Pay No Attention to the 140 P/E Behind the Curtain

Yes folks, it’s time to dust off those party hats… It’s Dow 10,000 time! Pay no attention to anything else folks. Especially not the S&P 500 P/E ratio…

As of Oct 7, The S&P P/E Ratio is 140.82. Yep, 140!!! This isn’t my data; this is directly from the New York Fed. Here’s the link (pdf).

So, remember that little thing called dot.com? Remember all that irrational exuberance that was “the bubble”, where the P/E basic fundamentals went from the 15 range, and shot all the way up to 47…

Well now, we're at 140! The funny thing is, it doesn’t even fit on the Fed’s chart. (Look for yourself) The line goes to the top, and then there is text telling you that the P/E is at 140. It is absolutely comical.

There are no fundamentals, just fake money floating around, created from thin air, looking for a place to land. (note to the Fed, when you create money, it needs to be dispersed! It doesn’t just need to be spun around the fractional reserve system of the debt, creating greed whores who will cash out bonuses of false profits from stimulus floatation …or, you get what we have today, fundamentals that fall completely out of whack.)

Pricing the S&P at 140 falls into what I call unattainable true price discovery. I discuss this at length in my “Evaporflation Theory” as true price discovery (even for stocks) will soon become unattainable. You can’t mess with the economic forces of nature. Much like Mother Nature, you don’t know how this force will punch back! An S&P P/E of 140 will likely lead to missed expectations on earnings. (Hmmmm does that sound good for all the massive pension funds that are looking to capitalize on this fake bull run, in order to recoup losses from there soon to come shortfalls?)

The bulls will argue against me, saying: look at the financials… their numbers aren’t bad, they’re recovering!

Let’s face it folks, when your financial institutions refinance all their debt at anywhere from 0.5% to 0.015% via the government/taxpayer loans/bailouts, and then re-loan that money out to taxpayers at 5% or don’t refinance existing taxpayers loans from their 6-10%, it becomes a built in profit that borders on criminal. Until the public realizes that this simple concept: I owe the bank money. I’m now going to take money from other parts of my paycheck, and give it to the government, so the government can loan it to the bank I owe at a really cheap rate… Just so that the bank I owe, can make a larger profit margin on the money I still owe them. …and after they make a larger profit, they can give themselves a bonus above and beyond the addition profits they made by cutting costs through layoffs.

P.S. I’ve lost so much interest in economics and finance in the last year. When the financial world started to resemble something as comical as the “professional wrestling” it gets hard to take yourself serious as an analyst of that venue. For me, (or the pros like Nouriel, Krugman, Schiff) or anyone else to sit here and make realistic prognostications on what will or should happen is as ridiculous as talking about whether Hulk Hogan was really better then Andre the Giant. It’s all fake people. Whether we are fundamentally right, momentum can irrationally go another way. Even if we are wrong, governments can intervene, “manipulate/correct” or “save” the economy for whatever reason.

Comments

[j-dub:]

We might see the beginning of the end for this bull run because:
Goldman's surprise beat was less than expected, however.
If this statement makes sense to you, then..................... so does a 140 PE and this pullback should be viewed as a buying opportunity.


THE MOST CONVOLUTED MARKET IN HISTORY?

Oct 15 10:07 AM

[Shishkarob:]

The 140 P/E is because of large one-time losses at companies like AIG and C. The forward PE is much more reasonable at 16x (assuming consensus is right, which is a debate itself). Another way to look at it is the median trailing PE of the S&P 500 - which is 20x

Oct 15 10:40 AM

[thiazole:]

"As of Oct 7, The S&P P/E Ratio is 140.82. Yep, 140!!! This isn’t my data; this is directly from the New York Fed."

And what is your prediction for the P/E ratio in 4 months? I'd like the author to go on record as either admitting that the current P/E is a red herring, or that he really doesn't understand the data behind that number (as most SA posters also don't understand).

Oct 15 10:42 AM

[fwi:]

Spot on! I loved the wrestling comparison. The only link that makes sense of the fact that the Fed govt is letting banks get away with this fraudulent accounting is that fact that Wall Street has spent more on lobbyists and pay to play in the first six months of this year as the entire 2005 (first year of George Bush).Legitimized prostitution.

