Financial Foreplay

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?

 

1-EPS estimatesQ1 2016, change in S&P 500 EPS estimates – the biggest decline since Q1 2009 – click to enlarge.

 

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.”

 

Bummer.

 

2-Hourly earningsHourly earnings have headed down in the most recent unenjoyment report – click to enlarge.

 

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.

 

Crackpot Valuations

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.

 

3-NFLXNetflix (NFLX), monthly. It’s a great business, but a hopelessly overvalued stock – click to enlarge.

 

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.

 

4-AMZNAmazon – in spite of rarely making any money, investors love it for its online retail dominance. The question is how much love it will get in the future – click to enlarge.

 

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?

 

5-XRX and AVPSometimes it’s a really bad idea to buy overvalued stocks … – click to enlarge.

 

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.

 

 
 

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3 Responses to “Crackpot Valuations”

  • Mad Max:

    Want to understand why valuations are what they are?

    http://thesoundingline.com/?p=674

    Even Yahoo Finance is starting to catch on… That can’t be good…

  • Awakening:

    Mr Bonner declares that wages are falling. This isn’t necessarily the case. If the new jobs created are lower paying jobs, they would bring the average down. The people previously employed could be making the same or more than last month, and the people who are newly hired are also better off than before since they now have a job (albeit still earning below average wages). Thus, it’s possible everyone is better off, or at least the same, as the prior month, even though the ‘average’ wage has fallen.

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