Is the U.S. market "cheap"?
Maybe not, if this (updated) graph of the trailing 12-month P/E ratio is anything to go by...
Another Bullish Bear
We last looked at the Bullish Bears? back on October 21. Now, we have another Ursine to add to the bull camp: Steve Leuthold, Chairman, The Leuthold Group.
He is the subject of this week's Barron's interview:
Barron's: What is your assessment of the market's big selloff this fall?
Leuthold: There were two stages, the first being what we thought was a normal cyclical bear market. We thought the economy had peaked in last year's fourth quarter. And then, about six weeks ago, after the market had come down about 25%, it looked to us as though the market had discounted a recession. By that time, the recession was eight or nine months old. So we thought that, as normally happens, the market tends to turn up in the middle of a recession.
Then came the liquidity freeze, which was the second stage, and that took us down over the past six weeks and really hurt us. We were doing pretty well up until that point because we were defensive, but we turned bullish too early.
In a recent research note, you wrote: "I remain bullish and wrong." Is that still your sentiment?
Yes, it is. I was just looking at an interview I did with Barron's in December 1980, and I was called a super bull. And then we got prematurely bearish in 1998, and people started calling me a perma-bear. Right now, though, I am not a super bull, but I am a very convinced and optimistic bull.
What underscores your case?
Certainly, the intrinsic value of stocks. In terms of our valuation model, it's the most positive we have seen since 1984. We look at 28 different factors, including price-to-earnings and price-to-sales, and they are quite decidedly positive. Because we look at normalized earnings, we smooth them out over a business cycle. We have always done it that way, and we are at about 12 times earnings now.
Is that on forward earnings?
No. What we do is we take the last 4½ years of historical earnings, and then we project forward only six months. Then we divide the whole thing by 20, or the number of quarters. We have found over the years that it is almost imperative that you do that -- that is, smoothing out the business cycle to get the underlying level of earnings.
How does that 12 times P/E ratio compare to other periods?
Looking back 55 years, we are in the 15th percentile, well into the bottom quartile, and this is where markets very often have bottomed out. So on a valuation basis, this is a really cheap market. At these levels, we are really down in bull-market territory. From here, on a one-year basis -- and this goes back to 1926 -- the market has been up about 18%, on average, in the next year.
There's more at Barron's, and their interviews often show up at Marketwatch of Yahoo finance.
INTERVIEW: A "Perma-Bear" Warms to Stocks Steve Leuthold, Chairman, The Leuthold Group
LAWRENCE C. STRAUSS
Barron's, NOVEMBER 3, 2008
SPX Earnings & Multiples ?
There's an interesting article in today's WSJ in which (coincidentally), I have a brief quote in:
"The financial system is undergoing a sea change that is forcing a global sell-down of assets. Even when this is complete, there is likely to be greater restraint when it comes to the use of borrowed money to juice returns. At the same time, investors are likely to demand a far higher price to take on risk than in the past. Even if financial stocks feel the brunt of these changes, few, if any, industries will be unaffected.
That argues for prices that reflect reduced expectations of future profits. Yet consensus estimates peg 2009 aggregate operating earnings for companies in the Standard & Poor's 500-stock index at about $94 a share, according to Thomson Reuters. That figure assumes earnings growth both this year and next.
If those estimates panned out, the S&P on Friday would have traded at what looks like a bargain multiple of about 9.3 times forward earnings. Shift earnings to the lower end of the consensus range, about $75 a share, and the multiple rises to 11.7 times.
That still might seem cheap compared with multiples that often exceeded 20 times during the 1990s. But it is well above trough valuations of about eight times seen during the depths of the 1970s bear market, according to data from UBS. And the economic outlook, along with the unwinding of the credit bubble, means it is unlikely that earnings will increase this year or next. The better question is how far they will fall.
Bears are well below the consensus in their answer. Barry Ritholtz, director of research at Fusion IQ, for example, says he reckons that 2009 earnings could drop to about $50 a share. In that case, even a multiple of 14 times would bring the S&P to about 750 -- nearly 15% below current levels."