I did the due diligence, realized that banks were basically bankrupt, but underestimated the power of "extend and pretend". Painful.

Oct 15 10:42 AM

[thiazole:]

Well, pay attention as companies beat earnings estimates over the next few weeks. The bears will say that this is happening because earnings estimates were too LOW. Once earnings are done, then they will go back to saying forward earnings estimates are too high so they can argue that forward P/E is artificially low. When you really listen to what the bears have to say, you realize that many are knowingly being dishonest in an attempt to mislead people.


On Oct 15 10:40 AM Shishkarob wrote:

> The 140 P/E is because of large one-time losses at companies like
> AIG and C. The forward PE is much more reasonable at 16x (assuming
> consensus is right, which is a debate itself). Another way to look
> at it is the median trailing PE of the S&P 500 - which is 20x

Oct 15 10:50 AM

[thiazole:]

I guess considering that FAS 157 didn't go into effect until Nov 2007 that all accounting was "fraudulent" prior to that. Did you refuse to invest prior to that?


On Oct 15 10:42 AM fwi wrote:

> Spot on! I loved the wrestling comparison. The only link that makes
> sense of the fact that the Fed govt is letting banks get away with
> this fraudulent accounting is that fact that Wall Street has spent
> more on lobbyists and pay to play in the first six months of this
> year as the entire 2005 (first year of George Bush).Legitimized prostitution.
>
>
> I did the due diligence, realized that banks were basically bankrupt,
> but underestimated the power of "extend and pretend". Painful.

Oct 15 10:57 AM

[Rich Hartmann:]

Most market people that I talk with have a hard time fathoming how the S&P P/E Ratio could possibly be at 140, if not for the anomaly of the recent markets. I argue the P/E would be even worse if not for the anomaly of government interference! Your Red Herring is the earnings reports that show earnings! ...like I said:

Making predictions on our current market is pointless. The fundamentals no longer apply. Defend the ponzi market all you like. At some point natural laws will take over, where a fractional reserve system was not meant to carry so much leverage. With risk ramped up to where it is, those earnings you are depending on will prove to be as shallow as a "recovery-less recovery".

That's deflation for you. (Yes deflation! Don't confuse the crashing dollar which in turn makes dollar priced assets increase in value.)

If you want predictions anyway, read my stuff over at the RGE from the past couple of years. (where 2 years ago I called DOW bleeding to 10,500 followed a 2,000 point crash to 8,500... or my oil call of peak 145 followed by a drop to 70 and subsequent fall to 30. ....oh yeah That oil call was from.... April 08.)

Enjoy the reading,
RH (or as I'm known at the RGE "Miss America")


On Oct 15 10:42 AM thiazole wrote:

> "As of Oct 7, The S&P P/E Ratio is 140.82. Yep, 140!!! This isn’t
> my data; this is directly from the New York Fed."
>
> And what is your prediction for the P/E ratio in 4 months? I'd like
> the author to go on record as either admitting that the current P/E
> is a red herring, or that he really doesn't understand the data behind
> that number (as most SA posters also don't understand).

Oct 15 11:08 AM

[Rich Hartmann:]

The ONLY way earning are coming out positive are through cutbacks and reduced spending. I'm here in the thick of it. I see it, I hear it. There are virtually NO PRODUCTIVE EARNINGS that are taking place right now.

When YOU realize that the bulk of these cutback earnings leads to another round of losses throgh macroeconomic losses based on a shopped out consumerless economy being over in debt and now laid off, you see that there are no earnings.... just stimulus.

Rich H


On Oct 15 10:50 AM thiazole wrote:

> Well, pay attention as companies beat earnings estimates over the
> next few weeks. The bears will say that this is happening because
> earnings estimates were too LOW. Once earnings are done, then they
> will go back to saying forward earnings estimates are too high so
> they can argue that forward P/E is artificially low. When you really
> listen to what the bears have to say, you realize that many are knowingly
> being dishonest in an attempt to mislead people.

