What does the true earnings picture of companies tell us about the market? Simple: it is overvalued relative to historical averages on every single basis, and not just the much discussed recently 10 year average used in the Shiller PE which has the market now at a 25x multiple. In short: the trailing EPS of 18x GAAP and 16.3x Non-GAAP is higher than the comparable GAAP and non-GAAP multiple for the long term, 1910-2013 average (15.8x and 14.5x), and while in line with the GAAP average for the 1960-2013 period, it is overvalued relative to the 15.9x non-GAAP average. However, if one excludes the 1997-2000 tech bubble, the historical average multiples drop even more to 17.7 and 15.2.
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!
It is hard to believe that the end of the year is fast approaching. This weekend's list of things to ponder covers a range of issues that caught our attention this week. Will the economy continue to grow, are stocks under owned, what about Fed - rising credit risk (and collapsing credit risk premia) and the question of "when or if to taper?" These are all important questions that all investors must answer as the new year rapidly approaches.
Back in August, we joked that in the Tesla press-release the one most often used word was Non-GAAP (43 times). Conveniently, we provided a word cloud of the company's Q2 release for the visual learners to grasp just this. That TESLA's earnings were an epic non-GAAP adjustment joke was only further cemented by the fact that the company itself provided a bridge between its GAAP and Non-GAAP earnings. Now, the euphoria is over and the story is different, as not only has the company's self-reported and erroneous record of making the safest car in the world gone up in flames, but the momentum appears terminally broken and following today's most recent 11% drop, TSLA stock could soon be headed for double digit territory again. More importantly, however, the end of the momentum story means that those who care about such anachronisms as fundamentals can once again look beneath the hood of TSLA to get the true story of what is really going. There, with the help of Bloomberg's forensic accounting sleuth Jonathan Weil one uncovers nothing but cockroaches.
The Unspoken, Festering Secret At The Heart Of Shadow Banking: "Self-Securitization" ... With Central BanksSubmitted by Tyler Durden on 11/15/2013 16:45 -0500
The implication of this particular and quite unprecedented shadow banking circle jerk, which could very easily make even the direct wealth transfer resulting from trillions in QE pale by comparison, is so stunning that we leave it up to the reader to come to their own conclusion.
I have a business I would like to sell you. Let’s run over the numbers first. First and foremost, I have to be honest, this business has not implemented a budget in five years. I know that seems like an insane way to run a business, but I can assure you that management is comprised of highly intelligent, ethical people.
The kabuki theater that passes for governance in Washington D.C. reveals the profound level of ignorance shrouding this Empire of Debt in its prolonged death throes. Ignorance of facts; ignorance of math; ignorance of history; ignorance of reality; and ignorance of how ignorant we’ve become as a nation, have set us up for an epic fall. It’s almost as if we relish wallowing in our ignorance like a fat lazy sow in a mud hole. The lords of the manor are able to retain their power, control and huge ill-gotten riches because the government educated serfs are too ignorant to recognize the self-evident contradictions in the propaganda they are inundated with by state controlled media on a daily basis.
Judging by the plunge in IBM stock after hours (accounting for a major portion of the Dow Jones Non-industrial Average Index), the CFO can't pay shareholders with hopium and rumors. The reason: while IBM beat EPS modestly with a very adjusted bottom line of $3.99, beating estimates of $3.96, driven mostly by this: "IBM’s tax rate was 16.0 percent, down 8.6 points year over year" (assuming a flat tax rate Y/Y, GAAP EPS would plunge from $3.68 to $3.30), it was revenues - that ongoing 2013 horror story for the "stawk" and economic "recovery" - that was the problem, because instead of printing at $24.74 billion where it was expected, sales missed by a whopping $1 billion, or $23.72 billion. Of note: while America revenues of $10.3 billion dropped just 1%, and Europe was actually up 1%, it was the all important China and Japan, i.e. Asia-Pacific, where revenues cratered by an unprecedented 15%! So much for both Abenomics and the Chinese "recovery." And what's worse, the Emerging Market callamity of Q3 finally took a big bite: "Revenues in the BRIC countries — Brazil, Russia, India and China — were down 15 percent." Time to push the global recovery myth to the 4th half of 2013 (the third half is where the government shutdown will be squeezed).
TedBits - Newsletter
Two months ago we were the first to highlight the 'real' great rotation in US equity markets as so-called "professionals" were selling in size as "retail" was the big buyer. Since then, market breadth has been weaker and the new highs are made on the back of fewer and fewer supposed "cult" stocks (as Cramer so aptly put it before Lumber Liquidators started to crumble). Perhaps the most infamous of the "cult" stocks is TSLA. At twice the market cap of Fiat, needing to sell 537,815 cars to meet expectations, and the gap in GAAP, Tesla closed at all-time highs on Friday. So who is buying?
Fingers of Instability
Having risen phoenix-like off the lows in July, it seems Blackberry is echoing the Eastman Kodaks of the world. Releasing its earnings early, the results are dramatically worse than expected:
BLACKBERRY 2Q PRELIM. REV. $1.6B, EST. $3.03B
BLACKBERRY CUTTING 4,500 JOBS
BLACKBERRY TO CUT OPER EXPENDITURES BY ABOUT 50% BY END 1Q '15
The last bullet point is great news: think of all the cash that will go toward dividends and stock buybacks...
Not only does FNM seem to be unprofitable under the new FHFA guidance, but payments made to Treasury might need to be reversed.
Richard Ebeling on Fed insolvency (technically, it's a nolo due to non-GAAP accounting gimmicks). And, Dean Baker demonizes your favorite False Profits[/Prophets?]: Greenspan, Bernanke and...Summers.