Irrational exuburance and extreme markets valuation - when will it end?

While the markets have rallied by about 40% since the low just 3 months ago, it's probably time to stop and think a bit. Why this rally? Because the consensus is now that:
  1. We will have a V shaped recovery, and that the recovery is now and will be quick.
  2. Banks are now posting profits, they are recovering as shows the payback of the TARP funds.
  3. Unemployment rise is slowing (even though unemployment is still rising).
  4. "Green shoots" have sprouted and blossomed.
So where are we?
V-Shaped recovery
The only sign of V shaped recovery is the stock markets, nowhere else do we seen any recovery. Which other signs of recovery have we seen? What I have seen is manipulated data from the government, showing that the decline is slowing. But nothing stating that we are recovering.

Bank are posting profits and repaying the TARP
I already mentioned that the sole reason for banks to post profits is that a change in the accounting rules is legalizing "mark to fantasy", which banks are now using instead of the "mark to market" accounting rules. This is fraud.

We also know that repaying the TARP is yet another way for the government to make a wealth transfer to the banks from the tax-payer payer, their children and grand-children, and the USD-barer to the banks.

Banks won't be sound as long as their total borrowing does not return to normal (see chart below, from the Fed itself, click for bigger view).

Unemployment rise slowing?
First of all, this is seen as "Unemployment is declining" which is obviously wrong.
Second of all, according to the official figures of the BLS, both U-3 and U-6 have seen their increase accelerate (higher rate of increase) up to the latest data point available:
Jan. Feb. Mar. Apr. May
2009 2009 2009 2009 2009

U-3 7.6 8.1 8.5 8.9 9.4
13.9 14.8 15.6 15.8 16.4

U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)
U-6 Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.

And according to ShadowStats, the real rate of unemployment is now slightly above 20% already.

Finally, Yahoo Finance is reporting Jobless benefit rolls post first dip since January (copied from Mish).
The number of people receiving unemployment aid fell by 148,000 to 6.69 million in the week that ended June 6 -- the largest drop in more than seven years. The decline broke a string of 21 straight increases in the number of people claiming benefits for more than a week, the last 19 of which were records. (A dip in continuing claims several weeks ago was later revised higher.)

On the surface, the government seemed to signal Thursday that more Americans are finding jobs: The number of people receiving unemployment aid fell for the first time since early January.

But that doesn't necessarily mean more companies are hiring.

Fewer people are receiving jobless aid largely because more of them have exhausted their standard unemployment benefits, which typically last 26 weeks. Government figures, in fact, show the proportion of recipients who used up their jobless benefits in May topped 49 percent, a monthly record.
Where are the green shoots? I can't see them, and it seems that I am not the only one:
June 19 (Bloomberg) -- General Electric Co. Vice Chairman John Rice said he isn’t seeing an increase in orders even as U.S. economic statistics suggest the world’s largest economy may soon shift to a recovery.

“I am not particularly of the green shoots group yet,” Rice said today to the Atlanta Press Club, referring to a phrase used by Federal Reserve Chairman Ben S. Bernanke that described signs of a nascent recovery. “I have not seen it in our order patterns yet. At the macro level, there may be statistics suggesting the economy is starting to turn. I am not seeing it yet.

GE is the world’s biggest maker of jet engines, power-plant turbines, locomotives, medical imaging equipment. Rice oversees the Fairfield, Connecticut-based company’s industrial businesses.

“We see a world where good companies and good consumers can’t get all the credit we would like,” Rice said. “Companies with lots of cash on their balance sheet are worried about whether they will get what they need for working capital” and are cutting spending.

“Until that changes I don’t think you will see a significant rebound,” Rice said. “We are preparing for 12 or 18 months of tough sledding.

Are the markets cheap?
The Russell 2000 is loosing money, and hence has no PER. Yet, it has rallied 50% since the bottom.
The S&P 500 has a current PER of 35. Which makes it very expensive by historical standards AND absolute values.

Here is the chart of the S&P 500 historical PER, one series is the historical average since inception, the other is the quarterly values (click for bigger values).

Last but not the least, Sovereign Speculator has an interesting thread on the overvaluation of the markets:
the P/E ratio is subjected to all kinds of perversions to deflate it to levels that can be passed off as reflecting value. At the very least, most bubbleheads try to make it less scary than its current level of 133 for the S&P 500. [...]
Q1 2009 earnings were about $7.53, and Q2 and Q3 are expected (analysts tend not to be that far off for quarters directly ahead) to be more or less the same, so we are on pace for about $30 in annualized earnings. A glace at the historical data shows that this is about the same level as in 2001-2003, after a peak of $48-54 for a few quarters in 1999 and 2000. You have to go back to 1994-1995 to again see the $30 level, with the $20 level about the norm from 1988-1993. Assuming that the $30 is sustained, you could say that the current P/E is 30. That’s not value in anyone’s book.[...]
To say that stocks are anything other than dangerously overpriced with a P/E of over 130 and a yield of 2.5% on unsustainable dividends is either farcical or fraudulent.
It's time to remove your pink-colored shades and put on your reality lenses!

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