The Russell 2000 is back to the 2007 levels. The Crash of 2008 is long forgotten.

On the 9th of July 2007, the Russell 2000 ETF (IWM) reached its peak of $84.90 per share. Three and a half years later and many blog posts about this anomaly later, we are back at $81 per share, just 3% short of its all time high.

More interestingly, for the past 3 years, the index has had a negative EPS — meaning the aggregate of the 2000 small cap companies of this index are unprofitable, and that their earnings are negative. You can check the PER of the major US indices on this WSJ page.

This shows just how much speculative mania is driving this rally, and that there nothing "fundamental" that can be potentially driving this market.

Yet again, the NFIB just published their small business economic trends for the month of Feb, and here are the interesting quotes:

Average employment change per firm was negative 0.15 employees over  the past three months.  After hitting the “0” line in October and November, job creation turned negative in December and deteriorated further in January.  

[...]

Owners remain in “maintenance mode”, apparently unwilling to risk new capital investments or not seeing any need for them.

[...]

The net percent of all owners, seasonally adjusted, reporting higher nominal sales over the past three months improved by five points to a net negative 11 percent, 23 points better than March 2009 (near the recession bottom) but still indicative of weak customer activity.

[...]

Reports of positive earnings trends improved points in January, registering a net negative 28 percent.  Better, but still far more owners report that earnings are deteriorating quarter on quarter than rising.  Part of this is due to price cutting [...] Labor cost, materials costs, interest rates – not the problem.  It is still weak sales.

[...]

Washington remains obsessed with the notion that small banks will not lend money to “creditworthy” firms and that this is holding back employment and economic growth.  Washington keeps inventing new programs to spur lending to small businesses, ignoring the fact that small business owners, for the most part, do not want a loan.

[...]

A near record 52 percent of owners still claim they do not want a loan and only three percent claim that financing is their top business problem while 17 percent cite unreasonable regulations and red tape as their top issue. 

[...]

Federal, state and local governments have gone too far, arrogantly directing resources to unproductive purpose, engaging too many people in those activities and compensating them too well while promising too much.  This has compromised the health of the economy and impaired its ability to grow.  The financial crisis was at a minimum enabled by government, and most likely amplified by bad policies.  Government is the problem.  It will take time to clean-up this mess, but our future competitiveness and success depends on getting that task successfully completed.

Here are the relevant posts (I probably missed some more):

• 2008-07-28 Russell 2000 P/E of 2470 is correct
• 2010-03-02 Russell 2000 ETF reaches $65
• 2010-03-10 Russell 2000 Small Cap index soars 100% in one year, but what does the Small Businesses says?
• 2010-04-14 Small Businesses reality versus Small Businesses stock index

S&P 500's PER for October month end is 92

As of the 31st of November 2009, the PER of the S&P is 92. And I'm not talking about the Operating-PER, which is meaningless. I am talking about the actual profits of the 500 top cap public companies in the US. And I am talking official earnings.

Since S&P have decided to change their web site and not to report this number on a monthly basis, I have retrieved the actual earnings from Bloomberg and devided it by the value of the S&P 500 as of the close of the last business day of November.

Here's the historical chart of this index since inception (in 1936).

(Click for bigger image.)

In the meantime, Bernanke and the Fed are printing like madmen trying to fight the cure of too much debt: a reduction in lending and borrowing and a contraction in monetary and credit aggregate. They have increased the monetary base by over 300% from just about 10 years ago.



Their incompetence is only comparable to the size of their failure. Not only will they not succeed in bringing back inflation in the short term, while deflation is running its course, but they will destroy the dollar on the medium term if they stay on the same track.

You can read the previous posts from this link.

S&P 500's PER for October month end is 138

I have been posting about this since the greatest stock market bubble of all time began late 2008.

