Blog on the Run: Reloaded

Friday, September 4, 2009 11:18 am

Why the stock market’s uptick won’t last …

Filed under: We're so screwed — Lex @ 11:18 am
Tags: ,

… and we may even be headed for a double-dip recession: Stock prices currently have no realistic relationship to actual earnings, and that can’t last anymore than Wile E. Coyote can dangle indefinitely in midair over the canyon once he runs off the edge of the cliff:

  • While the S&P has increased by 50% to the (to date) peak, it has done so on a 6% decline in actual [earnings per share], implying the rally has been one of [price-to-earnings] expansion, 66% to be precise. … This is the third largest recorded PE expansion in history, with only the 72% PE expansion recorded in 1982 and the 78% in 1974 surpassing the current market.
  • Yet, what is unique about this market, is that while both 1974 and 1982 achieved their move higher in about a year (11 months for the trough to peak PE move in 1982, 16 for 1974), the S&P has hit its current PE peak a mere 5 months after the trough. This is an unprecedented record in the history of US recessions, and demonstrates just how much of a push influence Obama’s stimulus and Bernanke’s [monetary policy] have had on the PE multiple alone, if not on actual EPS.
  • At this point hope is exhausted (in the form of the PE multiple having plateaued), and any further gains will all have to come from an actual improvement in earnings. Yet for that to happen, more than just overhead will have to be cut: actual revenues will need to increase. However, with the record amount of slack still in the system, and the under investment in corporate CapEx, the probability of revenue growth at this point (and thus EPS growth) is slim to none.

Another observation is that at a 19.9x PE through the current market peak, the market is almost 3x turns more expensive compared to the historical peak PE average of 17.1x, and was cheaper at the peak than just the recessions of 1961 (22.7x), and 1990 (21.6x). Any claims that the market is cheap at current earnings are outright lies.

Apparently what came up this year may well be headed right back down. And to judge from their trading behavior, corporate insiders know it: If you’re selling almost $62 of stock in your own company for every $1 worth you buy, you clearly ain’t expecting your stock to do so well.


  1. How well do you trust this source? His assertions don’t seem to jibe with this PE chart from Robert Shiller of Yale.

    Comment by Roch101 — Friday, September 4, 2009 5:59 pm @ 5:59 pm

  2. Well, the figures appear to be from Morgan Stanley. As for how well I trust this source, to the extent that this blog has made predictions whose outcome could be determined during the months I’ve been reading it, it has been correct. That said, this is not my area of expertise. THAT said, some of this blog’s recurring themes, such as the overvaluation of assets on banks’ books, have been widely echoed in a variety of sources.

    (In case you’re not familiar with ZH, although most posts appear under the single pseudonym Tyler Durden, several different people appear to contribute to it, to judge from the variations in writing style and voice.)

    Comment by Lex — Friday, September 4, 2009 6:07 pm @ 6:07 pm

  3. Also, the scale on the Shiller chart is so large that it’s really hard — for me, at least — to tell whether his figures and Shiller’s match up or not.

    Comment by Lex — Friday, September 4, 2009 6:11 pm @ 6:11 pm

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