THE DOT - if this turns orange or red be alert

Thursday, September 3, 2009

Brainstorming Thursday - part 1

1. What is not mentioned in this analysis is that all troughs occured at a PE below 10 Around 8), which was not the case so far we turned around at a PE of 12 approx. - what brings me back to my assumption that we are in wave 4 up and wave 5 down will bring earnings trough statistics back on track. we also have to keep in mind that we have extrodinary factors pushing earnings up on the bank side which we explained who make the earnings suspicious. That leads to an eve higher PE is the earnings do occur do accounting changes which were not the same as on former earnings - giving an obsure factor to the whole comparrison.

Excerpt zerohedge

Current Market Move Is Third Biggest PE Multiple Expansion Recorded In Shortest Time Ever




Some historical observations: while readers may continue scratching their heads over just what the causes may have been for the torrid 5 month rally we have witnessed, two main things distinguish it among the last ten recessions stretching all the way back to 1953:

  • While the S&P has increased by 50% to the (to date) peak, it has done so on a -6% decline in actual EPS, implying the rally has been one of PE expansion, 66% to be precise. As the chart below demonstrates this is the third largest recorded PE expansion in history, with only the 72% PE expansion recorded in 1982 and the 78% in 1974 surpassing the current market.
  • Yet, what is unique about this market, is that while both 1974 and 1982 achieved their move higher in about a year (11 months for the trough to peak PE move in 1982, 16 for 1974), the S&P has hit its current PE peak a mere 5 months after the trough. This is an unprecedented record in the history of US recessions, and demonstrates just how much of a push influence Obama's stimulus and Bernanke's QE have had on the PE multiple alone, if not on actual EPS.

Another observation is that at a 19.9x PE through the current market peak, the market is almost 3x turns more expensive compared to the historical peak PE average of 17.1x, and was cheaper at the peak than just the recessions of 1961 (22.7x), and 1990 (21.6x). Any claims that the market is cheap at current earnings are outright lies.

At this point hope is exhausted (in the form of the PE multiple having plateaued), and any further gains will all have to come from an actual improvement in earnings. Yet for that to happen, more than just overhead will have to be cut: actual revenues will need to increase. However, with the record amount of slack still in the system, and the under investment in corporate CapEx, the probability of revenue growth at this point (and this EPS growth) is slim to none.

The graph below provides a convenient way to illustrate this. The past 5 recessions all attained their PE peak at 17x within a yea, at which point it was the Earnings turn to pick up. However, this is precisely where the risk of a double dip occurs: all the growth so far has been one-time in nature, due to various stimuli and subsidies. There is no continuous upward trendline that will encourage EPS growth as discussed above. This likely means that the market will exhaust its "hope" promptly and the current PE of 20x will collapse long before the EPS growth phase is initiated, resulting in either a double dip, a W, or whatever other soundbiting definition one wants to attribute to what the market will look like over the next 6 months.

Data from Morgan Stanley

2. One right step but I doubt it will end as it should since the rating agancies have commited fraud and still are but the implications of them being officially sentenced would be too big too let it happen for the government who has failed to regulate all this entities.

excerpt

M. Stanley, Moody's, S&P Must Defend Fraud Claims

A U.S. federal judge ruled that Morgan Stanley and two credit rating agencies must defend fraud charges in a class-action lawsuit accusing them of masking the risks of an investment linked to subprime mortgages, and which eventually collapsed.

U.S. District Judge Shira Scheindlin on Wednesday rejected efforts by Morgan Stanley [MS 27.09 --- UNCH (0) ], Moody's [MCO 26.10 --- UNCH (0) ] Moody's Investors Service and McGraw-Hill's [MHP 32.31 --- UNCH (0) ] Standard & Poor's to dismiss fraud claims brought by the plaintiffs, Abu Dhabi Commercial Bank and King County in Washington state.

She dismissed the plaintiffs' remaining claims, and all claims against a fourth defendant, Bank of New York Mellon [BK 27.95 --- UNCH (0) ], while granting permission for the plaintiffs to amend their complaint.

Scheindlin's ruling could affect other lawsuits brought by pension funds and other investors, seeking to hold banks and credit raters responsible for hyping the value of complex debt to win fees and causing investor losses as the debt collapsed.

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