Oct 15 11:13 AM

[fwi:]

To thiazole--FYI was long banks until June 2008. Did not hold any financials until March 2009 when I went short unfortunately. And I stand by my statement that for the most part bank accounting is now fraudulent--legal, but still fraudulent.

Oct 15 11:39 AM

[cyclingscholar:]

Sounds like whining and complaining from guys who have missed a 55% rally. Mark to market is, was and always will be a joke; and hopefully a stake has been driven through its heart so that it will never rise again. It increased the volatility of earnings, therefore the multiple attached thereto (aka a market crash, for you innumeratii and illiterati from publik skools); and now that it has been repealed, overall PE's can rise to more traditional levels.

Oct 15 12:17 PM

[joof:]

The trailng 4q PE leading to 140 is a red herring. The financial sector writedowns in 2008 unwound or reserved the excess profits in the financial sector from 2003-07 related to the mortgage boom/bubble. Using that number excessivley amplifies the effects of one period catch up for years of over reported profits ( or underreserved losses)

More relevant - trailng 10 year PE or forward to normaized earnings PE - assuming anyone has clue about the latter

Oct 15 01:25 PM

[Michael2343:]

A P/E of 140 compared to P/E of, lets say, 10, where stocks would be worth purchasing for both growth and holding value, can not simply be written off as a "red herring". That is a 1400% markup on prices.

Many more "one time losses" are likely to come. The only difference is, they are not expected. The market discounting mechanism will show us ahead of time that these losses are coming.

Oct 15 02:08 PM

[thiazole:]

It can be written off as a red herring, because we aren't talking about individual companies. We are talking about an index. Most of the individual companies in the S&P ALREADY have pretty low P/E ratios. The index ratio was caused by a handful of companies (some that aren't even in the index anymore) that lost a ton of money over a short period of time.


On Oct 15 02:08 PM Michael2343 wrote:

> A P/E of 140 compared to P/E of, lets say, 10, where stocks would
> be worth purchasing for both growth and holding value, can not simply
> be written off as a "red herring". That is a 1400% markup on prices.
>
>
> Many more "one time losses" are likely to come. The only difference
> is, they are not expected. The market discounting mechanism will
> show us ahead of time that these losses are coming.

Oct 15 03:23 PM

[thiazole:]

To elaborate on what I just typed, imagine an index with 2 companies in it - one that lost $9 billion over the previous year and one that earned $10 billion over the previous year, so the total index earnings would be $1 billion over the previous year. Based on an index P/E ratio of 10, we'd expect the combined market caps of the two companies to be $10 billion. BUT, that means that at most, the SINGLE company that earned $10 billion would have to have a P/E ratio of 1!!! Does that make any sense? Of course not. Index P/E ratios are for suckers during a recession like this. That is why the very people who have been chanting that the S&P P/E ratio has been too high all year have been on the wrong side of the market.


On Oct 15 02:08 PM Michael2343 wrote:

> A P/E of 140 compared to P/E of, lets say, 10, where stocks would
> be worth purchasing for both growth and holding value, can not simply
> be written off as a "red herring". That is a 1400% markup on prices.
>
>
> Many more "one time losses" are likely to come. The only difference
> is, they are not expected. The market discounting mechanism will
> show us ahead of time that these losses are coming.

Oct 15 03:30 PM

[thiazole:]

Your predictions are quite reasonable (and not too far off from my longer term predictions - I say the Dow hits 11,000, the S&P hits 1300, followed by a multi-year, gradual decay combined with bad inflation creating what in real $ terms would be a very nasty decline). But if I believed that the numbers we are getting for P/E ratios were really understating how bad things are, then I'd be much more bearish. I really don't understand why you think the "true" P/E ratios are 200+, but yet the market will go up as well (or why, if you think the markets will go up, you'd write articles trying to convince people to sell).


