Do You Believe In P/E Miracles?

Tyler Durden's picture

Since The Dreme (Draghi Scheme) began shortly after the EU Summit, the P/E multiple on the S&P 500 has risen by a faith-defining 2x. This is the largest three-month rise in this indicator-of-indifference-to-reality since the initial burst rally off the March 2009 lows. Meanwhile, the actual earnings consensus is being marked down further, heading for an earnings recession as we pointed out last week. It seems investors are too afraid not to believe in P/E miracles or perhaps it is just faith that central banks have it all under control and their 'promises' are as good-as-gold.

The S&P 500 seems 'managed' to a certain level - no matter what that means for EPS or P/E multiples, the spice must flow market must rise... (a 2x multiple increase since Draghi's initial utterances post EU Summit


As if the divergence was not enough, the 3 month rise in the S&P's P/E ratio (lower pane) is its highest since the initial V-bottom recovery in 2009...


Charts: Bloomberg and JPMorgan

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Silver Bug's picture

Who needs P/E miracles when you have QE miracles!

chump666's picture

Meanwhile China is showing the signs of a chaotic FUBAR situation i.e their new leader just went awol, also:

China bank loans data came in higher than exp at CNY704bln

Which means no new Chinese stimulus and Europe and America will face a beatdown end 2012 and 2013...once inflation causes total mayhem and Obama's debt juice overdoses the addict.


Daily Bail's picture

This clip is 2 years old but I reposted it Friday, because the entertainment value is just that damn high.  Maybe one of my all-time top 10 favorite clips. 

Irish Parliament Bailout Battle Ends In Profanity: "Fuck You Deputy Stagg!"
SafelyGraze's picture

I believe!

do you believe in 36 thousand miracles?

"Every time an analyst says that P/E ratios are too high today in the light of historical experience, she is implicitly saying that the risk premium is too low. In other words, she expects investors to go back to the days of being irrationally risk-averse. "


SafelyGraze's picture

.. and she has been expecting that for over a year now

I should be working's picture

It should be noted that profits bottomed in late 2009, while the market bottomed in March. There is nothing unusual in share price growth anticipating earnings growth.

This is why P/E is a useless indicator.

khakuda's picture

To me all it says is that they don't believe in the dollar. That loss of faith is showing up in gold, oil and stocks. As pointed out, the fundamentals of equities or oil or houses don't justify the price increases, but the loss of faith in fiat does, and the timing is impeccable to renewed talk of money printing this past Summer.

Dangerous game, this purposeful capital misallocation thing.

AynRandFan's picture

khakuda, perfectly said.

Cult_of_Reason's picture

Gary Shilling was on Bloomberg TV today.

His recommendation:

1. Buy USD (the only safe-haven currency)

2. Short equities

3. Buy treasuries

Cult_of_Reason's picture

This stock market is as exuberant about the Fed as crude was in 2008.

Remember Summer of 2008, the US economy was already deep in the worst recession/depression since the Great Depression, yet crude went up exuberantly parabolic to $148 on "the Fed will ease and provide liquidity for a Goldilocks decoupling soft landing" hopes?

And remember PIMCO's "fully invested" idiot Paul McCulley (at that time PIMCO's number two man) camping at CNBC and appearing on CNBC almost daily to tell CNBC viewers (mostly retail investors) that PIMCO was “fully invested” in "risk assets" because he was convinced about "the economy's runway to be lubricated with Fed easing" and "the Fed engineering a soft landing"? (BTW, somewhat analogous to nowadays PIMCO’s Bill Gross telling retail investors [only he is using both CNBC and Twitter] to buy “risk assets”)

History Repeating...

Pandorable's picture

Share prices rise on QE inflated currency (lack of) value - which is why big money continues to hold the market in a levitating swoon that would impress Houdini in hopes of more hot air...all the while taxpayers foot the bill of the bailouts. The only thing more powerful than fear is HOPE, which is why big money has been so cavalierly yanking the media strings to sell hope to the world - to distract and redirect the growing fear while they take your money.

If Bernanke announces more QE to help the TBTF "interests" and add to the crush on the middle class, it can only be viewed as evidence of his own death wish.

My money is in Smith & Wesson.

intric8's picture

The numbers weren't adding up before the 2008 crash. They aren't adding up now. There is one difference; dumb money was in the market then, so where's the source for this rally? Overseas cash? A market-making anomaly? Dunno, but somethin aint right

sitenine's picture

@intric8, You know where the money comes from. The money comes from the Fed. The Fed buys more toxic shit from the geniuses who originally leveraged 10 times the value of their firms to buy the not so 'AAA' anymore assets during the bubblelicious years. Snap. Everyone is saved - well, at least the banks are 'saved', again - liquidity trap? - yeah...

q99x2's picture

If QE3 doesn't happen and Germany's constitutional court doesn't vote in favor of Draghi and the markets do not sell off much then we will have more evidence that HFT or some non market force is active in the markets something that should be considered a national and world security threat.