As of the 30th of October 2009, the PER of the S&P is 138. And I'm not talking about the Operating-PER, which is meaningless. I am talking about the actual profits of the 500 top cap public companies in the US. And I am talking official figures from Standard And Poor's. [update on the 2009-11-30: S&P have changed their web site and don't seem to report that number anymore. I will have to calculate it myself from now on...]

So basically, the previous month chart and analysis still apply:

Is that the final equity bubble? Are we close to the end? Nobody can know for sure, but the odds are highly skewed toward a major collapse in the equity markets.

At the current PER (about 140) the value of the stock market would need to be divided by 20 — or decline by 95% — to reach a normal bottom on a bear market (that would mean the S&P 500 trading at about 50 !) or the total earnings of the 500 biggest US companies need to rise by 2,000%. Or anything in between.

For example you should have a decline of about 50% if the US companies increase their earnings 10 fold (i.e. by 1,000%). This is how realistic the current market is.

Also note that all the "better than expected profits" and V-shaped recovery didn't help reduce the PER. The effect of smoke and mirrors won't last forever. It is going to crash down in an ugly way.

You can read the previous posts from this link.

Earnings season begins with S&P PER at 140

For three months in a row now, the PER of the S&P 500 has been hovering about 140, levels never seen before in history.

And for three months in a row, unemployment has been rising, credit defaults as well, consumer credit has been contracting and deflation biting the debtors.

This evening Alcoa kick started the earnings season, and announced a profit ($77 million or $0.08 per share) where analysts were expecting a loss of $0.09 per share. And the profits are due to cost cutting (I haven't read the earnings report, but I'm guessing: accounting gimmicks).

Alcoa shares are up 8% in the after market, at $15.00. So even if those earnings were real, and sustained for 4 quarters, you would have an EPS of $0.32, which means that Alcoa would be valued 47 times its earnings...

Click for bigger view

Previous related posts.

New historical record on the S&P 500 PER

I have been reporting record and totally unrealistic PER on the markets for the past several months, but those records keep on being beat by newer ones.

Is that the final equity bubble? Are we close to the end? Nobody can know for sure, but the odds are highly skewed toward a major collapse in the equity markets.

At the current PER (about 140) the value of the stock market would need to be divided by 20 — or decline by 95% — to reach a normal bottom on a bear market (that would mean the S&P 500 trading at about 50 !) or the total earnings of the 500 biggest US companies need to rise by 2,000%. Or anything in between.

For example you should have a decline of about 50% if the US companies increase their earnings 10 fold (i.e. by 1,000%). This is how realistic the current market is.

Click on the chart for to obtain a bigger picture.

ChartOfTheDay.com comments:

From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high. Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129.

Previous related posts here.

Next bailouts: FDIC and Social Security

A lot more bailout are on the way, along with more money down the toilet...

Just some links of interest:

• Social Security crunch coming fast (Bill Fleckenstein Chronicle)
• As of Friday August 14, 2009, FDIC is Bankrupt (Mish)
• Loss Rates for FDIC higher than during S&L Crisis (WSJ via CalculatedRisk)
• The next great bailout: Social Security (Fortune Magazine)
  

In the meantime, the official PE (price earning ratio) of the S&P 500 is P/E 144 (as of 31st of July), the highest in history and analysts/pundits are more and more confident that the recovery is here. These kinds of valuation are found at the very top of very speculative bubbles (this is a historic high on the S&P anyway) and not at the start of new bull markets.

Historical PER record value on the S&P 500

The Fed, together with the Government and BubbleVision have managed to yet again beat the official record on the PER of the S&P 500. The broad US market is now even more expensive than the highest valuations ever reached during the Tech Bubble in 2000.

The chart shows the official PER quarterly values as computed by Standard's and Poor except for the very last point, because there's no official Q2 2009 value yet.

I have already drawn my conclusions. It's time to draw your own ones.

Click for bigger image

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
U-6 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!

S&P 500 and DJ indices update - 20081031

This is a follow up on the S&P 500 and DJ Indices update (2 weeks ago).

