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Killing The 'Stocks Are Cheap' Myth Once And For All

Tyler Durden's picture




 

Each and every day we hear, stocks are cheap - P/Es are low, money-on-the-sidelines, sentiment is contrarian-wise weak, 'it's an election year', and many other anecdotal BTFD-driving broker-based sound-bites. The truth will perhaps set you free. On both a valuation (trailing P/E and market-cap/GDP) basis and cyclical (long-term sideways trends, percentage holdings of stocks, historical election/decennial patterns, coincident-to-lagging indicators, and financials leading) basis, the fact is - the only drivers of bullish reasoning here is recent momentum, an implicit 'rationality/Bernanke put', and an implicit bias towards self-sustaining behavior by an entirely-dependent marketplace of professional commission-takers.

 

Valuation Insight:

On a trailing P/E basis, we are anything but cheap. In fact over the past 90 years we are almost perfectly 'average' and have not seen the re-emergence of secular bull markets until this trailing (hope-less) data drops notably further...

 

The stock market's value (market-cap) is well above its 70-year average relative to US GDP. At 2-sigma over its long-term average, stocks appear anything but cheap...

 

as the ponzi-like demand for stocks - by every fast-money hopeful investor/trader - maintains a status quo that remains notably away from long-term risk aversion realities.

 

Cylical Insight

On a long-term cycle basis, we have a few more sideways years (at best) before expectations of a 'secular bull' can have any credence...

 

as the typical sideways range-bound market has last 15-25 years, and we are well ahead of historical trend as we keep hoping that this breakout will be different...

 

and we are also well ahead of all the usually-cited cycles - election, seasonal, decennial - as hope remains efusive...

 

 

and fundamentally the leading-to-coincident indicator - which has tended to historically peak with stocks over the last 50 years - has rolled over quite notably divergent from stocks...

 

and the typical leaders of any secular rally - the financials - will be under more pressure as the Fed maintains ZIRP and the hope of more QE keeps the curve flat; making financials a headwind rather than a tail-wind for a broad market rally...

 

The bottom-line is that buying stocks here is a hope strategy - as it always is really and we have seen these kind of hopeful situations twice before in the last 10-15 years. As someone once said, fool me once, shame on you; fool me twice, shame on me; fool me thrice, shame on Bernanke.

 

Charts: BofAML

 

 

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Wed, 08/15/2012 - 10:14 | 2706594 dottjt
dottjt's picture

Stocks are incredibly cheap, priced in lies. 

Wed, 08/15/2012 - 10:24 | 2706633 SilverTree
SilverTree's picture

Truthiness.

Wed, 08/15/2012 - 10:37 | 2706681 ACP
ACP's picture

"I will destroy the dollar and make stocks cheap...

...I'm Ben Bernanke and I approved this message."

 

Wed, 08/15/2012 - 10:49 | 2706720 Rainman
Rainman's picture

Here's another coin flipping momo who sees S&P @ 1500 come year end. Wien is right half the time, or so he says.

http://www.bloomberg.com/news/2012-08-15/blackstone-s-wien-sees-s-p-500-at-1-500-in-2012-on-momentum.html

Wed, 08/15/2012 - 10:51 | 2706724 tbone654
tbone654's picture

The money is coming from Europe... it has to go somewhere...  China, no... Japan, no... Eurozone, no...  what's left?  US Stock Market...  If you can get your money out of Greece, you have to put it somewhere...

Drifting up...  no sellers...

Then someday the Captain says:  "lookouts below...  Pull the cork... Dive, Dive..."

Wed, 08/15/2012 - 11:00 | 2706756 vast-dom
vast-dom's picture

factoring in QE and ZIRP we are well over 5 sigma over long-term on stocks!

Wed, 08/15/2012 - 10:14 | 2706596 orangedrinkandchips
orangedrinkandchips's picture

V

 

That is the only letter you need to know.

 

This market is 100% HFT Arbitrage.....Take it down 10 points, then right back up to the EXACT PENNY.

 

Repeat if necessary!

