay their bills. More importantly, 25% would consider leaving the country for better opportunities.
Via translation from La Vanguardia, please consider One in three Spaniards have no money after paying their bills.
Read more at http://globaleconomicanalysis.blogspot.com/2013/11/25-of-spaniards-would-consider-leaving.html#2U4J7OgOvxWJuXzQ.99
In addition, Dr. John Hussman, in his weekly analysis of the financial markets, last week pointed out that the "E" portion of the P/E ratio, is currently 70% above historically normal levels. Thus, if earnings return to more sustainable and typical levels, then the current P/E ratio is in even more atmospherically bubbly territory.
Bulls ignore crazy E/P ratio when it's high, and use it to dismiss any suggestion of a bubble when it's "low" even though the bubble is obvious.
Time will tell.
This time it's different.
All one has to do is look at AMZN and it tangible book value of $16, its PEG OF 38 and its price of $393.5 up $110 from the August lows to know we are in the mother of all bubbles. Unless of course you're some sell side asshat or any member of the FED.
Forget earnings per share. They have borrowed trillions to buy shares back to jack that number.
Put up a chart of total earnings by the SP 500 companies by year. That tells the real story.
Home Depot for instance
Total profits 2005: 5.838 billion EPS: 2.72 Long term Debt: 2.67 billion
Total profits 2012: 4.68 billion EPS: 3.10 Long term Debt: 9.45 billion
So in 2005 it would take a half year to pay off their long term debt. But now it will take two years of profits....
See anything worrisome here?
Bingo.
EPS is no longer the correct measure of "earnings".
Using the share count from 2005, HD would have earnings of 2.49 per share, and not the feel good 3.10 per share they report for 2012.
Debt is is increasing per share profits, not productivity or a good economic environment.
That is the correct conclusion.
The entirety of the securities industry is now designed to conceal societal economic descent.
Then as long as you define P/E against forward earnings, which never deliver, and never mention that they did not, but rather just update your forward earnings to next year's numbers you continue to have ammunition for your cold calls to expand your 2/20 generating AUM.
BTW this comment was solid because of the specifics of the HD numbers.
ZH some months ago laid it out more generally in that of XXX% growth in EPS across the S&P, some huge % of it was buybacks. Anyone got the link?
Well said.
EPS is always reported.
And total earnings is (intentionally) never reported.
With EPS, they can spoon feed the MSM so the banks/hedge funds can buy up MOAR along with a few lemmings.
Leverage on the way up - deleverage on the way down - deleveraging is FUGLY!!!!