Tag Archives: stocks

Stock Market Warning Siren is Blaring, by Wolf Richter

Stop us if you’ve heard this one: the stock market is massively overvalued. Well, it is overvalued, and Wolf Richter got the stats and charts to prove it. From Richter at wolfstreet.com:

Are we blinded yet by the brilliance of corporate earnings?

“Adjusted” earnings growth is 10.2% year-over-year in the second quarter, according to FactSet, based on the 91% of the companies in the S&P 500 that have reported results. The energy sector was a key driver, with 332% “adjusted” earnings growth from the oil-bust levels of a year ago.

The sectors with double-digit earnings growth: information technology (14.7%), utilities (10.8%), and financials (10.3%). The rest were single digit. Earnings in the consumer discretionary sector declined.

Revenues grew 5.1%, also led by the energy sector. At the beginning of Q2 last year, the WTI grade of crude oil traded at $35 a barrel. In Q2 this year, WTI ranged from $42 to $53 a barrel.

So the Wall-Street hype machine is cranking at maximum RPM to propagate the great news that earnings are soaring, and that this is the reason why stocks should also be soaring, and forget everything else. The hype machine carefully avoids showing the bigger picture which is dismal for earnings and ludicrous for stock valuations.

Aggregate earnings per share (EPS) for the S&P 500 companies on a trailing 12-months basis rose for the second quarter in a row. That’s the foundation of the Wall Street hype. But here’s the thing with these EPS: they’re now back where they had been in… May 2014.

Yep. More than three years of earnings stagnation. No growth whatsoever, even for “adjusted” earnings. In fact, on a trailing 12-month basis, aggregate EPS of the S&P 500 companies are down about 5% from their peak in Q4 2014. And yet, over the same three-plus years of total earnings stagnation, the S&P 500 index has soared 34%.

This chart shows those “adjusted” earnings per share for the S&P 500 companies (black line) and the S&P 500 index (blue line). Chart via FactSet (click to enlarge). I marked August 2012 as the point five years ago, and May 2014:

And these are not earnings under the Generally Accepted Accounting Principles (GAAP). FactSet uses “adjusted” earnings for its analyses. These are the earnings with the bad stuff “adjusted” out of them by management to manipulate earnings into the most favorable light. Not all companies report “adjusted” earnings. Some only report GAAP earnings and live with the consequences. But others put adjusted earnings into the foreground, and that’s what Wall Street dishes up.

To continue reading: Stock Market Warning Siren is Blaring

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If This is 1929… by Michael Batnick

The market is richly valued, only in 2000 and 1929 has it been more expensive, and we know how those years turned out. From Michael Batnick at theirrelevantinvestor.com:

Eight days before the market bottomed in July 1932, Ben Graham wrote an article in Forbes, Should Rich But Losing Corporations Be Liquidated? In it he wrote, “More than one industrial company in three selling for less than its net current assets, with a large number quoted at less than their unencumbered cash.” At a time when the CAPE ratio was just above 5, many businesses were worth more dead than alive.

In the ten-years leading up to the crash in 1929, the CAPE ratio went from a low of 5.02 up to 32.56. Today, it’s as close to the 1929 peak as it’s ever been, with the exception of the late 1990s. “The CAPE ratio in the United States has never gotten above 30 without a subsequent market crash” would be a true statement. Perhaps misleading, with a sample size of two, but true nonetheless. So is it possible that today is 1929 redux?

What would have to happen for companies to be selling for less than their net current assets? I don’t have the slightest idea. An asset bubble built on the back of artificially low rates seems like the obvious answer, so that can’t be right, but if it is, I warned ya. But honestly, for the market to fall 90%, I’m thinking aliens, an asteroid, or another world war seem the most likely culprits.

hoover-2

The aftermath of the depression was a gold mine for value investors. Well, really for any investors, but for those that measured intrinsic value, it was nearly impossible to miss. From The White Sharks of Wall Street:

Here was a company being offered for sale for less than the cash in its pocket! All a fellow had to do was borrow the purchase price, buy the company, and use the company’s own cash to pay off the loan- it was like getting the company for free. Why wasn’t everyone lining up to bid against him? The answer lies partly in the psychological baggage that American industry carried out of the Depression. Despite the almost unprecedented prosperity brought by government wartime contracts, many American business leaders believed that the nation would slide promptly back into a depression the moment the war was over. A gamble on the scale that Evans was prepared to take was simply unthinkable for most of them. The engine for the deal, after all, was debt. And going into debt to finance a speculative venture- well, wasn’t that what the 1920s had been about? And didn’t it end very badly?