Wed, 08/15/2012 - 10:19 | 2706599 francis_sawyer
francis_sawyer's picture

It's not simply that 'stocks are cheap' anymore... It's that the dollars that they're redeemed in aren't worth owning... One worthless piece of paper valued in another worthless piece of paper...

Just keep believing that your paper portfolio is actually worth something & that gives them more time to pick up REAL copper pennies in front of the steamroller for as long as they can keep you distracted...

Wed, 08/15/2012 - 10:23 | 2706627 SheepDog-One
SheepDog-One's picture

Exactly, 'Whats 1 piece of paper worth priced in another piece of paper'....all just good kindling really.

Wed, 08/15/2012 - 10:52 | 2706678 francis_sawyer
francis_sawyer's picture

This weekend I'd just finished putting into Mason Jars the bounty of a modest crop of about 40 San Marzano tomato vines (which were harvested into):

- some jars of sun dried

- many jars of passato di pomodoro

- quite a few jars of whole peeled tomatoes

- some jars of roasted

Anyway ~ I couldn't help but stare at the produce and realize that it all came NOT just from a packet of $1 seeds... But that the $1 packet was bought 5 years ago & that the seeds from the past few years harvests were all heirloom seed harvesting from the original packet... Just ADD SUNLIGHT & RAINWATER...

Meanwhile ~ the supermarket wan't $6 Bernanke bucks to buy a packet of 6 of the same tomatoes...

UFB ~ Yeah... "Stocks are cheap" LOL

Wed, 08/15/2012 - 11:11 | 2706795 Uchtdorf
Uchtdorf's picture

+1

Extremely relevant and informative post. How could anybody give you a down arrow?

Wed, 08/15/2012 - 11:28 | 2706833 francis_sawyer
francis_sawyer's picture

francis_sawyer has 'anti-matter' groupies at ZH ~ (lol, stand clear ~ I'm radioactive)

Wed, 08/15/2012 - 11:47 | 2706889 SmallerGovNow2
SmallerGovNow2's picture

Canned eight quarts from my nine plants, and on the way had BLT's about five times per week since April.  Sure miss the fresh ones now...

Wed, 08/15/2012 - 12:14 | 2706946 francis_sawyer
francis_sawyer's picture

That sounds like about the same haul ratio I got per vine after the normal pilferage... I do the sauce very last because a whole bunch just produce quickly at the very end & that's the best way to deal with them at that point (in volume)...

I have some greenhouses, so I have a 2nd generation going that were started 3 months after the first [traditional] wave ran its course... That way, I ought to have freshies at least thru November/Dec...

Wed, 08/15/2012 - 15:25 | 2707810 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

I have a different harvest: papayas, as many as you could want. Mangoes, ditto. Avocados. Bananas, 6 varieties, funny fat ones for cooking, little Lady Fingers for eating. Taro and sweet potato for starch. Plenty of salad stuff, arugula by the armload. Funny little island cherry tomatoes, the only ones that like the humidity and the salt air, still yummy. The guy down the way has a prawn farm, armloads of huge ones for a pittance. He now has geese, chickens, and goats too. And of course in the lagoon: fish everywhere. Snorkel for a half hour before dinner and you'll have grouper or snapper and maybe a lobster.

Yep, bragging. All tax-free too! Ask me how...

Wed, 08/15/2012 - 16:25 | 2708093 samcontrol
samcontrol's picture

so you live in Brasil, so what?

Wed, 08/15/2012 - 16:25 | 2708094 samcontrol
samcontrol's picture

so you live in Brasil, so what?

Wed, 08/15/2012 - 16:25 | 2708095 samcontrol
samcontrol's picture

so you live in Brasil, so what?

Wed, 08/15/2012 - 23:24 | 2709185 francis_sawyer
francis_sawyer's picture

I'm jealous...

Wed, 08/15/2012 - 10:41 | 2706695 Jay Gould Esq.
Jay Gould Esq.'s picture

A share of stock still represents a share of ownership in an underlying business; as such, if the entity is fundamentally strong, generates a material amount of cash flow -- a portion of which, is distributed to share owners, then the stock does indeed have value...the problem is the ever-depreciating currency in which the share of stock is reckoned.

