Analyst says market is 3 times worse than the tech bubble! (10/9/09)

Discussion in 'Trading' started by sub0, Oct 11, 2009.

  1. sub0


    "...the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x (see chart below), which is three times the levels prevailing during the height of the tech bubble."

    full article...
    David Rosenberg 38 minutes ago Rosenberg: Now This Is "One Overvalued Market"
    Joe Weisenthal|Oct. 9, 2009, 9:13 AM | 2,340 |17
    PrintTags: Investing, Stock Market, Economy
    Gluskin-Sheff economist and hardcore skeptic of the rally David Rosenberg is out with a "special report" on the V-Shaped Recovery, and in his case the "V" stands for valuation, because:

    ...every basis point of this 60% rally in the U.S. equity market from the lows has been due to an unprecedented expansion in P/E ratios. In fact, by some measures, the S&P 500 is already trading at valuation levels that would ordinarily be consistent with an economic expansion that is five-years old as opposed to a recovery that, at best, is in its infancy stages.


    There has been plenty of debate over whether equities are overvalued or not, and certainly we would assume that many investors know where we stand on the topic. Let’s look at the facts now that the September data are in. On an operating (“scrubbed”) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is today (and that 15x is also calculated off depressed earnings level of prior recessions – we have more on the historical comparisons below). While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x (see chart below), which is three times the levels prevailing during the height of the tech bubble.

    Here are some charts to emphasize his point. Here's where PEs should be at the end of the recessions.

    And obviously, if we went by pure trailing earnings (with all those massive losses) then PE ratios are insane.

    But then, even if you look at forward earnings (which are always wrong) PEs are high.


    It is interesting to hear market bulls talk about how distorted it is to be using trailing multiples that include ‘recession earnings’ (even though using ‘forward’ earnings means relying on consensus forecasts on the future and these are rarely, if ever, correct). It is also interesting that the last time the multiple was this high was back in March 2002, again after a huge countertrend rally that deployed ‘recession earnings’ from the 2001 downturn. If memory serves us correctly, this was right around the time that the bear market rally started to roll over and in fact, six months later, the S&P 500 was hitting new lows and 34% lower than it was when the multiple had expanded to … today’s level!

    But the point is well taken that if in fact we are at an inflection point, moving out of recession and into expansion, looking strictly at multiples on depressed trailing earnings could be misleading. So let’s take a look at what valuations looked like at previous turning points in the cycle. For example, when therecession ended in November 2001, the trailing multiple was 29.3x, muchhigher than today indeed, which may be a reason why the market did not bottomfor nearly another year. It was too expensive.

    At the end of the recession in March 1991, the trailing P/E multiple was 17.2x. In November 1982, it was 11.0x and in July 1980 it was 8.3x. When the recession ended in March 1975, the P/E ratio was 9.9x, and in November 1970, it was 17.0x. Now there is no doubt that the bulls would argue that the
    multiples troughed at unusually low levels because inflation was extremely high. Point taken. But when we go back to the low-inflation periods of February 1961, the multiple at the recession trough was 20.5x, not 27.6x. At the April 1958 recession-end-point, the P/E was 14.8x, and in May 1954, it was 11.1x. The P/E was not 27.6x.
  2. ammo


    do u remember the circumstances in 86-91 when the interest rates came down and japan bought millions or billions of our bonds, i remember vaguely the detail that japan had bought a lot of prime real estate in new york and hawaii,later was wiped out either thru bonds or dollar value, the reason im asking is, this is when the bubble started , and we are now coming out of it ,or creating a new one with borrowing foreign money
  3. Pascal


    Multinational corporations are laying off 10's of thousands of employees in the us, plus the fed is devaluing the dollar. Those two actions result in huge earnings potentials for large corporations.

    The downside is that within 2 years, these misguided policies by the fed and large corporations will result in either, a re-lapse in large credit losses for financial institutions, which will be inflated out by the federal reserve, or a huge revolution from the working class, which will create huge political problems for the corporations.

    The solution is for the ruling corporations to become more loyal to American Citizens, or they will experience a backlash not seen since the original creation of the US.

    Or, the fed will just inflate our way out of this. The hidden tax alway tricks the working class.

    My thought is, the latter, stocks to the moon.
  4. ammo


    i think your tens of thousands of layoffs are happening internationally, and the line between government and industry is fading fast as they work together to keep companies and economy afloat, i was searching for tthe detals in memory,possibly a bond trader , not the rewrite by wsj or reuters, about the beginning of this bubble and the events that brought japan down after they bailed us out.
  5. Hard to know how extremes really are with phony accounting to make things "look" better.

    However the high PE ratio is a function of corporations writing off everything but the kitchen sink last Fall. Expected "operating earnings", phony as that measure is, are forecast to be around $70 for 2010.

    So, market can be thought of as "15x", which isn't extreme.
  6. ammo


    we had the savings and loan deal in the late 80's, bailed out by the fed, sold bonds to japan,britain and germany, 3 largest buyers then, and japan failed, we rallied out of it, i wonder if, like pascal said, we will inflate our way out of this,and what will happen to china
  7. Operating earnings are what matters in the long run to valuation. In the off chance there were actually write-ups of assets, I don't think that should be priced in as anything but a one-off (so as to not generally affect the multiple). Same goes with write-downs, but yet Rosenberg does this to further his case. He is pricing himself into irrelevence with this sort of 'forget the minor (major) detail' analysis.

    This on top of all the liquidity going into the markets ($20B/week * effective money multiplier of new money on MBS alone), and his arguments don't hold so much weight.
  8. Years ago, Operating and As Reported earnings didn't differ much, but in recent years they've diverged a great deal.

    And though bull spinnners always claim the write-downs are "one off", they seem to be have become perpetual ... that is, many compaines seem to have "one off" write downs quarter-after-quarter.

    In spite of sky high PEs over recent months, investors haven't flinched.

    Earnings can be phony, manipulated, deceptive. Dividend ratios, OTOH, are a better measure of value.

    Best to focus on price chart.
  9. lrm21


    You can complain a about bulls discounting trailer earnings PE but it is true if you use trailing earnings in a recession you miss the move.

    Companies are bought for future performance not past results

    right now the sliding dollar is also affecting perception. Do you keep your money in cash while the dollar goes of a cliff?
  10. jjj1000


    Interesting thoughts in this threads. I am convinced that the FED will not let inflation go out of control - people nowadays know much more about "bubbles" and inflation, and I don't think that there would be political support for this.
    #10     Oct 11, 2009