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"By Almost Every Measure Stocks Are Overvalued" Warns Goldman After Slamming Corporate Buybacks

Tyler Durden's picture




 

Over the weekend, we first reported that none other than Nobel prize winner Robert Shiller said that in his opinion, unlike 1929, this time everything - stocks, bonds and housing - was overvalued.

Curiously, none other than Goldman's chief equity strategist, David Kostin echoed this sentiment when in his latest weekly note to clients he said that "by almost any measure, US equity valuations look expensive. The typical stock in the S&P 500 trades at 18.1x forward earnings, ranking at the 98th percentile of historical valuation since 1976. For the overall index, the aggregate forward P/E multiple equals 17.2x, a rise of 63% since September 2011, compared with the median expansion of 48% during 9 previous P/E expansion cycles. Financial metrics such as EV/EBITDA, EV/Sales, and P/B also suggest that US stocks have stretched valuations. With tightening on the horizon, the P/E expansion phase of the current bull market is behind us."

Don't tell that to the SNB, the BOJ or any of the other central banks once again buying Emini futures hands over fist with freshly printed money and a complete disregard to cost basis or downside and losses.

Of course, for Goldman to say all of this, it means either the bank is already full to the gills with ES puts, or is just hoping to buy up the S&P to 3000 and above. Here is what else Kostin says on record valuation:

US equity valuations are also historically extended when adjusted for the extremely low interest rate environment. For example, during the past 40 years when the real interest rate (10-year Treasury less core CPI) was between 0% and 1%, the S&P 500 forward P/E multiple averaged 11.2x, well below the current level. Moreover, since 1921 (94 years) when real interest rates have been 0%-1%, the trailing P/E multiple has averaged 13.5x, which is 27% below the current trailing S&P 500 index multiple of 19x.

 

Valuation looks even more striking in the context of current profit margins—the highest in history. Since 2011, margins for S&P 500 (ex-Financials and Utilities) have hovered around the current 9% level. Information Technology has been the driving force for the overall margin expansion. Profits are highly sensitive to small changes in margins: every 50 basis point shift in S&P 500 margin translates into a roughly $5 per share swing in EPS. Given the current P/E multiple, a $5 shift in EPS would translate into a swing of nearly 90 points to the valuation of the S&P 500.

 

The current P/E expansion cycle has lasted 43 months, the second longest since 1982, but will likely end when interest  rates rise. After each of the three prior “first” Fed hikes, P/E multiples contracted by an average of 8%. In the meantime, we expect the 2% dividend yield to generate the entirety of the total return we forecast the S&P 500 index will deliver during the next 12 months. We expect the market will rise to 2150 around mid-year but fade after Fed liftoff in September and end the year at 2100.

But what is more interesting is that after telling Goldman clients to weeks to put their cash in companies that are most likely to engage in stock buybacks, Kostin now rages at the practice:

Corporations have so far used record profits to return cash to shareholders. S&P 500 firms have spent more than $2 trillion repurchasing shares during the past five years. 

 

However, like investors, managements are often poor market timers. In 2007, companies allocated more than one-third of their cash use to buybacks ($637 billion) just before the S&P 500 plunged by 40% during the following year. Conversely, at the bottom of the market in 2009 firms devoted just 13% of their annual cash spending to repurchases ($146 billion).

 

We forecast buybacks will surge by 18% in 2015 exceeding $600 billion and accounting for nearly 30% of total cash spending. We recognize activist investors often advocate for firms to return excess cash to shareholders via buybacks. Tactically, repurchases may lift share prices in the near term, but in our view it is a questionable use of cash at the current time when the P/E multiple of the market is so high.

 

Although buybacks do not represent an optimal use of cash at the current time, they will be positive for near-term stock performance.... As noted, most firms should do something with their cash other than buyback shares. However, we expect firms will repurchase shares and investors will reward these actions and shares will post near-term outperformance.

As for the long-run, well just ask Keynes.

And while all of the above is well-known, there is one take home from Goldman's note: what Goldman says, or rages at, quickly becomes policy.

As such, don't be surprised if one of the upcoming executive actions by that Supreme Fairness Distributor, president Obama, will be to determine just how much stock buybacks corporations will be allowed to engage in.