Wed, 08/15/2012 - 10:15 | 2706600 mrktwtch2
mrktwtch2's picture

meantime aapl and goog keep marching higher..

Wed, 08/15/2012 - 10:15 | 2706601 Aziz
Aziz's picture

Only dip I'm buying is in guacamole and salsa.

Wed, 08/15/2012 - 10:24 | 2706632 aint no fortuna...
aint no fortunate son's picture

buy and hold bitchez rotflmfao

Wed, 08/15/2012 - 12:35 | 2707040 fuu
fuu's picture

Francis_sawyer appears to be cornering that market...

Wed, 08/15/2012 - 10:16 | 2706603 scatterbrains
scatterbrains's picture

I don't know..  if the fed can manage to drive gasoline prices up to $5 or $6 dollars a gallon I think we could hit all time highs in the SPY. So far it's working pretty well for them. Just a bit more printing aught to do it.

http://fiatflaws.blogspot.com/

Wed, 08/15/2012 - 10:20 | 2706618 Jlmadyson
Jlmadyson's picture

Average bull market 34 months. This one: 41. S&P up 104%.

When it all falls apart they better be running for the doors like Bernie M.

Who knows how long this game can last but it shall be intersting to see.

Wed, 08/15/2012 - 10:38 | 2706626 Cognitive Dissonance
Cognitive Dissonance's picture

"On a trailing P/E basis, we are anything but cheap. In fact over the past 90 years we are almost perfectly 'average' and have not seen the re-emergence of secular bull markets until this trailing (hope-less) data drops notably further..."

We ain't seen the bottom until we see P/E's in the single digits. And don't forget that today's "average" P/E's are supported by financial alchemy aka smoke and mirrors.

Going down? See ya in the sub sub (P/E) basement.

Wed, 08/15/2012 - 10:43 | 2706705 Jay Gould Esq.
Jay Gould Esq.'s picture

CD: as an aside, is Mr. WB7 on holiday ? I do not recall seeing any contributing posts in some time.

Wed, 08/15/2012 - 11:07 | 2706782 Cognitive Dissonance
Cognitive Dissonance's picture

I believe he has been living large with wild women. :)

He has been out-of-pocket. However I just saw Bill post an image on another thread so he might be back. I hope so because ZH is just not the same without him.

Wed, 08/15/2012 - 10:43 | 2706706 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

This article focuses on points that are a waste of time.  We should be focusing on the fact that a group of international bankers have made the world think it is in debt when the debt is made up of a fallacious denomination called "fiat currencie" which has no intrinsic value.  We should be marching them off to the squares and locking them in chains.  We should be buying silver and taking back the money supply.  Rather we sit on computers and discuss P/E and cyclical charts.

WTF CD?!

Wed, 08/15/2012 - 12:03 | 2706928 Cognitive Dissonance
Cognitive Dissonance's picture

Actually Mrs. Cog and I have been buying Silver over the last several weeks. In fact, we have been regularly buying the dips for the last year or so and I have been buying for the last 10 years. Love those special deliveries. You know, the postman always rings twice. :)

And yes, I do understand the irony of discussing the illusion as if it were real. The fact is LH that the vast majority of people are just not ready to let go of their illusions. We (the collective we) are not ready to give up, thus we support the continuation of the very illusion we claim to disbelieve.

This is why my focus was, and still remains, seeking peace and a greater understanding within.

Wed, 08/15/2012 - 10:24 | 2706629 carambar
carambar's picture

poor thing. you have been rooting some much for a stock market demise. I understand your frustration but that should not allow you to lie.

Stock valuation has a direct correlation with interst rates, inflation and GDP growth.

you mention none of these (except some indicators)

An honest stance is Stocks are cheap compare to interest rates and inflation levels, BUT due to the perceive risk of an economy slow down and budget constrain,

it makes sense to have a cheap market.

Stop the stonewalling . you are loosing your already thin credibility.

Wed, 08/15/2012 - 10:31 | 2706658 LawsofPhysics
LawsofPhysics's picture

That's a good sheep. Everything is fixed, the rule of laws and contracts has been restored.  All the debt will be repaid and there is no counterparty risk in any of that paper.  moreover, inflation in things you need (not counted in today's CPI calculation) and deflation in everything else is always bullish.  Move along, all is well.

