The Most Expensive US Market Of All Time 28 comments
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That’s the current P/E for the S&P 500 based on reported earnings (earnings that include write-downs). According to David Rosenberg of Gluskin Shef (and former Chief Economist of Merrill Lynch), no US market has ever been this expensive in history. The Tech Bubble, which by all accounts was an extraordinarily overpriced market traded around a P/E of 40 during its peak.
I realize not everyone likes to use reported earnings as a measure of value. After all, all those write-downs that are obliterating reported earnings are a one time event due to the worst credit collapse in 80+ years.
So let’s look at operating earnings (earnings without write-downs included). Today, the S&P 500 trades at a P/OE of 27.6. Put another way, assuming no earnings growth, if you bought the entire market at its current value today, it would take 30 years for you to break even on the deal.
Now, to be blunt, there are times when paying 30 times operating earnings for a business makes sense. If the business is a market leader worldwide, then the price is not too steep (this is roughly what Mars paid for Wrigley, Proctor & Gamble paid for Gilette, etc). If you’re buying a brand that dominates your industry, paying 30 times operating earnings isn’t bad.
But paying 30 times operating earnings for the entire S&P 500... including businesses that are insolvent or bankrupt : AIG, Citigroup, Bank of America, etc? Sorry but I cannot imagine anyone in their right mind would be willing to pay that price.
And they’re not:
Last Friday, the market closed at its highest level for the year of 2009… on the lowest volume of the year. It’s been a hallmark of this rally that the higher it goes, the lower the volume. And when you consider that 70% of the market volume is High Frequency Trading Progams exchanging blocks of shares back and forth to collect a ¼ penny rebate, it’s clear that virtually NO ONE is buying the market at today’s levels.
After all, why would they?
David Rosenberg points out that typically when the US economy shifts from contraction to expansion (as some claim it is now) the stock market is usually price at a P/OE of 15 (roughly half its current levels). He also notes that there reason the P/OE is as high as 15 at these times is because earnings are extremely low due to economic hardships destorying profitability.
Indeed, with the exception of 2001, stocks have never been so rich after any recession in the last 55 years. Put another way, today’s S&P 500 is more expensive that at any point in the last half century when compared to the underlying economic conditions.
Bottom line: anyone going long right now is buying a very, very overpriced market. True, stocks could rally higher, but the market is already trading at what would easily qualify as bubble levels. This is not surprising given the fact we have a bubble-crazed Fed Chairman hellbent on inflating stocks to the moon and destroying our currency so as not to repeat stock market performance of the Great Depression. He already helped manufacture two Bubbles in the last 10 years. Both of those ended horrifically.
Perhaps he thinks third time’s the charm?
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The real question is "where is the market ultimately going"? S&P P/E and P/OE mean nothing when bubble money keeps filling the balloon.
>But any good card player knows that when you bet when the odds are against you, even if you win, you have still lost something.<
Absolute right! Even though the card player got real lucky, he's lost either his self discipline or his mind to have stayed in the hand to begin with. Right on the money PDT!
> Do you really think that the Markets are all about P/E and valuations?
> - This is a different game, and this and other technicians are totally
> puzzlled and confused by where the market is. The only thing that
> counts is how successful their recommendations are for Investors.
> The author of this article has a horrible returns on his recent recommendations,
> and that's the only thing that matters. The articles seem as detached
> from the reality of the market as can be. There is nothing current,
> nor on the near horizon to change the good/recovery-mode feel of
> the market.
----------
I see this is your 6th comment and every single one of them is attacking Mr. Summers. Did you lose some money on one of his recommendations, or are you a competitor of his, or...?
Valuating an equity's value purely on current P/E ratio is rather too simplic. What about book value?: What about future profit potential? How about physical gold and silver metal? They just sit there and produce nothing, so does that make they worthless based on P/E?
If you insist on P/E, then the current equity market is rather too cheap in terms of the dollar. Because the dollar can be considered as an equity stock to a big corporation called the US Government. The dollar has a very very expensive P/E.
The dollar is a fiat currency. It is like the stock of the US government. There are roughly one trillion dollar in the monetary base. So that's roughly one trillion shares outstanding. Each share is priced at $1. The US government has an outstanding debt of about $12 trillion. So that's a book value of NEGATIVE $12 per share. The book value/share price is -12. Or in another word, debt/share = -12. Annual budget deficit is $1.5 trillion. So that's a negative earnings of -$1.50 per share. The P/E therefore is -0.666. That's far more expensive than any stock you can find.
