Tuesday, January 24, 2012

Cheaper Than They've Been in Two Decades huh?

I was down in Palm Beach over the weekend to attend an event held at the Breakers. It was my first visit to the area which I enjoyed thoroughly. I must tell you that in addition to all the exotic Ferrari, Bentley and Jaguars I saw an awful lot of vacant commercial space down there. Lots of it.

While in Palm Beach I chatted with a friend while down there who likes to read this blog who asked me. "Whats up? You haven't been posting much."

No doubt about it.

I have to admit I have little to say. People who know me realize this is something because I most usually always have something to say! Lets put aside for a moment the fact that the last time I felt this way, with very little to say, was during the culmination of both the tech bubble and the housing bubble. I'm not trying to be Gary Kaminski-esque here pounding my chest while showering myself with rose petals over my great call but it is simply a statement of fact.

I truly believe that free markets are no longer. This market has been so manipulated and distorted via Fed interventions, free money via the Fed to the too big to fail banks, high frequency trading, and above all else a virtual lawless environment that would make Al Capone blush were he alive.

I believe the elite know the ship is sinking and are stealing anything not nailed down. But you know that already and if not, now you do.

I have been trying to grasp exactly what it is the bulls are so excited about.
Job growth?
Cheap energy?
World peace?

What are the fundamentals that are so compelling as to make one want to own this market. What are the fundamentals underlying that would provoke Bespoke Investment to put out a piece Stocks are Cheaper Than They've Been in 2 Decades. The piece by strategist Paul Hickey cites among other things:

"The S&P500 is currently trading below its historical average P/E and P/B ratios, and these ratios are also at their lowest levels in the careers of a large percentage of money managers."

Regarding book value, you must forgive me if I simply take a pass on the fiction that book value in corporate America has become.

Now for those earnings.

There is no mention but I assume Bespoke is using, like the rest of Wall St., operating earnings as opposed to reported earnings. For those unaware reported earnings are GAAP earnings and operating earnings are GAAP earnings that exclude "write offs".

I like to refer to write offs -which are supposed to be one time events but seem to occur quarter after quarter- as bad stuff or bonus destroyers for management. Think 'Lucy you got some 'splaining to do' and you understand write offs perfectly.

I can already hear you asking; "Why would someone use operating earnings that exclude write offs? Aren't write offs a factual event. Of course they are. But somewhere about the late 80's as stock valuations went up Wall St. starting using operating earnings. Then in the late 90's with no way to justify the stratospheric levels of tech stock valuations and most stocks in general, the Wall St. switch to operating earnings become 'official'. It was necessary 'cover' Henry Blodget and the myriad of other Walll St. charlatans masquerading as reputable analysts used to flog pure dog shit to their customers.

You don't agree?

Okay, then how about the fact that operating earnings are notoriously unreliable with studies showing them missing the estimated targets by about 25% over the last ten to 15 years. You don't get to hear that from paid Wall St. shills as it might interfere with their bonus pool. I haven't even mentioned the revisions that invariably come out.

Take note Bespoke's last comment that these ratios are at the lowest levels in 'the careers of most money managers'. Not lowest levels in history of the markets or the sector but careers of most money managers. This is a justification in a public piece by a Wall St. firm? You gotta be kidding me? So the inexperience of the crowd becomes part of the justification for buying stocks. I won't be holding my breath for Bespoke's piece to avoid markets as stocks are at the highest levels in the careers of most money managers.

This whole thing reminds me of two things.

First it reminds me of the time I came home with a C on a test. My father asked me how I did and I replied that I got the highest mark it the class, (this was true!) He countered that's not what he had asked. I then told him I got a C to which he replied. "Great! You're the smartest of a bunch of dummies."

And secondly, reminds me of is my grandfather speaking of the go-go markets of the 60's where the phrase 'gotta get me a kid' was coined. He and many other experienced brokers had clients leave him due to their refusal to purchase shares which many experienced in the market thought were outrageously valued.

Well, Bespoke goes on in their piece to point out that;

"At the end of 2011, the S&P 500 was yielding 13 percent more than the 10-Year US Treasury,"

Do you think there is a reason equities are yielding so much. Do you think there may be some risk attached to them?

Suffice to say that, when one pulls the covers back on Bespoke's facts justifying the cheapest equity valuations in 2 decades, I haven't much faith.

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