Wed, 08/15/2012 - 10:32 | 2706661 LowProfile
LowProfile's picture

LOL

Is the CORP/FED/GOV hiring Chinese citizen to make posts now?

Fucking outsourcing is TRU DA ROOF, DAWG

Wed, 08/15/2012 - 10:37 | 2706682 scatterbrains
scatterbrains's picture

Interest rates = manipulated

Inflation = suppressed

GDP = debt expansion

Let me guess you went to Fartmouth University ?

 

Wed, 08/15/2012 - 10:39 | 2706691 LongSoupLine
LongSoupLine's picture

fuck you TBTF troll.

Wed, 08/15/2012 - 11:04 | 2706768 Pareto
Pareto's picture

hey ass clown.

your perception of "cheap" valuations, hinges on the FED continuing to buy out the long end of the yield curve.  So interest rates, and the easy money sell short buy long carry enables fairy land to continue.  The day that manipulation stops and debt is appropriately priced to market, is the day your stocks suddenly become expensive as hell.  But, your ok with price fixing, because thats what pinko commies like you believe - that government and central planning is smarter than EVERYBODY else........Until they are not.

Wed, 08/15/2012 - 12:26 | 2707004 Hippocratic Oaf
Hippocratic Oaf's picture

carambar......

 

I count twelve grammatical errors in your post. I may be on the low end. 

To quote you........'you are loosing your already thin credibility.'

Thu, 08/16/2012 - 11:59 | 2710836 carambar
carambar's picture

you are right, I am not a native english speaker. so what.

Stop being blindsided by Tyler  flow of negative comments.

this is his job!.  he has to deliver blood to the crowd ie he is corrupt.

 enjoy sitting on the side line.

Wed, 08/15/2012 - 12:29 | 2707015 YesWeKahn
YesWeKahn's picture

Tyler, are you sure that you wanna Bernkidiot to post here?

Wed, 08/15/2012 - 10:27 | 2706640 Meesohaawnee
Meesohaawnee's picture

im thinking the only ones selling that is bubble vision. which has been totally exposed as just an outsourced PR/Ad firm of the Fed and big corp. Nothing else.

Wed, 08/15/2012 - 10:27 | 2706641 Shizzmoney
Shizzmoney's picture

"Look at the corporate yields!" the pundits like Jim Cramer will say (and be parroted by my muppet friends).

Yeah, because when (more like "if") I get capital, the first thing *I'm* gonna do, is buy me some stocks!  Just throw my money at Wall St because it's such a capital boomerang factory down there!  Look at how the people at MF Global did!

Wed, 08/15/2012 - 10:33 | 2706668 The Axe
The Axe's picture

All true TYLER    but in a no volume controoled Fed induced ponzi....its like a 3 card monti game.......its GREAT    Until you fucking play....you lose!!!

Wed, 08/15/2012 - 10:39 | 2706692 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

When I see a stock report that doesn't address the fact that the underlying asset which denominates everything, the dollar is constantly depreciating due to inflation, due to the fact it has no intrinsic value, then I tend to ignore any arguement.

That and even if we just address the charts it appears stocks are well priced, because P/E looks average, and the cycle is flat and could go either way at anytime.

Factor is UE and....oh wait, that just means the corporations that make up US equity, those that hire cheap labor overseas, have less input cost, so they will continue to meet their margins, or, if they have purchasing power, they can raise them, and, make more dollars, which will increase profit and increase their stock prices.

Wed, 08/15/2012 - 10:57 | 2706742 Centurion9.41
Centurion9.41's picture

Like it!  However would have liked to see something, that I either missed or you failed to note, about what printing does to data measurements. 

 

To comp two periods, one in which printing was "normal" and the other in which mana was thrown from the heavens via helicopter, is a pure act of hubris or ignorance.  Why?  Because printing changes the measuring stick, money.  Printing is like taking a ruler and adding more tick marks and then changing the numbers above the ticks.  The tick that used to have the number ten above, now has an 11, or 12, or... well, it all depends upon the number of new ticks you painted in the spaces of the old ruler.

