Stock Market Bubble Now the Most Expensive US Market Of All Time
Stock-Markets / Financial Crash Oct 13, 2009 - 12:51 PMBy: Graham_Summers
140…
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.
Bottomline: 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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Swing by www.gainspainscapital.com/roundtwo.html to pick up a FREE copy today!
Good Investing!
Graham Summers
Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets.
Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.
Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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