Good stuff . . .
Autumn Is Here. Now for the Fall...
WSJ, OCTOBER 25, 2008
Biggest Dividend Cuts in 1/2 Century
No surprise here:
"Dividend payments by companies in the Standard & Poor's 500 Index may plunge 10 percent this quarter, the biggest decline since 1958, as bank failures and slowing economic growth stifle payouts, S&P said.
The firm also cut its estimated 2008 dividend from all S&P 500 companies to $28.05 from $28.85, representing the slowest annual growth since 2001, according to a statement. Financial companies in the index reduced their payouts 35 times in 2008, almost triple the past five years combined, said Howard Silverblatt, the senior index analyst at S&P."
For the banks, this is a good thing, They need to hoard their capital, and stop sending $30-40 billion a year off their books.
For everyone else, its a sign of financial distress, and a protracted recession. And it points out how dangerous it is to buy something merely due to a high dividend.
S&P 500 Dividends to Fall Most Since '58 This Quarter, S&P Says
Bloomberg, Oct. 21 2008
Analysts Forecasts Remain Too High
Well, now that we got THAT unpleasantness behind us, its time to look forward to earnings season! Its not going to be pretty. The question is from these still depressed levels, will there be any further damage wrought.
On that exact subject, I hope in the midst of the recent market activity, you did not overlook this article about earnings expectations. Its the key to where markets will eventually find themselves after the current bailout mania subsides.
As we have repeatedly harped upon this year, the analyst community is still way too bullish when it comes to S&P500 earnings consensus.
"Investors who are expecting a rebound after almost $7 trillion was erased from U.S. equity markets this year may be disappointed as earnings fail to match forecasts. S&P 500 companies that earned less than analysts estimated in the past year dropped 13 times more than the index's average decline, data compiled by Bespoke Investment Group LLC show...
Operating profit at S&P 500 companies fell 7.5 percent last quarter and will jump 28 percent this quarter, led by banks and brokers, according to analysts' estimates compiled by Bloomberg. That would exceed the record $222 billion they earned in the April-June period last year.
Six of 10 industries will report record profits or come within 5 percent of all-time highs, according to Wall Street projections, which are usually based on company outlooks.
"The consensus will have to go down significantly,'' said John Praveen, Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which oversees $638 billion. "The numbers are way too high.''
The Street is at $95, and I am at $65 . . . times a 15 multiple means we are actually near fair value. As long as earnings don't fall even below my pessimistic forecast -- and multiple compression doesn't rear its angry little head.
If that happens, all bets are off . . .
Pricey Markets? (September 03, 2008)
Analysts Overstate Earnings Once Again (July 30, 2008)
S&P500 Profits Ex 3 Oil Cos = Awful (May 19, 2008)
U.S. Stock Analysts Keep Estimates as Markets Fall
Bloomberg, Oct. 13 2008
Vanishing Act Timeline
How various firms on Wall Street are disappearing:
click for ginormous
Wall Street, R.I.P.: The End of an Era, Even at Goldman
JULIE CRESWELL and BEN WHITE
NYT, September 27, 2008
Quote of the Day: Fair Value Accounting
"In reality, however, fair value and mark-to-market have little to do with what is happening. It is companies' refusal to properly and clearly value their assets that's getting them in trouble...
"The Citigroup-Wachovia deal is the latest example of that. Citigroup agreed Tuesday to buy Wachovia's banking operations, the bulk of the company, for $2.16 billion plus the assumption of debt. That's a shockingly cheap price for a company with a book value - assets minus liabilities - of $75.1 billion...
"Which means either that Citi got an unprecedented bargain, or that Citi and the market didn't believe that the values Wachovia placed on its assets were realistic."
>-Michael Rapoport, Dow Jones
Floyd Norris asks, "Wachovia went out with a book value of $75 billion. Citi paid $2 billion. Could it be that asset values are overstated, not understated?"
