The markets are eerily quiet. With so many trends and facts to titillate us all, you’d expect a little more excitement. As it is, the big sell-off at the start of the year seems incomplete – a kind of financial foreplay without the climactic battering of a real bear market. What to make of it?
One thing is sure: There is still no recovery. First, earnings-per-share estimates for the first quarter are dropping faster than ever in history. On the S&P 500, they’re already down by 8% from the previous year. What kind of “recovery” makes businesses less profitable? Well, there is one possibility. But this isn’t it…
A genuine recovery increases the demand for labor… which results in higher wages. This leaves businesses with more sales but smaller margins. But that is not happening today. Sales are not rising. They are weak or falling. So are wages.
As you know, Washington’s jobs data are largely fraudulent; the feds make seasonal and other adjustments to add jobs that don’t exist. Wage data are more reliable. They are based on tax withholdings. And they measure the money that workers take home in their paychecks. Reports Bloomberg:
“Employers added more workers in February than projected, but wages unexpectedly declined, dashing hopes that reduced slack in the labor market was starting to benefit all Americans. The 242,000 gain followed a 172,000 rise in January that was larger than previously estimated, a Labor Department report showed Friday. The jobless rate held at 4.9 percent as people entered the labor force and found work. Average hourly earnings dropped, the first monthly decline in more than a year, and workers put in fewer hours.”
We’re becoming more like India or China and less like Sweden or Germany: more people working (at least according to the official statistics) but earning less money! Pretty soon, the job stats will include new professions appropriate to the new economy – “hewers of wood” and “carriers of water.”
Nevertheless, the Dow rose 67 points – or about half a percentage point – on Monday. This sets up investors for what is either going to be one of the biggest (and most anticipated) busts of all time… or yet another surprise for us poor, long-suffering doom-and-gloomers.
We still believe you can’t build real wealth on a foundation of phony money. And now, with corporate profits falling and recession looming… surely the Day of Judgment must be close at hand. Finally, we will be able to hold our heads up and say, “See, we were right!”
And when that happens – it’s bound to sooner or later (at least that’s what we keep telling ourselves… hoping it happens while we are still compos mentis) – there will be hell to pay. Because some of the most popular stocks in the U.S. are trading at some of the loopiest, nuttiest, most crackpottiest valuations in market history.
Remember, our goal at the Diary is not to be smarter than other investors. It is – modestly – just not to be quite as dumb. We don’t have to find the best investments at the best time. We just aim to avoid the worst investments at the worst time.
Online movie- and TV-streaming service Netflix must be one of the latter. It trades at a price-to-earnings (P/E) ratio of 317. In other words, investors pay $317 for every lousy dollar of annual earnings. Online retail giant Amazon – which we long ago dubbed the “River of No Returns” – is even worse.
Go ahead. Buy a share. If things were to continue as they are going now and the company were to pay out 100% of its income in dividends, you would get your money back 450 years from now.
Put another way, Amazon’s earnings would have to soar to over $26 billion (back of the envelope calculation) to justify the current share price. More likely, you’ll lose 95% to 100% of your money as prices go down to more reasonable levels.
Flirting With Lunacy
This is hardly the stock market’s first flirtation with lunacy. In the 1960s and 1970s, there was the so-called Nifty Fifty era, when stocks such as Xerox and Avon were the favorites.
The broad market was not doing so well. But investors believed they could just buy a handful of the 50 largest stocks listed on the New York Stock Exchange and sit back and let the profits roll in.
Never mind that many of the Nifty Fifty traded at nosebleed P/E ratios. These “one decision” stocks were expected to dominate the economy for decades to come. What happened to Avon and Xerox?
Xerox sold for $25 a share in 1972. Now, it’s a $10 stock. Avon traded in the $9 range in 1972. Now, it’s at $4. How’s that for something to look forward to? Amazon at $280 in 2060!
Charts by: Factset, St.Louis Federal Reserve Research, StockCharts, Fidelity
Chart and image captions by PT
The above article originally appeared as “These Trendy Stocks Have Reached Crackpot Valuations“ at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
3 Responses to “Crackpot Valuations”
Most read in the last 20 days:
- A Date Which Will Live in Infamy
President Nixon’s Decision to Abandon the Gold Standard Franklin Delano Roosevelt called the Japanese “surprise” attack on the U.S. occupied territory of Hawaii and its naval base Pearl Harbor, “A Date Which Will Live in Infamy.” Similar words should be used for President Nixon’s draconian decision 45 years ago this month that removed America from the last vestiges of the gold standard. Nixon points out where numerous evil speculators were suspected to be...
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- Bank of England QE and the Imaginary “Brexit Shock”
Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame). This is how Mark Carney is seen by...
- News from TINA Land
Distortions and Crazy Ideas We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Silver is in a Different World
The Lighthouse Problem Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams. Who put that bobbing lighthouse there? Image credit: John Lund / Corbis Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat,...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- Good Money and Bad Money
Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks. Canny investors at work (an old, but good one...) Cartoon via Pension Pulse But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...