03-12-2020, 08:31 PM
** 12-Mar-2020 World View: Fantasy untethered stock prices
This is truly a remarkable time. I heard an analyst complain that
stock prices have become "completely untethered" from earnings,
because the only thing affecting stock prices now is the latest news
headline.
I would argue that stock prices have been "untethered" from earnings
for a long time. As you know, I focus on price/earnings ratio, to
keep things simple. Prior to the 1990s, the core value of a stock was
considered to be "tethered" to the P/E ratio, what today we would call
P/E based on "trailing earnings."
Starting with the 1990s tech bubble, that P/E ratio was producing
results that stock salesmen disliked, so they started using "forward
earnings" or "operating earnings." But unlike trailing earnings,
which are solid values backed up by audited financial statements,
forward and operating earnings are fantasy earnings, not backed by
financial statements, but backed by wishful thinking from public
relations departments.
An example of the fantasy is something that I hear frequently.
Someone will say that stock X has a p/e ratio of 80, and stock Y has a
p/e ratio of 40, and therefore stock Y is better. This is about as
meaningless as you can get.
This has given rise to complete doublespeak. Analysts will talk about
a historic average p/e ratio of 14, and say that if a stock's p/e
ratio is less than 20, then it's close to the historic average.
Actually, 14 is the historic average p/e ratio with trailing earnings.
I've estimated that the historic average p/e ratio with forward
earnings is around 8. So a stock with a p/e ratio of 20 is
astronomically overpriced.
So stock prices have been untethered to trailing earnings since the
1990s, and in the last few weeks they've even become untethered to
fantasy forward earnings. We might also say that they've become
untethered to sanity, and now, as prices fall, investors are literally
paying the price for have depended on fantasy forward earnings.
By the way, Vince, I just have to suggest that you be very careful
about the gold price. Nothing has changed from the past. Gold is
still in a huge bubble, with a trend value of around $500, and when
there's a crash, it will overshoot to $300-400. Just beware.
Higgenbotham Wrote:> The only reason companies are going to be looking for capital is
> to cover negative cash flow and the market is not going to look
> kindly on that.
> Yesterday I opened my stock account and looked at the list of
> stocks I was trading over a year ago. At that time and previous,
> I was buying individual stocks on a short term basis and "smashing
> the bots", reporting the results here.
> Yesterday every stock on my list (about 50 stocks) was down and
> the typical loss on the stocks on my list for just yesterday was 7
> to 9 percent (more than the averages, in other words). I wondered
> why that was. The huge stocks that comprise the largest
> percentage of the indices like Apple have held up relatively well.
> I looked at the individual S&P 500 components and all but about 5
> were down yesterday.
> Back to the point of this post. During the downturn in the 4th
> quarter of 2018, with the S&P down 20% that quarter, I was still
> able to selectively buy stocks and "smash the bots". I looked at
> the intraday charts of several stocks I used to trade and focused
> on the area since the downtrend started last month. It would have
> been literally impossible to make any money trading these stocks.
> And many of the stocks were down 30 to 50 percent. This speaks to
> concepts John has mentioned many times - Generational Panic and
> Maximum Ruin. That is what I feel is happening now. Stock
> portfolios that people have spent decades amassing for retirement
> or whatever have been substantially ruined in one month.
Higgenbotham Wrote:> Tonight the situation is even worse. The typical stock I'm
> looking at on my list is down 10 to 14 percent.
> FedEx down 12.62% IBM down 12.85%
> These are typical. Any person with a 401K who is in buy and hold
> for retirement mode "for the long run" and owns "great American
> companies" like FedEx and IBM lost about 1/8 of their life savings
> just today. And this is typical, some are up a bit more and some
> down a bit more.
> What I'm saying is the stock averages are masking how bad this
> really is under the surface.
This is truly a remarkable time. I heard an analyst complain that
stock prices have become "completely untethered" from earnings,
because the only thing affecting stock prices now is the latest news
headline.
I would argue that stock prices have been "untethered" from earnings
for a long time. As you know, I focus on price/earnings ratio, to
keep things simple. Prior to the 1990s, the core value of a stock was
considered to be "tethered" to the P/E ratio, what today we would call
P/E based on "trailing earnings."
Starting with the 1990s tech bubble, that P/E ratio was producing
results that stock salesmen disliked, so they started using "forward
earnings" or "operating earnings." But unlike trailing earnings,
which are solid values backed up by audited financial statements,
forward and operating earnings are fantasy earnings, not backed by
financial statements, but backed by wishful thinking from public
relations departments.
An example of the fantasy is something that I hear frequently.
Someone will say that stock X has a p/e ratio of 80, and stock Y has a
p/e ratio of 40, and therefore stock Y is better. This is about as
meaningless as you can get.
This has given rise to complete doublespeak. Analysts will talk about
a historic average p/e ratio of 14, and say that if a stock's p/e
ratio is less than 20, then it's close to the historic average.
Actually, 14 is the historic average p/e ratio with trailing earnings.
I've estimated that the historic average p/e ratio with forward
earnings is around 8. So a stock with a p/e ratio of 20 is
astronomically overpriced.
So stock prices have been untethered to trailing earnings since the
1990s, and in the last few weeks they've even become untethered to
fantasy forward earnings. We might also say that they've become
untethered to sanity, and now, as prices fall, investors are literally
paying the price for have depended on fantasy forward earnings.
By the way, Vince, I just have to suggest that you be very careful
about the gold price. Nothing has changed from the past. Gold is
still in a huge bubble, with a trend value of around $500, and when
there's a crash, it will overshoot to $300-400. Just beware.