On Oct 15 11:08 AM Rich Hartmann wrote:

> Most market people that I talk with have a hard time fathoming how
> the S&P P/E Ratio could possibly be at 140, if not for the anomaly
> of the recent markets. I argue the P/E would be even worse if not
> for the anomaly of government interference! Your Red Herring is the
> earnings reports that show earnings! ...like I said:
>
> Making predictions on our current market is pointless. The fundamentals
> no longer apply. Defend the ponzi market all you like. At some point
> natural laws will take over, where a fractional reserve system was
> not meant to carry so much leverage. With risk ramped up to where
> it is, those earnings you are depending on will prove to be as shallow
> as a "recovery-less recovery".
>
> That's deflation for you. (Yes deflation! Don't confuse the crashing
> dollar which in turn makes dollar priced assets increase in value.)
>
>
> If you want predictions anyway, read my stuff over at the RGE from
> the past couple of years. (where 2 years ago I called DOW bleeding
> to 10,500 followed a 2,000 point crash to 8,500... or my oil call
> of peak 145 followed by a drop to 70 and subsequent fall to 30. ....oh
> yeah That oil call was from.... April 08.)
>
> Enjoy the reading,
> RH (or as I'm known at the RGE "Miss America")

Oct 15 04:42 PM

[swisswiss:]

But realize the beauty of it--"evaporflation" defies rationality, which means there is no reason the Dow can't float to 11,000 or 12,000 or higher. All you need is fake money to play, and viola, it rises ... like hydrogen.

Oct 15 05:08 PM

[Rich Hartmann:]

If forced to make a prediction... I would say we will see single digit as reprted earnings for the next 7-10 quarters. At a current S&P level, that will translate to forward P/E's that will range from 30-45 (most qtrs above 40), and with a 20% market drop, P/E's that range from 25-38 (most qtrs at 35ish)

Forward earnings of 11-15 over the next 2 years, coupled with an S&P drop between 700-900 are the only realistic way to get your P/E ratio into the 15-20 zone.

If 25-30 is the new acceptable range for you, then S&P 1,000 with earnings hovering between 9-10 over the next few years is needed.

Any way I see it, those seem like sincerely optimistic longshots.

I'd prefer a dose of reality.

RH

I just don't


On Oct 15 10:42 AM thiazole wrote:

> "As of Oct 7, The S&P P/E Ratio is 140.82. Yep, 140!!! This isn’t
> my data; this is directly from the New York Fed."
>
> And what is your prediction for the P/E ratio in 4 months? I'd like
> the author to go on record as either admitting that the current P/E
> is a red herring, or that he really doesn't understand the data behind
> that number (as most SA posters also don't understand).

Oct 16 04:57 PM

[TheTruthinator:]

In a vacuum, a 147 P/E Ratio would be unfathomable. As noted, it is a short-term aberration. This is sensationalism posing as journalism.

Oct 17 04:01 PM

[Rich Hartmann:]

@truthinator... I supose you don't think earings could have another collctively negative number in the next 7-10 quarters??? Does your methodoligy of prognostrication only allow for positive earnings?

As a person who well predicted/timed our credit crisis and market drop, I think that 140 P/E averaged in (because of the -23 Q4-08) show people's failure to account for "abberations".

The sad thing is... in todays volitle market, the bulls and naysayers are still failing to see the inherent risk that is just below our recessionary surface. (which should be "depressionary" if not for devine Fed intervention).

Believe your earnings and count your chickens.
...or factor in some reality.


On Oct 17 04:01 PM TheTruthinator wrote:

> In a vacuum, a 147 P/E Ratio would be unfathomable. As noted, it
> is a short-term aberration. This is sensationalism posing as journalism.

Oct 19 11:15 AM

[thiazole:]

Looks like you are wrong on this. Earnings are not only coming out positive (something like 85% beating estimates), but revenues are starting to climb again. Also keep in mind that the earnings that are getting beat are the "upgraded earnings" that pundits complained about that lowered foward P/E ratios. Earnings season is still early, but the trend definitely isn't favoring your bias.


On Oct 15 11:13 AM Rich Hartmann wrote:

> The ONLY way earning are coming out positive are through cutbacks
> and reduced spending. I'm here in the thick of it. I see it, I hear
> it. There are virtually NO PRODUCTIVE EARNINGS that are taking place
> right now.
>
> When YOU realize that the bulk of these cutback earnings leads to
> another round of losses throgh macroeconomic losses based on a shopped
> out consumerless economy being over in debt and now laid off, you
> see that there are no earnings.... just stimulus.
>
> Rich H

Oct 19 05:27 PM