There isn't much to say except that the expected massive rally in the $ and the markets happened, and led to a massive overvaluation of the US markets in both absolute terms (in $ terms and PER terms) as in relative terms, compared to the European shares and Gold:

• The Dow still has a negative EPS which means that the basket of shares composing the index are losing money on the calendar year (and it doesn't have a PER).
• The S&P 500, after a big decline since the all time highs of last year still sports a massive a PER of 21, meaning that it can easily decline by another 50 to 75% (!!!) and that the current prices show either a massive bullishness and expect the end of the crisis as early as maybe next quarter? or a massive inflation in $ terms (quite likely given the reckless behaviour of the US gov and the Fed).
• The Dow is up almost 10% in Gold terms since the lows in July (which crisis? which crash?) and up 4% in Euro terms where the CAC is down 14%, meaning that it is over-performing the French index by a massive 18%!
• The S&P 500 shows the same trend, but with a lower over-valuation.
• The short US equities - long European ones trade seems more and more appealing. I am still waiting for the Dow to reach 10,000 to short it.
  

Dow Jones in various currencies (click for bigger image)

S&P 500 in various currencies (click for bigger image)

S&p 500 and DJ indices update

Two weeks ago, I made the following statements in my post: Are we done yet? No Expect a lot more decline:

• The equity markets are still very expensive in historical terms and will decline sharply
• The VIX and VXO volatiliy indices will beat their previous historical records

It appears that I was very lucky on my timing, since both happened exactly when I predicted them. The equity markets declined by about 15% in dollar terms and the volatility indices beat their previous records by as much a 50%-70%.

I would like to provide the following updates, and draw the following conclusions from what happened today:

• The DJ INDU and Russell 2000 still have negative earnings and hence no PER
• The S&P 500 had a big decline in the PER (probably thanks to the rebalancing of the indice, removing several big loosers in the past few weeks, including Fannie, Freddie, Lehman, WaMu, etc.). But, the PER is still at about 20, which is very high historically. Should the S&P PER decline to it's historical mean, it would mean a drop of another 25% to 33% of the value OR an increase of about 25-33% of the corporate profits (or somewhere between the two). What are the odds of a huge increase in corporate profits? Who would bet on major declines in corporate profits in the coming months/quarters? In which case, as during major recessions, should the PER drops to about 7, this would mean another 60-70% decline, provided that corporate profits do not decline! Given the current inflation figures and all the bullishness in the market, I expect the market to rebound at some point, but on the long term, we could see a major decline... (See Fig.1)
• Regarding the market decline, if you look at the DJ and S&P 500 in EUR or Gold terms, you will see that since the USD rallied massively in the past several weeks meaning that the US indices have actually made only a small decline. (Un)fortunately, this is bearish for them, since during the past few years, many companies massively benefited from international sales and the devaluation of the USD. Comparing the INDU30 to the CAC40, the difference is a massive 13%. So it is very likely that the German and French markets would beat the INDU on the mid-term and that a long CAC/DAX short DJ would be a nice strategy - specially since I am very bearish US, given the mess over there...
  

Fig. 1: Historical PER on the S&P 500 (click for bigger image)

Fig. 2: S&P 500 in Gold, EUR, USD and compared to French CAC 40 (click for bigger image)

Fig. 3: DJ INDU in Gold, EUR, USD and compared to French CAC 40 (click for bigger image)

Are we done yet? No, expect a lot more decline

Many interesting things happened this week, which seems like it lasted for months. The two events that caught the most my interests are the rise of the USD in spite all the bad news against it and also the big surprise comes at the Market decline following the Senate vote on Friday which passed the bailout bill. Though it is kind of rational to have had this decline, I wasn't expected the market to behave in any rational way (see my previous post on the Bernanke+Paulson PUT).

So the several trillion USD question is: Are we there yet? Has the market correction been overdone and is it a good time to buy bargain stocks?

The short answer is: No, we're far from there!

The long answer follows.