Where do you put your money when the dollar collapses?
I'm not saying the market is overvalued or undervalued, I'm just saying there's no point using this particular indicator at this particular juncture.
The market in general is on a path very similar to the recovery during the post-internet crash. When you look at the big picture the really interesting thing isn't even the internet crash, but the run-up from 1995 to 2000. The fact that this most recent bubble popping (or the internet bubble popping for that matter) hasn't taken the market down to 1995 levels is saying something about it that nobody really understands yet.
Honestly, I'd be happy if the market settled down at around current levels for the next few years.
-Matt
1982: 808 DJIA
So the best picture we can look for is a decade and a half of ZERO RETURNS and a HUGE DEPT for our grandchildren to pay off for us AND a huge rally in gold AND a Volcker type at the end of the gigantic fraud to do in three years what we should have been doing for 18.
Still, the debt DOES NOT just go away.
On Oct 13 01:28 AM ryanclarke wrote:
> The Fed really is stupid enough to think they can pull off another
> '65 to '82 stock market ... just inflate their way out of it ...
> and screw the little old lady who puts her money in a savings account
> at 1% because she doesn't know where else to put it. She's not going
> to drive anywhere anyway is what the Fed thinks ... but if Bernake
> thinks he can drive around D.C. in a Caddylac while everyone else
> goes to Wal-Mart and buys the last Chinese made bike for $99 ...
> woops, I mean $199 ... and has to give up everything just to fill
> the gas tank with $300 of Saudi made black gold ... Bernake is going
> to starve ... because the farmer's aren't going to go down to the
> bank to get a loan to buy potash for $20,000 a handful. It's Zimbawbe
> or Depression ... one way of the other ... and Bernake knows it.
This is a wonderful lesson to be teaching our children. Let's cheat; maybe we'll avoid what we deserve.
...there...I've said it...
...I take it back...forget you saw this...
...whadda I know???
can it really carry on until Christmas?
...this ain't advice...no way!!!
...does a bear have horns?
not long enough at the bottom...
too long at the top...
I have got to get a job...
-----
What does this mean? You could have made approximately the same statement a week ago, and you would have been totally wrong (the market is up about 4% since then). Where's the math? How do you equate a P/E ratio to how long it takes to break even on the deal? What does "break even on the deal" even mean if it doesn't mean what I would be able to sell "the market" for compared to what I paid for it?
enjoy the trend for that too will end... but not yet...not yet!
IF is a big word.
IF the s&p gets over 1082 if it passes 1100 if it passes 1175
but it certainly Mr Mkt wont get beyond 1250 w/out fundies after the Xmas rally;happens 90% of the time..
NO-don't fight the Fed or the trend!
Why complain? We can't do anything about it. Who's going to listen to a bunch of small, individual investors?
And as investors we must play the hand we are dealt—and that is a dollar infested economy.
For me PEs tell me how popular stocks are—other metrics tell me of value.
But let's say this is a very expensive market. The next question is, after dumping every stock we own, what the hell do you do with the money? Let it sit there while the money-changing termites eat it worthless?
I began buying late last winter until I owned about 20 stocks, and have trimmed down for one reason or the other to 13, mostly foreign stocks.
I would as soon stay in them as run for the bushes.
Besides, I don't see the danger until the money-changers begin sopping up their spillings. When they begin collecting the scraps, that will be the time to begin looking for a hiding place.
> Thanks, Graham. It is clear that this market is a big fraud, being
> funded by crippling the US Dollar. Yes, let's inflate and SCREW
> anyone living on a fixed income. Old people, hell, they don't matter.
> It's better than having to pay our debts.
>
> This is a wonderful lesson to be teaching our children. Let's cheat;
> maybe we'll avoid what we deserve.<
Isn't it a sad state of affairs when what you say is absolutely correct? The attitude of the banking elite (and I use that word "elite" with utter contempt) is exactly as you describe... criminal beyond anything ever seen on this planet at any time in past history. Will they eventually pay for their sins? You have no idea how badly I want to see them held accountable. I've even found religion one more time, just for this purpose.
I am watching fixed income market closely as if the Treasurys plunge we will have the exact same situation like 1987 crash: falling dollar and rising yields.
It does not make sense for this market at this level, but market can be irrational as long as it wants. What triggers the reversal is unknown, I am just hoping it is not the dollar.