David Rosenberg had another good report on Friday trashing the jobs numbers as I and others did. He also had some choice commentary on investor complacency. Please consider Snack with Dave.


  • According to Investors Intelligence, there are now three times as many bulls as there are bears. Almost everyone is a performance chaser.
  • Market Vane sentiment on equities has firmed to 57%, higher than it was in September 2007 when the market was beginning to crest. We didn’t see a number this strong in the last cycle until September 2003 when the recession was already two year’s behind us. By way of comparison, at the March lows, it was sitting at 32.
  • Not one of the 12 seers polled by Bloomberg sees a down-market for 2010. The median increase in the S&P; 500 is +11%.
  • The VIX is down to 19, right where it was at the market peaks back in October 2007.
  • The S&P; 500 dividend yield is back below 2% for the first time in over two years.
  • Corporate bond spreads and CDS credit default swaps have collapsed to levels not seen since two years ago.
  • Based on the Shiller normalized P/E ratio, which is based on the 10-year trend in real corporate earnings, the S&P; 500 is trading with a 20x multiple versus the long-run average (back to 1881) of 16x. This market, in other words, is more overvalued now (25%) than it was in heading into October 1987. To be sure, the average ‘overvaluation gap’ at a market peak is 50% so the argument can certainly be made that the market can go even higher from here until it rolls over. That may well be the case. But investors should be aware that at this stage, they are buying into a very expensive market and the ability to time the exit strategy is more than just an art. Those buying stocks in hopes of catching a classic blow-off to a bubble peak — remember, this market is already 25% overvalued based on the most tried, tested and true valuation metric.


We should add here that on a Shiller real 10-year “normalized” earnings basis, the S&P; 500 is now trading at 20x, which is 25% above the historical average of 16x. This is the same level of overvaluation heading into October 1987, though at the bubble peak in October 2007, the overvaluation gap was 70%. At the average of prior market peaks, the extent of the overvaluation is 50%. We are not saying that equities as an asset class is in a bubble but they certainly have moved to an overvalued extreme.

Moreover, as we have pointed out recently, what is “normal” is that every percentage point of nominal GDP growth translates into 2.5 percentage points of profits growth. Most economic forecasters see nominal GDP growth at 4% for this year. But strategists see, on average, 36% profit growth. But that 4% growth in nominal GDP is only enough to boost profits by 10%, if the normal relationship holds up. To see such low nominal growth and such strong profit growth is a 1-in-50 event. Maybe the economist and strategist at the Wall Street research houses should sit down with each other.

We are labeled as being “bearish” because we see profit growth coming in at +10% for the coming year. That is hardly bearish. On average, profits in any given year typically rise 7%. The challenge is what is currently being discounted. Market participants seem to agree that we will see something close to $77 of operating EPS this year. It is fascinating that this precisely what the consensus view was this time last year for 2009, and what we will get is something close to $56. Nice call.

All the consensus seemed to do is just fast-forward that projection into 2010 — what skated the market onside last year was the surge in the P/E multiple that occurred alongside a halving of the VIX index to 20 …is it going to go 10 in 2010?. That would be a 36% increase from the 2009 level.

Never before — never — have we seen a 4% nominal GDP performance translate into anything remotely close to a 30% earnings profile, let alone a figure higher than that. There was a time when our forecast of $62 on operating EPS would have been viewed as wildly bullish but that was at least six months ago. But you know a lot of good news is priced into the equity market when an 11% profit growth forecast is considered as being outright negative.

Dave Rosenberg puts out a good column every time. Thanks Dave.

Mike “Mish” Shedlock
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