How many P/E ratios are there? Let me count the ways.
- As companies report for tax purposes (the real P/E).
- As trumped up by mainstream media (the pro-forma P/E also called operating earnings).
- As further trumped up by mainstream media (forward estimates, typically wildly off) based on pro-forma PE ratios.
I am quite sure I have missed other creative measures spewed out by market analysts promoting the message “stocks are cheap”.
However, let’s dive into an analysis of the above.
Russell 2000 P/E
As of the 2015, the as-reported P/E of the Russell 200 index was 3,474. It is now 691. But all the reports are not yet in.
Meanwhile forward estimates, throwing out all companies with negative earnings is 17.17.
Hmm, that creates another ridiculous measure: Throw out anything horrific, and average the rest, all pro-forma of course.
Wall Street Journal Estimates
The Wall Street Journal estimates the P/E of the Russell 2000 is negative. The Journal politely describes that as “nil”.
Somehow “nil” sounds better than 3,474!
And check out the others. Specifically note the S&P 500 as reported P/E is 23.53 whereas the “forward looking estimate hook” is 17.55.
The fact of the matter is 17.55 is not cheap. But willingness to pay 23.53 borders on the absurd.
23+ ranks with 2007, 2000, and 1929 in degree of absurdity.
This is nothing more than a central bank sponsored “greater fools game” in which market participants are willing to chase bond yields further down the negative interest rate rabbit hole, and P/Es further into the stratosphere.
Mike “Mish” Shedlock
As one of my colleagues indicated after our last round of layoffs and product manufacturing moves out of the US; “the beatings will continue until morale improves..”
Wages must beat down to the world price for unskilled labor. Two dollars per hour is a living wage for more than two billion souls. Our labor is over priced. Our wage slaves are not better than their wage slaves.
So the Russell 2000 has no earnings and a 3.5% dividend yield. Sounds like the junkiest of junk bonds, or maybe debt from Venezuela. The yield ought to be double digits.
Nope, no bubble aunt Janet. Keep buying suckers.
Let me correct that for you: Wages FOR SKILLED LABOR must be put down to world prices for unskilled labor.
Generally Accepted Accounting Principles
FASB was told to allow banks to lie about the value of assets. The stock market took off. Apparently, that is all that matters. Appearances.
The thing i wonder about is the future effect of all this debt that companies are taking on to buy back stock, as well as line the pockets of the CEO’s through stock options. The captain of the corporate ship is never left holding the bag. That falls to the common shareholders and the employees who lose their jobs.
“The captain of the corporate ship is never left holding the bag. That falls to the common shareholders and the employees who lose their jobs.”
Plenty of people who haven’t spent a single day of their corporate lives in anything but a ZIRP environment are by now moving into mid-level management positions. Whether or not anyone is aware of it, these folks will someday be tasked with all the buyback debt that was incurred to take a few million overpriced shares off the market back in 2009-15.
Meanwhile, the by then retired executive corps should be luxuriating in fabulous retirements funded by the ZIRP pixie dust sprinkled all over the corporate balance sheets. Look, either way, the important thing to remember is Bernanke studied The Great Depression in college.
The P/E of gold is also “nil”.
So what? Gold is a currency, nothing more. All currencies yield zero. If you deposit it in a bank, you are loaning your currency (creating a debt instrument) which might pay a coupon (interest).
As is the price per gram of Google shares……..
Gold is MONEY.
It is not a paper/electronic claim on future earnings/cash flows that may, or may not materialize.
If you don’t “get” that, you are truly lost.
If gold is money, you can be certain that broke govt’s are going to come after it.
No, gold is not money at all, but just one of the world’s 27 fungible commodities and a vastly overvalued commodity at that.
Hmm, which asset is the gov’t more likely to confiscate, the one it must go to someone’s home to take at the point of a gun or the ones it can take with the press of a button or the stroke of a pen on paper like your bank account or 401K?
And, gold and silver are not simply commodities but money not arbitrarily as a matter of random luck instead of sea shells or salt but for very good reasons. They exhibit the characteristics of money by being durable, divisible, convenient, consistent, limited in quantity, having inherent value for their chemical and other properties and a history of use as such.
