Valuations Ahead, Not Behind 10 comments
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David Rosenberg writes in the Financial Times:
An unprecedented eight-point price/earnings multiple expansion during a six-month faith-based rally has left the market at its most expensive (26 times operating profit, 180 times reported profit) in seven years. On a reported basis, this market is nearly four times overvalued, as it was during the tech bubble!
The problem is Rosenberg is looking backward not forward. The S&P 500’s earnings for the fourth quarter of last year were dismal. In fact, they weren’t even earnings, it was a slight loss. Once that weight is off the trailing four quarters, things will look much better.
The latest estimates say that the S&P 500’s operating earnings will hit $54 for 2009, and nearly $73 for 2010. A multiple of 15 gives the market a fair value of roughly 1100. Discounted back to today means the market is fairly accurately priced.
Of course, the underlying assumptions may be wrong, but I don’t see any current disconnect between today’s outlook and prices.
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don't get massacred !
When we borrow, banks create new money! They do not lend existing money.
Here is how banks create money:
www.tradingstocks.net/...
New money makes the economy good. Whatever good days you have seen in your life was because people borrowed more and more exponentially! Read about the way government and the FED uses home sales as a way to create money and inject into economy:
www.tradingstocks.net/...
This is why the government is trying to propel the home prices up again! They don't want affordable housing! They want EXPENSIVE HOUSING. Home prices MUST go up and we MUST keep buying faster and more to sustain the fake recovery. That is not happening. We don't borrow and the banks do not lend, thus new money is NOT being created. Bank credit is deflating. The crash will be worse then Great Depression. Some are shorting the market:
www.tradingstocks.net/...
Deflation is a MAJOR threat now! All the money FED prints is not making a blip in inflation! There is still a bubble in housing and stocks. It is a bubble that was inflated for 50 years! make no mistake, it will deflate.
www.tradingstocks.net/...
You don't have to think hard about earnings and business in this environment. Money supply is shrinking. Bank credit dissapears the same way it was created. making money will be a challenge for any company! It is not possible to increase earnings to sustain a sensible PE ratio in this environment.
On Sep 24 01:47 PM User 143167 wrote:
> $74 on 2010 is too good to be true. The highest S&P500 earnings
> were around $90, with 35 from the financials and 55 from others.
> The financials will have only half of their best earnings in 2010,
> that is $18, so the non-financial earnings have to be $56 to make
> it $74, which means the non-financial operating earnings will make
> a historical new high in 2010! Day dreaming!
www.gpoaccess.gov/usbu...
I suspect these govrenment budgets may be overly optimistic, as seems prevalent at the moment.
However, even if these figures turn out to be correct, they suggest Corporate profits are likely to remain very subdued for some period ahead.
Given this and other indications, including -
1) The Debt to GDP ratio is heading north quickly, to 100% and beyond.
2) Consumers have taken a massive hit, via falling housing equity, lower share values & reduced access to credit.
3) The economy is deleveraging and will do so, for some time to come. Derivatives is the other Elephant in the living room!
4) Two of the three major growth drivers (Oil & Population), have Peaked and are heading south.
5) Unemployment and Taxes are both rising.
6) Bankruptcies are rising.
7) Consumer activity is down.
8) Massive increases in Health and Social Security Costs, are on the way, again expanding government deficits.
9) Problems arising from Climate Change and Food Production are also set to interfere with future plans.
10) Share Markets have already fallen 50% and have since increased some 50%, still leaving a massive reduction in total wealth.
I would consider that markets are currently trading at lofty P/E ratios and that the markets will shortly fall into line with more realistic earnings!
"Bullish analysts like to dismiss the actual earnings because they are “depressed” and include too many writeoffs, which of course will never occur again. Fine, on one-year forward (operating) earning estimates, the P/E ratio is now 15.7x, the highest it has been in nearly five years. At the peak of the S&P 500 in the last cycle — October 2007 — the forward P/E was 14.3x, and the highest it ever got in the last cycle was 15.4x. So hello? In just six short months, we have managed to take the multiple above the peak of the last cycle when the economic expansion was five years old, not five weeks old (and we may be a tad charitable on that assessment). As an aside, the forward multiple on the eve of the 1987 stock market collapse was 14x and one of the explanations for the steep correction was that equities were so overvalued and overbought that it was vulnerable to any shock (in that case, it came out of the U.S. dollar market). It certainly was not the economy because that sharp 30% slide took place even with an economy that was humming along at a 4.5% clip.