 

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Mon, 06/01/2015 - 12:07 | 6151984 remain calm
remain calm's picture

No Shit Goldman Sucks

Off topic Tyler, but the yen has broken support. Watch out below.

Mon, 06/01/2015 - 12:21 | 6152026 knukles
knukles's picture

Did we just land on BizarroWorld where up is down and .....

Mon, 06/01/2015 - 12:48 | 6152108 tenpanhandle
tenpanhandle's picture

Indeed, we are in BizarroWorld but we certainly did not just land there.

Mon, 06/01/2015 - 12:57 | 6152136 Banker Buster
Banker Buster's picture

Japan is funked.  

Mon, 06/01/2015 - 15:35 | 6152760 the_deflator
the_deflator's picture

It's all part of the plan.

Mon, 06/01/2015 - 13:23 | 6152205 yrad
yrad's picture

Also, the sky is blue and beans make you fart..

 

Just an FYI.

Mon, 06/01/2015 - 12:06 | 6151987 order66
order66's picture

Looks like Goldman's on the bid.

Mon, 06/01/2015 - 12:27 | 6152040 KnuckleDragger-X
KnuckleDragger-X's picture

Of course they are. GS and the other mega-banks have been floating bond issue's and arranging big loans for buybacks. They know the winds of change are starting to blow and like the FED, they are doing their damndest to wipe their fingerprints off the murder weapon....

Mon, 06/01/2015 - 12:37 | 6152075 mtl4
mtl4's picture

The dollar is rising for a reason and GS knows it........they are trying to get in another BTFD before it runs hard.

This is not a fundamental driven market, this is big money starting to hunt for the least worst place to hide.

Mon, 06/01/2015 - 12:08 | 6151992 Ramesees
Ramesees's picture

Out of curiosity how can all asset classes be overvalued?  I mean, there's ostensibly a finite amount of investment capital that exists in the world, and even keeping assets in "cash" in the scale Shiller is talking about requires investing in money market funds which are backed by interest-producing assets. 

The money has to go somewhere. 

Mon, 06/01/2015 - 12:27 | 6152041 Mayer Amschel R...
Mayer Amschel Rothschild's picture

Margin debt on NYSE at 50% higher then previous all-time high.  Cash in mutual funds nearly at all-time low levels.  S&P500 corporate profits almost entirely dumped into stock buy-backs.

Mon, 06/01/2015 - 12:58 | 6152138 tenpanhandle
tenpanhandle's picture

The fact that fake money (debt as money) has been printed in almost infinate amounts one can argue that there is actually infinate investment capital.  All synthetic / paper assets are overvalued.  Real money is massively undervalued under these circumstances so the statement "all asset classes are overvalued" is a calculated lie.

Mon, 06/01/2015 - 13:02 | 6152152 BlowsAgainstthe...
BlowsAgainsttheEmpire's picture

"Out of curiosity how can all asset classes be overvalued?"

 

Because access to capital is too easy and price-insensitive LSAPs by CBs.

Mon, 06/01/2015 - 12:08 | 6151993 firstdivision
firstdivision's picture

Thanks Goldman. I'll be going long everything under the sun.

Mon, 06/01/2015 - 13:17 | 6152192 Cloud9.5
Cloud9.5's picture

Dumb money is in now they are using a head fake to pull in the rest.

Mon, 06/01/2015 - 12:11 | 6151996 philosophers bone
philosophers bone's picture

This is all a scam.  The central banks prop up the price to allow large pension funds / institutions to "liquidate" to the company rather than selling into the market and tanking it.   Executive bonuses all around as EPS numbers are distorted and stock price is inflated.   Muppets will be left holding the bag, as always.  Someone needs to take a run at all of these boards of directors who are flushing their shareholders money down the toilet. 

Mon, 06/01/2015 - 13:08 | 6152167 tenpanhandle
tenpanhandle's picture

To distort EPS numbers, bought back shares would have to be delisted.  Is this the case?

Tue, 06/02/2015 - 09:14 | 6154998 Farqued Up
Farqued Up's picture

Correct but the boards are elected by a bunch of dildo pension funds of anti-free marketeers, THE UNIONS!!!! 