Since when does a commodity, or money, or insurance (any of which could be used to describe gold) have a P/E? Silly comment.
If you yoke your statistical ox to one stock market measurement, such as P/E, your odds of being right are binary like flipping a coin, 50-50, heads or tails but only if the P/E measure is highly relevant and reflects what actually moves the market. I think another column of figures in your chart is more relevant, and is the reason the DOW Industrials are so resilient.
The P/E was much higher in 2008/9, at times above 200 before the market moved up again; so P/E was not a particularly useful measure for buying or selling stocks then. A person would have done best selling when P/Es were lower and then buying back in when P/Es were highest (2009). Of course, the big problem, strangely enough, was liquidity (not having the cash to buy, or being too afraid), which was why things were crashing.
Back to your charts, Mish. I would pay more attention to the almost 3% dividend yield of the DOW stocks, and suggest that the resilience of the DOW Industrials is investors buying the yield in a world where the Central Planning Politburo seems hellbent on banning cash and enforcing negative interest rates. If rates go negative that 3% yield in stocks is worth even more; and P/E at 17 is good enough (provided the companies are financially sound; not like GM or the banks in 2008) and well below the 200-300 levels of top stocks in 1929 when dividend yield was microscopic. Of course, liquidity problems could come up again and stocks could drop in half and yields could double. Anything is possible. A few months ago in a used bookstore I saw a book titled “How to Make a Million Dollars in Stocks.” The author’s formula: Start with $2 million.
But, for argument’s sake, let’s say the odds are 50-50 for the P/E thesis, then perhaps 50% stocks and 50% gold and cash. Or if you want to set odds like Nate Silver, make it 61% or some other number. The one good thing about Silver’s WI predictions is that at least we will know in a few days whether he was right or wrong.
Pick your poison
You can choose between a P/E of 20 ( so 5% interest yearly, at least on very gross basis and disocunting the huge convexity effects) and a bond yielding 1% (Not to mention sexy alternatives such as a 2 million $ crackhouse in Vancouver)
Seen this way, is the stock completely out of touch with the other asset classes, or is your only reasonnable bet at earning money from investing, even with a very low “yield ?
Stocks?
Escalator ride up
Elevator (shaft) down
How would the S&P PE compare to other investments worldwide?
How would potential/likely currency moves affect the S&Ps relative value?
Is the S&P a safer place for world money that is under destructive pressure?
Is this analysis possible?
hello Mish, ten year reader, first comment. great work you do, Mish, since the interest rate drop in 2008 and the feds willingness to force most into risk assets like you describe above, do you know the dollar amount in bank CDs today compared to eight years ago?
I don’t have CD numbers
They may be available – will have to look
For a strictly dividend play the ‘Dogs of the Dow’ have been doing pretty good YTD.
http://www.dogsofthedow.com/dogytd.htm
Stock buybacks don’t care a whit about P/E.
Too funny –
…
Volvo’s North American CEO, Lex Kerssemakers, lost his cool as the automaker’s semi-autonomous prototype sporadically refused to drive itself during a press event at the Los Angeles Auto Show.
“It can’t find the lane markings!” Kerssemakers griped to Mayor Eric Garcetti, who was at the wheel. “You need to paint the bloody roads here!”
http://www.reuters.com/article/us-autos-autonomous-infrastructure-insig-idUSKCN0WX131
Thank you for that link. Am driving those same roads Lex Kerssemakers is complaining about and thinking the same thoughts. A little paint and a few plastic reflectors are all that is needed, but I think that gets done on a several year schedule same time as repaving.
Really makes a difference when you drive the same stretch of Los Angeles freeway at night with no clear lanes, praying those cars going 70 mph on either side of you know better what they are doing than you. Then when painted lanes and reflectors are laid down on the same stretch of highway, it is like night and day. When you catch yourself praying driving those L.A. roads, you know are not atheist enough for the Marxian totalitarian socialist state. Another round of opiates for us masses.
Only people that believe we are in traditional times use traditional metrics.
I love all of the comments comparing the dividend yield of stocks to the yield on treasuries. Something about a child who kills their parents and then begs the court for mercy because they’re an orphan.