To continue reading: If This is 1929…

Betting Against History, by Kevin Muir

Here’s a well-reasoned argument against one of every stock market bear’s favorite investments: cash. From Kevin Muir at themacrotourist.com:

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It’s another of those days. The S&P 500 closed the week at an all time high, and although you would think everyone would be feeling good about it, the rally has brought about more angst than pleasure.

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Turning on your twitter feed this morning, you face a deluge of scary charts about debt burdens and historical P/E comparisons that remind you of all the risks in the markets. Your timeline is filled with sarcastic comments about how “this will end well” and witty remarks about clueless CNBC guests. You take refuge in the fact that you are part of the elite crew who “gets it.” After all, this group has some pretty illustrious company. Mark Yusko from Morgan Creek Management was recently quoted as saying, “I’m telling you right now, the U.S. is going to have a massive crash.” Carl Icahn has even produced a video titled “Danger Ahead” where he lays out the bear case, and why you should put on all the same trades that worked in 2008 because, not only is another great financial crisis coming, but this time it will be even worse. There seems to be a direct correlation with how “smart” you are, and your level of bearishness.

Now maybe these gurus will prove correct. Maybe we are about to crash and this article will age poorly. I am willing to accept that possibility. After all, I get stuff wrong all the time.

But I want to take a moment to point out that so does everyone, including all these “smart” hedge fund managers. I love listening to Kyle Bass. His arguments are well thought out, original and entertaining. Yet I bet many of you have forgotten about his 2011 trade where he bought 20 million nickels because the melt value was 6.8 cents.

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Yes, Kyle knew melting coins is illegal, but when you could buy an asset at a 36% discount, with a hard put at your cost (after all, a nickel will always be worth a nickel), it was effectively a free option. Not only that, but I think at that time Kyle was a big hard asset bull, so it offered a unique risk reward.

To continue reading: Betting Against History

 

U.S. Stocks Are Disastrously Overvalued, by Bill Bonner

If there are any value investors left, US stocks do not currently represent good value. From Bill Bonner at bonnerandpartners.com:

SALTA, ARGENTINA – Today, we write about corporate earnings.

Unless you’re playing the game of “greater fool” – buying in the hope that someone out there is willing to pay a higher price – the only reason to buy a stock is for its earnings.

As a shareholder, you participate in the business’s profits. All else being equal, as earnings rise, so do stock prices.

Weighing Machine

Investors have their moments of darkness and their periods of euphoria.

Over the short term, this changes the “multiple” investors are willing to pay for each dollar of earnings.

When investors expect higher future earnings, price-to-earnings (P/E) ratios rise. When they expect lower earnings ahead, P/E ratios fall.

But when all is said and done, hope and despair give way to the reality of earnings. You pay for a stock. You expect to get some money back.

Over the long run, stock markets rise and fall, more or less… sort of… on earnings.

Billionaire investor Warren Buffett famously described the stock market as a “voting machine” over the short run… and a “weighing machine” over the long run.

Earnings are what investors are putting on the scales.

According to figures from Yale economist Robert Shiller, over the history of the S&P 500, investors have paid an average of $15.65 for each dollar of underlying earnings.

With the S&P 500 trading at 25.4 times earnings, investors today are willing to pay 60% more than the historical average for each buck of earnings.

Fed Model

Is that “too high”?

The so-called Fed model – which compares how much investors are willing to pay for stock market earnings to how much they’re willing to pay for income on long-term government bonds – tells investors not to worry about it.

Because interest rates are so low, it makes sense that stocks should be high. If you have to pay $40 for every dollar of earnings from a government bond, you shouldn’t mind paying $25 for a dollar of corporate earnings.

That’s the theory.

But government bond yields are low because the Fed pushed them down by diktat. This pushed up the amount investors were willing to pay for stocks without any need for increased earnings.

Ultimately, prices are the only reliable measure of what a stock is worth. But they are subject to change without notice.

To continue reading: U.S. Stocks Are Disastrously Overvalued

The Last Time This Happened Was in 2008, by Bill Bonner

One of the best contemporaneous economic indicators, one that can’t be fudged or faked, is tax collections. Right now, they’re falling. From Bill Bonner at bonnerandpartners.com:

The Dow fell about 100 points yesterday.

It’s not hard to see why…

Factory output dropped the most since last August, led by declining auto sales.

Meanwhile, housing starts are at a four-month low. Bank loans are slipping. Commercial property is “rolling over.” Consumers have tapped out. And the Fed’s GDP growth estimates are getting lower and lower.

But the biggest deal is that tax receipts are down, year over year, for the fourth month in a row. Taxes are real money. They’re not fake news like unemployment and inflation statistics.

