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Here's The Problem: Despite The Plunge, Company Valuations Are Still At Extremes
Following the recent broad market selloff which has taken all US stock indices into the red for 2015 and in some cases, red for the past 52 weeks, the real question traders should be asking themselves now that the power and potentcy of central bank intervention is increasingly questioned (see Deutsche Bank's note this morning stating that "The Fragility Of This Artificially Manipulated Financial System Was Finally Exposed") is whether stocks are now fundamentally cheap or at least, "fairly" valued. The answer, as SocGen's Andy Lapthorne points out, is a resounding no.
The SocGen strategist notes that heading into the August global market crash, catalyzed by both China's devaluation and the FOMC Minutes (the S&P was just shy of 2100 last week), "corporate debt levels in the US in particular were rising at an alarming rate whilst cash flow growth was all but absent in most markets, save for M&A deals and currency translation effects. As such, median valuation levels, particularly those based on EV/EBITDA, were at extremes and equity market positioning, as we noted at the beginning of August (see link), was already behaving in a bear-market fashion. The equity markets have finally given up and are now falling and fast!"
So here is the first part of the problem: it is no secret to anyone that the biggest contributor to soaring stock prices in the past year were stock buybacks, funded almost exclusively not with (declining) cash flows, but with new debt. So, "as equity values decline, implied leverage will be on the rise and this risk should be at the forefront of investor concerns" Lapthorne warns. He adds that as a result, balance sheet problems "will inevitably emerge given the size of the price declines so far and the uptick in volatility will make it increasingly difficult for companies to continue to raise debt to the extent they have done in recent years. Share buybacks, especially those fuelled by debt are likely to screech to a halt and investors eyes are likely to shift to the elevated levels of net debt to EBITDA, particularly in the US."
Indicatively, following today's rout, some 80% of the corporations that have engaged in stock buybacks in the past year are underwater on their purchases: perhaps they should have "invested" all that money in capex and growth instead...
But we digress. Because the second problem for investors, as Lapthorne notes, is "where to hide."
Higher quality stock valuations were already at relative extremes, despite not actually being in a recession. Quality income stocks (those high quality companies with a 4% dividend yield or higher) are notable for their rarity and despite recent share price declines, the median EV/EBITDA ratio for MSCI World is still at extremes.
And here is the take home message: despite the equity rout, and the tumbling equity valuations, EV/EBITDA for the MSCI World ex financials is just about 10 turns, the direct result of the collapsing cash flows over the past several years. Because one can fabricate and manipulate non-GAAP earnings all one wants, but when it comes to cash flows, there is just one number.
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MOAR Plunge!
Anything that will get valuations properly aligned to earnings.
I'm out anyway until this long expected shitshow is over.
What plunge ? Everything is looking good now. We may close green.
From Black Monday to (probably) closing at a positive.
There are no words....
here's a word...Tuesday is another day.
Sure
Happy
It's
Tuesday!
YOU CAN'T HANDLE THE PLUNGE!!!
P/E ratio of 1 sounds about right.
Really? Germany's DAX is f***ed!
Closed 22% down from high:
http://gu.com/p/4bmy6/stw#block-55db3da0e4b0959e5f8de04a
???
I see -4.72%
The recent record high. -4.72% is for today.
UK close today is -4.67%. That's -17% from April high I think...
Never mind...It's still all Bullshit!!!
I see a lot of people who occupy the C-suites retiring very soon for "health" reasons and to spend more time with their families...in a non-extraditing country.......
But... but... Cramer told me to BTFD.
Plunge, what plunge, we will be back to even today and up tomorrow.
What's a few more trillion to buy back all the stocks after all the stops are triggered?
After all, the banksters will own them all eventually. Along with everthing else.
If this market hits unchanged or positive I'm gonna lose my shit
Adult undergarments are readily available. Janet's wearing one right now.
It's quickly making a comeback. #freemarkets
Black rubber undies???
Then be prepared to lose your shit. We will close green today.
that will make it too obvious. we'll close 127 points down. a loss, but manageable.
This is just a trial run. The real fun will begin in Sept.
What year?
Could somebody please start talking about something inortant like the Khardasians.
I believe, as PODS said earlier, they will get the market to end the day around 100 to 150 points down on the dow. That way it's still down some and yet hasn't collapsed by a 1,000 fucking points like it should!
