Submitted by David Stockman – The Contra Corner Blog
By the lights of bubblevision Tuesday’s plunge was just a bull market “retest” of last week’s lows, which posted at 1867 on the S&P 500. As is evident below, the test was passed with 80 points to spare at today’s close.
So according to the talking bull heads—–CNBC had three of them on the screen at once about 2pm—–its time to start nibbling on all the bargains. Soon you may even want to just back up the truck.
You can supposedly see it right here in the charts. The market hit the October 15 Bullard Rip low last week, and has gone careening upwards where it is now allegedly forming a new bottom around 1950. Remember, its a process. Be patient.
Not on your life! The world is heading into an unprecedented monetary deflation——with output and trade falling nearly everywhere. That implosion is already rumbling through Canada, Mexico, Brazil, Australia, South Korea, Malaysia, Indonesia, Russia, Japan, the Persian Gulf oil states and countless lesser economies in between. And at the center, of course, is the unraveling of the Great Red Ponzi of China.
In the face of this on-coming economic storm, honest financial markets would have been selling off long ago, and, in fact, would never have approached today’s absurd levels of over-valuation. But financial markets have been hopelessly corrupted by two decades of massive central bank intrusion and falsification of asset prices. Consequently, Wall Street punters and their retainers and cheerleaders cannot see the forest for the trees.
Thus, one of today’s CNBC permabull threesome reassured viewers that the US economy is chugging along in fine fashion and that China is a big problem——but for the policymakers in Beijing, not the S&P 500.
The “1000 points of fright” last Monday is actually a gift. You can now buy the market at 15X, which is tantamount to a steal. So he said, and with no inconsiderable air of annoyance that anyone would think otherwise, let alone succumb to panic.
Well, let’s see. The implied “E” in that proposition is $130 per share on the S&P 500 for 2016. But that’s the Wall Street sell-side’s version of earnings ex-items.
So let’s start with where we are at the end of Q2 2015 in the real world of GAAP profits. That is, the kind of earnings that CEOs and CFOs certify to the SEC upon penalty of jail as fair, accurate and complete, according to well settled general accounting principles.
It turns out that the reported LTM net income (latest 12 months as of June 2015) of the 500 largest US companies in the index came in at $97.32 per share. But that’s down considerably from the LTM figure of $103.12 per share in the June quarter of last year, and was off by 8% from peak LTM earnings of $106 per share in the September quarter last fall.
What this means is that the market is not really trading at 15X at all, but closed today at 20X—–which is an altogether different kettle of fish. By the lights of permabulls like CNBCs 2pm trio, of course, the market is always trading at 15X and is always cheap. You might even think that Wall Street’s ex-items year-ahead EPS estimates are goal-seeked—-and you might well be on to something.
In any event, how do we leap the chasm from $97 per share and falling to $130 per share and soaring? Well, you mount a Wall Street hockey stick, close your eyes to the rest of the world and hope for a swell ride.
In the alternative, you might want to scroll back to nearly an identical inflection point in mid-2007 when the Greenspan housing and credit bubble was nearing its apogee. To be specific, LTM GAAP earnings at the time were about $85 per share and the June 2007 quarter closed with the index at about 1500 or just 4% below its October peak of 1565.
So the market was positioned at 17.6X honest-to-goodness GAAP earnings in the eve of the Greenspan Bubble’s collapse. Needless to say, that was a pretty sporty multiple under the circumstances—–the rot in the Bear Stearns mortgage funds had already been exposed and the sub-prime market had gone stone cold in the spring. Yet it was well below today’s 20X.
Naturally, Wall Street didn’t see it that way at the time. The ex-items consensus for 2008 was $120 per share of S&P 500 earnings, meaning that it was indeed time to back-up the truck. You could buy the broad market for less than 13X, said the talking heads, or more specifically the very same trio that made its appearance today.
Indeed, the chasm between reported GAAP and the forward hockey stick ex-items was $35 per share at that point in time. Ironically, today’s spread between the reported actual and the Wall Street hopium is the exact same $35 per share.
Here’s what happened next. By the June 2008 LTM period, GAAP earnings had fallen to $51 per share and by June 2009, after the meltdown, S&P 500 earnings for the previous four quarters were, well, $8 per share!
That’s right. The great Greenspan financial bubble collapsed; the global economy buckled; and corporate balance sheets were purged of 7-years worth of failed investments and financial engineering maneuvers gone astray, among sundry other losses. In the end, Wall Street’s $120 per share hockey stick got smashed into smithereens.
Eight years later we are at an even more fraught inflection point. The post-crisis money-printing binge was orders of magnitude larger and more radical, and was universally embraced by every significant central bank on the planet. As a consequence, the resulting financial bubble has become far more incendiary than the one which burst in September 2008, and the distortions, deformations and malinvestments in the global economy dramatically more insidious.
Consider some of the early victims of the collapse of China’s alleged miracle of red capitalism and the great global deflation it has triggered. On a nearby page, for example, we outlined the unfolding disaster in Brazil.
(to be continued)