If one thinks about it, one can easily see how a "100%" return could be created if enough new ticks were drawn.

For those who argue and point to CPI/inflation, etc., you miss the point.  It is NOT simply a matter of saying the nominal S&P on TV should be shown in inflation adjusted terms. 

The inflation calculation used in such a re-drawing of the S&P uses the ruler measurements of multiple assets and products.  Since $USDs do not flow equally into each asset class, such an "inflation ruler" does not correctly measure because it does not account for the relative flow. 

Nor does it account for the leverage used to buy in the equity asset class.  Retail buyers do not buy what they need to live via leverage. 

And therein lies the fundamental nexus of deception.

The "nest egg" is made to look much much larger, by leveraging the $USD to buy the "S&P", than it was before, RELATIVE to the egg at the store.

So, the Sheeple get a 100% nest egg bounce with as of yet no such "inflationary" bounce at the store. 

Sheeple feel good, simply because they do not understand the rulers they are looking at are not the same.

It is the same for the Wall Street Snake Oil Salesmen and Marketeers.  They show charts, that should be in log/% terms, in nominal terms... because it is like painting over a Da Vinci with florescent and glow in the dark paint.

The same holds for all the "fundamental" data points and calculations, e.g. P/E, relative yield based comps, as well as valuation and Fed "models".

 

Wed, 08/15/2012 - 10:58 | 2706752 adr
adr's picture

Have the government prosecute 1 person for financial fraud and then we'll see if stocks are cheap.

If a criminal knows he isn't going to be arrested for any crime, he's going to go straight for the top capital offenses. The little stuff just won't give any thrill.

Since the Obama administration made it clear that there would be no prosecutions for financial fraud, the CFOs have been pushing the limits. Getting away with fudging earnings by 20% doesn't do it for them anymore. Getting away with misstating earnings 100% to the upside, now that is thrilling.

Do you really believe Target's earnings report? I sure as hell don't. Inventory held has been way down at every Target I go to and products in the center of the store have layers of dust. Sure they sold a lot limited edition designer women's clothes, but that was one and done inventory.

Sales are being misstated by hundreds of millions, all to prop up a share price that has been skyrocketing this year. The last thing a board member wants to see is his shares that hit a 52 week high get Grouponed or Netflixed. Knowing that the company's books won't be audited under Obama, the green light to cheat is given. Make earnings look as good as possible without making them look too good.

 

Wed, 08/15/2012 - 11:19 | 2706814 css1971
css1971's picture

50% cash for the dips.

Nothing with a double digit P/E. Utilities. Cleaning products. Pills. Dividends. etc.

Gold for those times they get serious about beggaring the old and the poor.

Wed, 08/15/2012 - 11:24 | 2706830 Super Marco
Super Marco's picture

Thats the shit I be saying dawg.

Wed, 08/15/2012 - 13:23 | 2707248 orangegeek
orangegeek's picture

Well regarded stocks are members of indexes like the Dow Jones or SP 500.

 

Elliott wave count on the Dow shows a big downturn is near.

 

http://bullandbearmash.com/chart/dow-jones-industrial-average-weekly-aug...

 

Stocks are cheap?  Hardly.

Wed, 08/15/2012 - 14:32 | 2707524 ItsDanger
ItsDanger's picture

P/E is just one measure and is severely overrated.  What you can sell it for is all that matters.  Either to the next bagholder, buyout, privatization, takeover, etc.  Lots of companies just plow their 'earnings' back into the company.

Thu, 08/16/2012 - 08:49 | 2709667 PlayTrader
PlayTrader's picture

I do not agree with your analysis. Take a look at the equity risk premium. The trailing earnings yield on the S&P500 less the US Ten Year Yield is currently 5.21% having peaked at 6.19% last year. Between 1974 and 1982 the equity risk premium peaked at 6.24% then collapsed to -3.74%. Based on your calculations, if you expect the trailing P/E on the S&P to collapse to 10x, this would imply a 10% earnings yield on the S&P, which in turn would imply the US Ten Year Yield should be between 3.74% and 13.74% in the next 4 years. I assume you are massively short US Ten Year Government Bonds????

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