Mon, 06/01/2015 - 12:10 | 6151998 venturen
venturen's picture

so Goldman's Investment Bankers instruct the Lemming CEO to do this...and then blame them....This is funny SH!T

Mon, 06/01/2015 - 12:54 | 6151999 Dr. Engali
Dr. Engali's picture

Fuckers crack me up. First they "advise" their corporate clients to buy back shares so that insiders can profit then once buy backs have run their course the berate them for doing what they told them to do.

Mon, 06/01/2015 - 12:16 | 6152010 i_call_you_my_base
i_call_you_my_base's picture

There is a difference this time, in that almost everyone sees it coming. OK, maybe not retail, but they never will.

The fed is fucked. Their reputation and credibility is at an all time low and they can't do a thing to change it. Doing the "right thing" (raising rates) has to be done from a position of strength, not of abject weakness. They are going to be blamed for everything this time.

Mon, 06/01/2015 - 12:17 | 6152012 Winston Churchill
Winston Churchill's picture

The Frankenmarket has gone out of control.

Dr. Goldman is scared.

Mon, 06/01/2015 - 12:17 | 6152016 synthetic
synthetic's picture

Kostin been saying to run from stocks for years... http://www.cnbc.com/id/48725644

Had you anti-muppeted you'd have seen a 18+% ann. ret. since then.

Mon, 06/01/2015 - 13:07 | 6152162 Government need...
Government needs you to pay taxes's picture

Sheiitt Negro, 18% is for Goldman Sach summer interns.  Baller club starts at 50% per year . . .once you get juiced into the .gov inside info. 

Mon, 06/01/2015 - 12:34 | 6152066 orangegeek
orangegeek's picture

GS cocksuckers talking their book again.  Read GS report.  Do opposite.

Mon, 06/01/2015 - 13:05 | 6152156 Government need...
Government needs you to pay taxes's picture

Talk about a group that needs some time on the gibbet.

Mon, 06/01/2015 - 12:56 | 6152130 fremannx
fremannx's picture
"By Almost Every Measure Stocks Are Overvalued"

Now they tell us! old news I'm afraid..

http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...

Mon, 06/01/2015 - 13:05 | 6152155 Government need...
Government needs you to pay taxes's picture

And as muppet trading desks race to sell, the Goldman Sack prop desk profits!

Mon, 06/01/2015 - 13:16 | 6152188 Quinvarius
Quinvarius's picture

This market is one of the worst bubbles in history.  But I look at M1 and M2 numbers.  They never stopped printing after QE ended.  The money is still coming from somewhere.  So who knows how big this set of fads will get.

Mon, 06/01/2015 - 13:47 | 6152282 Chuck Knoblauch
Chuck Knoblauch's picture

Goldman needs your shorts.

 

Mon, 06/01/2015 - 13:52 | 6152316 Dragon HAwk
Dragon HAwk's picture

Sounds like they're trying to trigger the crash, and the computers are all having too much Fun and want no parts of it..

Mon, 06/01/2015 - 13:55 | 6152330 Jack Daniels Esq
Jack Daniels Esq's picture

The USFRB just stuffed $3 Trillion into Wall St stocks - blow baby blow

Mon, 06/01/2015 - 14:20 | 6152443 Bennie Noakes
Bennie Noakes's picture

"There's a muppet born every minute." --- Lloyd Blankfein

Mon, 06/01/2015 - 15:18 | 6152695 nakki
nakki's picture

So after 6 years of ZIRP, mark to fantasy, extend and pretend, stagnant wages for the major majority, another 8 trillion in debt for the US, 4.5 trillion added to the FED'S ledger (as far as we know) and corporations buying back shares while cooking their books, the jig is up?

How bout this, banks have been selling to the corporations for last three years. When it breaks 70% the banks will be issuing newly minted shares for those corporations getting free stock out of it.  Add in another 10 trillion in QE and their is no way they lose. All you have to do is own the printing press, its that easy.

 

Mon, 06/01/2015 - 15:38 | 6152778 the_deflator
the_deflator's picture

This is a mindfuck. I think stocks are overvalued personally, but what credibility do I have. I don't know what to think now.

Mon, 06/01/2015 - 18:12 | 6153334 Monetas
Monetas's picture

I think it's black mail .... margin debt so high .... over valued stocks .... the money has to go somewhere .... we dare you to pull the plug .... better to keep the QE coming .... or you won't like the sell off .... Ponzi roulette .... who's gonna blink first !

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