"In other words, valuation may not be the best timing device, but it still matters. If the S&P 500 was in a 700-750 range, de facto pricing in zero to 1% real GDP growth, we would certainly be interested in boosting our allocations towards equities. But at 1,060 and over 4.0% GDP growth effectively being discounted, we will be spectators as opposed to participants, understanding that the key to success is to NOT buy at the peaks."
On Sep 24 03:58 PM Mad Hedge Fund Trader wrote:
> wsc The one absolute, take it to the bank, bet the ranch fact you
> can count on right now is that there is no value in the stock market.
> We are at a lofty 20 X earnings, and historically, when the market
> sported such a rich valuation, a 7% drop ensued in the following
> year. But what is history, but the ravings of an angry, frustrated
> old trader? Maybe having seen the best bargains in a century only
> six months ago, I’m spoiled. I have always been a tightwad. I must
> be the only guy around who flies his own private plane to garage
> sales for the sheer love of the deal. I just reviewed all of the
> stocks and sectors I liked at the beginning of the year, and a more
> picked over field you never saw. (Click here for my New Year list
> ) The list of big winners is long: FCX, FXI, BYDFF, BIDU, X, gold,
> silver, copper, crude, oil services, junk bonds (seekingalpha.com/symbo...),
> (seekingalpha.com/symbo...), emerging markets (seekingalpha.com/symbo...),
> BRIC’s, Korea (seekingalpha.com/symbo...), with shorts in
> long dated Treasuries (seekingalpha.com/symbo...), volatility
> (seekingalpha.com/symbo...), and the dollar (seekingalpha.com/symbo...),
> (seekingalpha.com/symbo...). Even tax exempt munis have
> been on a tear. Many of my core positions are up over 400%. When
> everything in your portfolio has done so well, it’s time to go hide.
> The problem is that my more loyal, even fanatical followers have
> taken out paid subscriptions for up to two years, so I must keep
> dancing. Hence, the recent increase in book reviews, political pieces,
> or just outright frivolous stories. What you do here is deep research
> and list building, so when the window opens you can jump through
> with both feet, and without any reservations. I hate being out of
> the market. But I hate losing money even more.
The reason nobody likes forward earnings is because they subject to way to much "manipulation". Essentially you can estimate whatever you want and thereby justify whatever you want.
Why don't you try using more objective measures such as;
1) Price to dividend - dividends much harder to manipulate.
2) Price to sales - can't lie about sales as easily
3) Price to book - much harder to lie about book value.
4) Price to cash flow - can't lie about cash flow.
None of these more objective, less subject to manipulation measures, are supportive of current stock market prices.
Furthermore if you look at the most objective PE measure, namely PE10 ratios, which normalizes/averages earnings over time ... it shows that the current market is substantially overvalued when compared to any other recessionary time period in stock market history. And it is worthwhile to note that PE10 ratios have 100% accurately tracked the market over history. But then if you want to argue the age old arguement that "it is different this time", go ahead and you will be WRONG, it is never different and it never will be. Furthermore PE10 ratios have accurately show all market bottoms previously and according to all past PE10 ratios, the bottom has NOT YET been put in for this market. If you choose to bet against that, go ahead ... it's your money .... just don't be surprised if you lose a bunch by buying at these levels.
Very simply, it is a trader's market, and if you are an astute trader you probably can make some money in this market, provided you are able to GET OUT in time. But it is a virtual certainty that much much better buying opportunities at much lower stock prices for LT investors will become available in the relatively near future.
On Sep 24 02:37 PM Eddy Elfenbein wrote:
> Goldman recently raised their 2010 estimate to $75.
>
> www.bloomberg.com/apps...;sid=aAdEz1inj7zc