They also need to put volatility to bed some as they can't see a one day rip higher by 50 to 70%!! CAN'T HAPPEN..... not on my watch (Yellen).
I was way off. I said down 2%.
At this climb rate, it might actually finish UP 2%.
pods
Only need to buy one company to push the 'markets' up. What a con
We're headed toward the green now momentum is up up up. That was a fun few days see you guys at Dow 20k.
Relax. European markets are now closed. The real buying of US equities has just commenced.
Green by 2. I said noon earlier, but that's even a bridge too far for the PPT in just a half hour.
The smart money is buying; the dumb money is whining on ZH.
And your proud of this fucking blantant manipulation? - is that brown on the tip of your nose?
I live in the world of what is, not in the world of what should be.
Oh ok then , just kind of came off like you were enjoying it a bit too much
I don't really enjoy anything financial. If anything it's the opposite -- it all causes stress.
Down 210.... Lol. 800pts recovered. Perfucktly normal.
What is this "plunge" with which you speak of??
Gold is far more over valued than the S&P. Gold has no yield and little value in the digital age.
Gold is heading below $1000/oz. Oil is near a bottom and will rise to $60/barrel within a year.
Okay I'm going to go build a portfolio now thanks for the free and sure-to-be-accurate advice.
ZeroNero....In the words of Forrest Gump:
"Just then...MDB shows up!"
I agree that gold is over valued. It's value is based on emotion, not need. Only 15% of anual gold production is used industrially, and the rest of it just sits in vaults, as bullion or jewelry.
The price of gold is fueled by two things, fear OR greed. It rises on both of these EMOTIONS. When the price of gold is rising, as it did in 2008/2009, everyone wanted gold BECASUE it was expensive and it became an "investment".
Gold is rising right now becasue of fear. Fear of a market crash. Fear is an emotional reaction.
Dow now down only -200 (11:59 est) .... PPT is trying to juice the markets just before the sheeple check their portfolios at lunch time.
B T F D
When the Dow is back over 18000 next week/month/tomorrow(!) we'll laugh about this minor blip
You all are crazy. Plunge? Check again, at least in stocks. The ONLY way this market "plunges" for good, is when the rest of the world sticks it's middle finger to us.....valuations be damned. When has that mattered in the last 7 years? This fucker will be green by 3:30 or damn close. Anyone still playing in this market is a fucking idiot. It's all about the fed and the banks now. It's a giant shitshow designed to empty your pockets.
what a beautiful resilient market might b time to pick up a little uvxy
Point of the article is valid - equity markets are trading ownership in more and more worthless entities. But when did worthless stop the trading? The pennies wrung out of derivatives of derviatives of derivatives will still buy hookers and blow.
We traders often see the classic low-volume lunchtime 'Unch' touch on triple digit days, taking out the retail stops before re-dumping, but if they manage that today, 'twould be the greatest round trip since Apollo 11
Well, they opened everything down ten miles, then "rebounded" to down just one mile. But now who do they expect to buy in this weak market having missed the main chance?
Who exactly got those extreme executions, I'm betting they did NOT just clear the books on the way down, though maybe some on the way back up.
Yessir, some non-nimble believers (i.e., humans at big firms) will no doubt be expecting the classic 'double touch' of the lows, but odds are above 50% they'll chicken out if it makes it back within the next week.
I keep saying, if Harry Styles will stop being an asshole, stop his solo (yolo) career move, and get 'One Direction' back together again we could actually avert this ENTIRE DISASTER!!!
He's so shelfish!
2X the book value per share of the SP500 would be more than a fair price for the index as long as the economy grows. The book value is currently @729=SPX 1458, and that would certainly be reasonable.
plunge? what plunge?
you all got Bruce Jennered (from afar it looked like a chick, but up close, it's a dude)
Mr. Trouble never hangs around
When he hears that mighty sound:
"Here I come to save the day!"
That means the Central Banks are on the way!
Just curious.
Can any securities lawyer here ponder out loud about potential breach of fiduciary duty lawsuits which could be brought against the execs who had their corporations borrow money to fund stock buybacks in order to trigger stock option compensation for themselves? If a crash leaves the corp crippled by debt, and if there are emails left around somewhere in which the execs are chortling about what they have done to line their own pockets at shareholder expense, isn't that a legal disaster looming for the perps?
It is a pleasant thought, though, that the bagholders this time around might not be just only retail, but also some of the biggest corps in the universe.