When people earn less, they pass less in taxes. A decline in tax receipts means that something real is happening in the economy.

The last time tax receipts fell like this was in 2008. You know what happened next.

False Impression

Meanwhile, evidence mounts that – outside of dividends – investing in stocks is rarely profitable.

According to a paper by Hendrik Bessembinder at Arizona State University, even without accounting for fees and expenses, roughly 70% of stocks deliver lower returns than the Treasury bill (considered to be one of the safest assets).

It’s part of the reason why, according to research firm Dalbar, only roughly one-quarter of active fund managers beat their indexes.

Winning stocks are rare.

We have long suspected that fund managers avoid slipping behind the indexes – which they use as benchmarks for their performance – in the simplest possible way: They buy the index!

This – and the fact that the big stocks in the index are the ones covered by the fake-news media (that is… by the popular press) – tends to boost the few popular stocks over the many unknown ones.

This also gives investors a false impression. With the index rising, say, 10% a year, they say: “If I buy ‘stocks,’ they should give me a 10% return.”

But a 2015 paper – “Why Indexing Works” by J.B. Heaton, Nicholas Polson, and Jan Hendrik Witte – revealed that the typical investor does not begin at zero with a 50-50 chance of beating the indexes.

To continue reading: The Last Time This Happened Was in 2008

S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since, by Wolf Richter

If anyone doubted the assertion in SLL’s review of Robert Prechter’s book that earnings have no consistent relationship to stock prices, here’s further proof. From Wolf Richter at wolfstreet.com:

Grounded in some sort of new reality? LOL

The S&P 500 stock index edged up to an all-time high of 2,351 on Friday. Total market capitalization of the companies in the index exceeds $20 trillion. That’s 106% of US GDP, for just 500 companies! At the end of 2011, the S&P 500 index was at 1,257. Over the five-plus years since then, it has ballooned by 87%!

These are superlative numbers, and you’d expect superlative earnings performance from these companies. Turns out, reality is not that cooperative. Instead, net income of the S&P 500 companies is now back where it first had been at the end of 2011.

Hype, financial engineering, and central banks hell-bent on inflating asset prices make a powerful fuel for stock prices.

And there has been plenty of all of it, including financial engineering. Share buybacks, often funded with borrowed money, have soared in recent years. But even that is now on the decline.

Share buybacks by the S&P 500 companies plunged 28% year-over-year to $115.6 billion in the three-month period from August through October, according to the Buyback Quarterly that FactSet just released. It was the second three-month period in a row of sharp year-over-year declines. And it was the smallest buyback total since Q1 2013.

Apple with $7.2 billion in buybacks in the quarter, GE with $4.3 billion, and Microsoft with $3.6 billion topped the list again. Still, despite the plunge in buybacks, 119 companies spent more on buybacks than they’d earned in the quarter. On a trailing 12-month basis, 66% of net income was blown on buybacks.

To continue reading: S&P 500 Earnings Stuck at 2011 Levels, Stocks up 87% Since

 

6 Charts That Make The Case We Are In Long-Term Secular Bear, by John Mauldin

John Mauldin is not prone to exaggeration or hyperbole. From Mauldin via zerohedge.com:

As I look out over the coming years, I am convinced that we’ll see the blowing up of the biggest bubbles in history – including those of government debt and government promises. And it’s not just in the US, but all over the world.

That will lead to an eventual global crisis of biblical proportions. Although, it isn’t clear what the immediate cause of the crisis will be.

Let’s start with some basics

The most common way to measure valuation is with the price-to-earnings ratio (P/E). Analysts compile P/E and other indicators from many companies to give us valuation metrics on entire markets and indexes.

You can see overvaluation and undervaluation in this chart from my friend Ed Easterling of Crestmont Research.

The red line is the combined P/E ratio of the S&P 500 as originally reported. The green and blue lines are adjusted Crestmont and Shiller versions, which occasionally diverge. The P/E ratio spent most of the last century between 10 and 25.

Presently, all three P/E versions are near or above 25, indicating overvaluation. This doesn’t mean the end is near—though it could be. But it does suggest that we are not at the beginning of another long-term bull market.

P/E adjusted to economic growth

The next chart illustrates the past and present trend in a different way.

Direct your attention to the dashed line.

It’s Ed’s long-term earnings baseline, which he adjusts to reflect the relationship of earnings to economic growth. Reported earnings per share go below the baseline during bear markets and above it in bullish periods. Currently, it is way above trend and is projected by S&P and many others on Wall Street to become even more so.

To continue reading: 6 Charts That Make The Case We Are In Long-Term Secular Bear