1- The Market is at historically high level still. Even after this sharp correction, the S&P 500 has a PER of above 25. The Dow Jones IA and the Russell 2000 still have a negative EPS and hence no PER! See graph below. The profits declining sharply in the best case, and big losses on the normal cases, the markets are going to have a hard time maintaining the current levels.

2- The VIX hit all time high but this is irrelevant. As you can say on the graph below, the VIX hit an all time high this week and has been trading at historical high levels for the past week or two. Many consider this as a good opportunity to buy stocks on the cheap as it is considered that VIX levels of about 40-45 are signs of market bottoms (see chart below). Unfortunately, the VIX has been computed only since the early 90's which makes it irrelevant since we are currently in uncharted territory. There has been no crashes since the early 1990s, there has been the TechBubble bust but it's not comparable to what we are living today. That's the reason why I have kept my PUTs so far and with now regrets. I might change my stance in the next few days because:

The VXO might be more appropriate for these kind of comparisons. And if you take a look at the chart below you will see that it hit 60 during the 87 crash. So there's a lot more to go for the volatility as well, contrary to what I have read here and there. Of course this doesn't exclude a short term sucker-rally, since so many just have been bottom fishing for the past 12 months.

VIX (click for bigger image)

VXO (click for bigger image)

3 - The US Markets haven't really declined since mi-July, despite the disastrous news piling up and the big sucker rally in the USD is not going to help. As you can see on the chart below, the Dow Jones and S&P 500 are almost flat since mid-July in EUR terms.

Dow Jones Industrial in various currencies (click for bigger image)

S&P 500 in various currencies (click for bigger image)

What to expect next?

• I think the market starts to realize that the $700,000,000,000 bailout is not going to change anything and is going to be a big waste, a drop in the ocean of derivatives and other ABS and MBS... Bill Gross, the person who is going to make the most profit out of this and who is going to be totally bailed out even dares asking for $500,000,000,000 for the bailout! It's easy to see that the $700 billion won't be enough as the Fed increased his balance sheet by about $600 billion worth of illiquid toxic junk in just 2-3 weeks! This is a massive 55% increase!
  
• Stephan Karlsson explains that the dollar rally is due to central banks interventions. Which makes sense to me, since the bailout could have created a run in the USD and a collapse of both the US Dollar and of the Treasuries. So basically what this means, is the the Europeans and Asians will, willingly or more likely unwillingly, take part in this Bailout Bill, by buying overvalued (valueless!) USD in exchange for their own currency. The whole bailout bill was about buying assets at above market price right? So we can expect a drop in the USD once the interventions end.
  
• The massive intervention in the USD pushed the prices of commodities a lot lower and lead the path to a probable surprise rate cut at the Fed. This could be the very last bullet in Bernanke's arsenal, and I don't think he will keep rates that high for a lot longer. Why not a Fed Fund rates of 1% within the next few days? I think it's very likely.
• The SEC extended the ban on short selling for another couple of weeks. Another intervention that will not only decrease confidence in the markets, but also make any drop steeper since there will not short covering during big downward moves.
  

Dow Jones Indus and S&P 500 in $, € and Gold [Update]

S&P 500 (click on image for better view)

Dow Jones Industrial Average (click on image for better view)

These are the charts of the DJ INDU and the SP500 as of the intraday high (not the closing price) of the 2nd of September 2008 (from the bottom of the 15fh of July 2008 (closing prices)) in terms of percentage change (as an update of the graphs I published two weeks ago here)

Check how the major US indices perform in terms of USD, EUR and XAU and also check how the DJ and the S&P500 outperform the CAC 40 (equivalent of DJ INDU but for France, in €).

Below is the USD in EUR. Notice the trend, and the huge rally.

Isn't there a problem here? The DJ is outperforming the CAC40 by 10% in 8 weeks, is rallying 16% in Euro terms, and the USD is taking 12% against the EUR and, during the same period, the US saw the biggest bankrupcy in history, most of the banks in the US are now insolvent, the US government raised its debt by many hundreds of billions of USD, unemployment hit record level, consumer spending and housing are in the abyss, and yet, both the USD and the markets rally?