AynRandFan's picture

Let's say we could prove that the Fed is manipulating the U.S. markets.  What would be the right course of action?  Having propped them up, let them fall to zerio?

seek's picture

Let price discovery happen. They won't fall to zero. (Well, except for Faceplant.)

Once real prices are found, we can have a real stock market and people can allocate capital correctly again.

BORT's picture

From what I can tell, it is the GM dumb money walking away from a guaranteed annuity and taking the lump sum.  Trusting some young Edward Jones punk to beat a 4.255% return from prudential.  Good Luck , idiots.  This will soon be over and your retirement will be gone-zo

AynRandFan's picture

I believe P/E now reflects changes in the monetary base, on a stagnant set of earnings.

Cursive's picture

It will be a festivus miracle.  /sarc

r00t61's picture

"Let us begin with the airing of grievances."

kevinearick's picture

Insiders trading with fewer and fewer insiders, trying in vain to prime the retail pump, from apple back to facebook, always regrouping on apple, hoping that technology sex will attract the necessary golden goose to unlock the system, growing pressure on decreasing volume, only to be surprised with each crash...

where's lazarus?

miracle smiracle.

Scalaris's picture

I thought that P/E was driven solely on a semiannual speculation of monetary easing, acting as a promise of substitution for future earnings, which would be unable to support the otherwise overinflated share prices, due to their stagnating nature, as a result of the mostly unemployed and underfunded middle class., which would otherwise drive the economic growth.

hedgehog9999's picture

What happened Today? 


Did Draghi get his pants down or something , futures down big time....

or is it just the market's tantrum before Bernanke has his meeting and force his hand.....

An SPX gap down of 50+ tomorrow might get him thinking of loosening the purse strings......


KickIce's picture

Japan's finance minister committed suicide.

Some big yukity yuk in China has disappeared.

Quantum Nucleonics's picture

"the spice must flow"

Nice Dune reference.  Let's see...

Ben Bernanke: 3rd Stage Guild Navigator

The Fed: The Spacing Guild

President Obama: Emperor Shaddam IV

Ron Paul: Paul Atreides

Mario Draghi: Count Hasimir Fenring

Janet Yellen: Alia

Larry Summers: Barron Harkonnen

Tyler: Stilgar

Kyle Bass: Duncan Idaho

Angela Merkel: Gaius Helen Moheim

Tim Geithner: Piter De Vries



SafelyGraze's picture

if more than 3 billion a month is leaving nyse

then presumably levitation (including P/E) is occurring directly via fed POMO (and indirectly via other unaudited balance-sheet expansion and off-balance-sheet currency swaps).

anybody happen to know what the typical spread is on treasury purchases/sales between primary dealers and the fed? 10 basis points? 100? is the fed *selling* at a loss to PDs?

that's 40 billion of purchases. and 40 billion of sales. one percent of that action would be 8 billion of monthly equity-levitation money for the PDs. maybe not enough to stanch the outflows, but it's something.

have looked for a graph of the PD spreads on POMO before, but without success. should be possible to do the forensics based on CUSIP numbers of POMO purchases/sales based on daily prices of treasurys versus transactions published on the nyfed POMO sites.

pointers appreciated.

Colonel Klink's picture

As I've said before.  There are no markets, for when you realize, it is YOU who bends over.

Hope you've pulled your money out of this HFT trading arena.

falak pema's picture

The Dreme meme for the New dream team :

....Do You Believe In P/E Miracles?...

Yes, if the miracle is made in Hollywood tinsel town, and the protagonists are Brangelina and "Nespresso George!"

george clooney and nespresso - Recherche Google

Ah! "Yes we can" bandwagon is now hurtling along to November race line. 

Pump away, fiat pump, until the market says "hold enuff"; at which time Potus will be in place and they can all sing "Mega dump, last man out is the devil's victim!".

May the real games begin! 

orangegeek's picture

The US Dollar Index is weighted about 57% against the Euro. When the Euro rises, markets rise and the US Dollar falls - and vice versa of course.

The Euro is just completing a wave 2 retracement in a bear trend. When Europe has winded itself from talking and doing little, their unsolvable debt crisis should pick up momentum - wave 3 down.

Below is a daily version of the US Dollar index.

sbenard's picture

At what point do we call this market what it is -- a bubble? Oh that's right! It's a "wealth effect" now, not a bubble!