Friday, October 18, 2013

Equity Markets Discounting 88 Years Of Earnings - 1925 Or 2101. Take Your Pick.

Today, 29 out of 30 Dow stocks are underperforming the Nasdaq, which is having a large up day.  Or, it is at the time I am typing this.  Of those 29 Dow stocks, 21 are negative.  Not exactly a normal day.  Especially because massive speculation in the Nasdaq is a sign of extreme ignorance driving markets. 

Today, also, the Russell 2000 hit a price to earnings ratio of      88.   That means it is discounting earnings for the next 88 years.  Or put another way, it would be like we were living in 1925 and the Russell 2000 was discounting all of the earnings up until the present day.   The Russell 2000 didn’t even exist in 1925.  And while I cannot guarantee that none of the companies in the Russell 2000 existed in 1925, I can say with a high degree of confidence 99% of them didn’t exist in 1925 either.  I would bet my life that neither the Russell 2000 nor any of its companies will be here in 2101 or in 88 years either.

Now Russell tells us the price to earnings ratio for the 2000 index is 22.  They asterisk that “fact” by telling us that ratio is ex-negative earnings.   Seriously.  This is what the Orwellian world has come to?  This is like saying you are in great health except for that brain tumor you have that’s the size of Rhode Island.  Or, the U.S. employment picture is great except for the 25% who are unemployed.   Or, that pizza tastes great except for that pile of cockroaches laying in the middle of it.  Or, corporate cash levels are at record levels, except for that even higher level of record corporate debt.  Or that Obamacare’s first few weeks has been a huge success except that almost no one has signed up.   The endless propaganda, err dystopian advertising, of the corporate capitalist state has literally gone mad. 

There was an example of similar bulloney in the 2000 bubble as it pertained to the S&P 500.  But instead it was operating earnings - loosely interpreted to be whatever earnings a company wished to share with investors.  One day I woke up and the price to earnings ratio of the S&P magically changed to some reasonable number from the prior week’s astronomical number in one of the oldest and most respected publications on Wall Street.  Now, the publication that pulled this nonsense was accosted and almost immediately changed their manipulation.  But that didn’t stop them from trying.  Telling the truth in a time of universal deceit is a revolutionary act.

To get some type of context, the price to earnings ratio of the Dow in 1929, right before it collapsed over 90% was 16.  Let’s see.    Well over five times more expensive today than the peak of the roaring 20’s mania that nearly led to the collapse of corporate capitalism?  

We have blowhards, including the Federal Reserve, telling us that stocks are not a bubble.  Of course, nothing is a bubble to the status quo.  They create bubbles with their policies used to loot the rest of us so what else are they going to say?  We are the enablers of corruption and rip offs that have destroyed the U.S. economy and our economic sovereignty? 

As I have noted before, measurements such as price to earnings ratios and Tobin’s Q are incredibly faulty and going to see systemic failure.   We already see the Russell 2000 price to earnings ratio has risen drastically in the last year as the world starts to reveal itself.  And I can assure you the same is going to happen on the S&P.  These arbitrary and easily misleading measurements do not accurately reflect the value of equities any more than the arbitrary and misleading GDP accurately reflects the U.S. economy.   It should be of no surprise that I have attacked GDP as wildly misleading on here in past years as well.

This is far and away the largest financial bubble in the history of the world as I have noted on here dozens of times over the last eight years.

posted by TimingLogic at 11:20 AM