Dow Jones Indus and S&P 500 in $, € and Gold [Update]

S&P 500 (click on image for better view)


Dow Jones Industrial Average (click on image for better view)

These are the charts of the DJ INDU and the SP500 as of the intraday high (not the closing price) of the 2nd of September 2008 (from the bottom of the 15fh of July 2008 (closing prices)) in terms of percentage change (as an update of the graphs I published two weeks ago here)

Check how the major US indices perform in terms of USD, EUR and XAU.

Interestingly, Bloomberg published this article today [emphasis added]:

Sept. 2 (Bloomberg) -- The best already may be over for the U.S. stock market this year.

The Standard & Poor's 500 Index, which had the worst first half since 2002, added 0.2 percent this quarter, the only gain among the world's 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38 percent.

Money managers at Federated Investors Inc., Russell Investments and Morgan Asset Management, which oversee a combined $600 billion, said the gains won't last because corporate profits will fail to meet analysts' estimates. Wall Street forecasters, who were too optimistic about earnings for the past four quarters, predict income at America's biggest companies will grow by a record 62 percent in the final three months of 2008, according to data compiled by S&P.

I don't need add anything to this last sentence: 62% rise in profits by the end of the year!!

S&P 500 is rising quickly - things are getting worse...

While the Dow Jones and Russell 2000 still have a negative EPS and hence no PER, the PER of the S&P 500 rising quickly and reaching historical high levels if you exclude the Internet bubble. We all know how things end, when we reach these levels...

Click on the image for a bigger image.

Dow Jones Indus and S&P 500 in $, € and Gold - Charts

S&P 500 (click on image for better view)

Dow Jones Industrial Average (click on image for better view)

These are the charts of the DJ INDU and the SP500 from the 15th of July 2008 to the 15th of August 2008 (closing prices) in terms of percentage change.

Check how the major US indices perform in terms of USD, EUR and XAU.

The question remains:

• why would markets go up with the news that we are hearing?
• what was/is over-valued: were the Euro and Gold over-valued? Or are the stocks and the USD over-valued?
  

Talk about over-valuation and irrational exuberance?

Indices PER update

I have talked about the indices PER just a few days ago, but with the quarterly reports published at the end of the week, we have reached another milestone:

The Dow Jones Industrials and the Russell 2000 have now negative EPS, which means that you cannot compute a PER for them...

At first I thought my numbers were wrong or that my spreadsheet was going postal, but the figures are confirmed by the WSJ (see screenshot below).

Indices PER update

So with the mega sucker rally following the no-news period (well maybe some news: US Gov and Fed injecting many more dozens billion USD in the market...) the PERs of indices have been taking off:

• DJ INDU: PER close to 80
• S&P 500: PER close to 26
• Russell 2000: PER close to 2600 (Does "2000" in "Russell 2000" actually refer to the PER of the index??).

These PER confirm that there's actually no downturn and everything is going well in a perfect world.
I am glad that Mr Market is here to clarify this situation for me, I was about to have a few doubt about "the strength of our economy" which "is growing steadily". Thank god we killed all the dangerous short sellers and commodity speculators. Oh, by the way, Oil is up 4% to 125 USD per barrel.

Assessing US equities

MacroMan has an interesting read about US equities where he concludes:

On the basis of what's worked since 1988 (and indeed since 1970, on the basis of a stripped-down model that excludes analyst expectations), US stocks may be cheap, they may be expensive; but one thing they are clearly not is a buy.

Historical PER of the S&P 500

The S&P 500 hundred has been quite expensive for the past 10 years according to the data found on the S&P web site. However, we are now entering a period of declining growth at the very best (or diving in decline if we are realistic).


Anyway, the S&P 500 is reaching historical high levels, if we exclude the Internet Bubble.