Gee, I dunno. Better obscure them as soon as possible . . .
Lying Bank Accounting
September 30, 2008, 1:37 pm
Latest Bailout Plan Spin: Its a Money Maker!
Most people are unfamiliar with the evolution of financial management over the years. It began as a clubby old boys network, who you knew mattered more than what you knew. It evolved over time. Starting in the late 1970s, retail stock brokerage became a telemarketing sales business. Although that model is clearly changing, there is still trillions of assets under management today that got that way via the cold call.
The cold calling sales approach was developed and refined at Lehman Brothers (perhaps their collapse was Karma). It was encapsulated by a man named Martin D. Shafiroff, who wrote up, refined and perfected various phone techniques. These include the straight line, the first trade, the trust close. All of his various techniques were published in the book "Successful Telephone Selling in the '80s" and subsequent editions ('90s, etc.)
Having worked on the Sell side for the first decade of my Wall Street career, I am intimately familiar with the various pitches the retail world uses to obtain clients and assets. There is not a single retail broker of my acquaintance that does not have Shafiroff's how-to on his bookshelf.
The reason I bring this up today is due to the latest sales pitch from various people, aggressively pushing the bailout plan. The newest spin on the massively expensive plan is "Hey, its a jumbo money maker!"
The spin reminds me of the classic retail stock jockey. The guy has buried his clients in a series of bad trades, bad judgment, poor risk management -- all motivated by his self-interested, commission-generating trades. The only way out of the money losing mess, pitches the broker, is a big, Hail Mary trade.
This technique is one of the last ones in the the Shafiroff book. Once an aggressive retail broker is upside down, the plea goes out for raising more money from the
mark client. "Believe me, I hate being under water more than you. I pulled in some favors, this is the trade that makes it all back for us and then some. I could even get in trouble telling you this, so don't mention this to your pals. This is the one -- but I need you to send in more capital so we can recoup the prior trades that went bad on us."
I guess Paulson read the book in the early days of his career. That line of bullshit is identical to what the public is now being fed. A series of OpEds in the Washington Post and the Wall Street Journal (and who knows where else) are all pushing the same nonsensical line: The bailout plan is a big money maker:
Andy Kessler in the WSJ:
"My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury...
Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.
Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion."
SIPC: Lehman To Be Liquidated
How did this little gem slip by unnoticed? Tomorrow at 4PM, Lehman is to be liquidated.
SIPC released this:
“On Friday, September 19, 2008, SIPC will file a proceeding placing LBI in liquidation under the Securities Investor Protection Act (SIPA). After extensive discussions and consultation with representatives of the firm and its parent company, as well as representatives of the Securities and Exchange Commission, the Federal Reserve, the Commodity Futures Trading Commission, the Financial Industry Regulatory Authority and others, SIPC has decided that such action is appropriate for the protection of customers and to facilitate the transfer of customer accounts of LBI and an orderly unwinding of the business of the brokerage firm.
This action is being taken in connection with a proposed sale of the business of the broker-dealer to Barclays Capital Inc. A hearing on approval of that sale is scheduled for September 19, 2008, at 4p.m., in the Chapter 11 proceeding of the parent company, LBHI.
One of our small funds was prime brokered with Lehman, and even though we were advocates of selling/shorting the equity, that was merely a trade.
Our hearts go out to the many good people there suffering through this Fuldian mess.
Hopefully, the Barclays buy means that many of the 10,000 people who work in that division wont lose their jobs . . .
SIPC ISSUES STATEMENT ON LEHMAN BROTHERS INC.: LIQUIDATION PROCEEDING NOW ANTICIPATED
WASHINGTON, D.C. - September 18, 2008
Financial Sector Stock Losses (by company)
Terrific interactive graphic from the NYT showing the financial destruction caused by the wall street meltdown.
29 firms have lost about a Trillion dollars. (thats trillion with a T)