This Time Is The Same – And Worse!

The current stock market melt-up hardly qualifies as limp. Even the robo-machines and hyper-ventilating day traders apparently recognize that their job is to tag the May 2015 highs and then get out of the way.

So when and as they complete their pointless mission, the question recurs as to why the posse of fools in the Eccles Building can’t see that they are inflating one hellacious financial bubble; and that when it blows it will deconstruct their entire 7-year project of make-pretend recovery.

In fact, if it weren’t for the monumental pain and suffering the next bubble collapse will bring to main street, you might even be tempted to urge them on toward the Wile E. Coyote moment just ahead. After all, if 84 straight months of ZIRP and $3.5 trillion of fraudulent debt monetization (QE) brings nothing more than another thundering financial collapse, it will be curtains time at the Fed.

And here’s why they can’t duck the blame this time with tall tales about a global “savings glut” causing lax underwriting in the mortgage market, or the lack of transparency on Wall Street balance sheets. The fact is, stock prices are just plain nuts given the intense and manifold global economic headwinds and the advanced age of the US business cycle.

At this point, 75% of S&P 500 companies have reported and earnings are coming in at $93.80/share on an LTM basis. That happens to be 7.4% below the peak $106/share reported last September, and means that the market today is valuing these shrinking profits at a spritely 22.59X PE ratio.

And, yes, there is a reason for two-digit precision. It seems that in the 4th quarter of 2007 LTM earnings came in at 22.19X the S&P 500 index price. We know what happened next!

Actually, we also know that the warning signs were then everywhere, but they were ignored by the Fed and the “goldilocks” infatuated traders alike. In fact, S&P earnings had peaked at $85 per share in the June 2007 LTM period and were already down to $66 by the fourth quarter.

Even the so-called ex-items or “operating earnings” were down by nearly 10% from their June peak of $91.50 per share. But that did not slow down the sell-side hockey sticks one bit.  By year-end 2008, earnings were supposed to be $115 per share or 25% higher.

As it happened, of course, ex-items earnings in 2008 came in at $49/share or half the Wall Street hockey stick level, while the kind of honest GAAP earnings that you don’t go to jail for filing posted at $15!

So here we go again. Notwithstanding the fact that S&P 500 earning have been falling for nearly a year, the Wall Street sell-side sees nothing by sunny skies ahead. Operating earnings for 2016 are currently riding that patented hockey stick at nearly a vertical plane of ascent, to $127 per share.

In other words, there is purportedly no reason to sweat the small stuff. Why a 16.5X PE multiple is par for the course, the Fed’s on hold and China’s Beijing bosses have stabilized the Shanghai index.

(to be continued)

Source: Citigroup