Good examples.
Look at BRGYY chart:
Yet P/E is n/a and EPS is -2.50. Yet it owns 25% of new Brazilian find.
yitbos
Posted on 06/27/2008 5:06:05 PM PDT by shrinkermd
Eight months after they peaked, stocks dropped to the threshold of a bear market, another signal of the mounting challenges that lie ahead for the economy, government and investors.
Friday's 106.91-point drop left the Dow Jones Industrial Average at 11346.51, down 19.9% from its October record, after it had fallen as low as 11297.99 during the day. At the day's low the Dow was down 20.2% from October. Investors typically consider a decline of 20% or more the mark of a bear market.
...Historically, the stock market bottoms before economic activity bottoms," says Paul Kasriel, an economist at Northern Trust bank. "This is not exactly a good omen, because the stock market doesn't appear to be bottoming."
Stocks and the economy are bound together in important ways. The stock market provides a signal of the outlook for earnings. Companies also turn to the stock market to raise money -- something many banks need dearly in the face of steep losses on loans. Falling stocks make it harder to raise capital.
...With one trading day left in the month, the Dow is now down 10.2% in June, the worst performance for the month of June since 1930
(Excerpt) Read more at online.wsj.com ...
That is an excellent point! What good is having money and not being able to use it in a dead global economy? I have faith in the intelligence of these oil producing states, greed wise....
Nice post OKIEDOC
PEs (by themselves) are IMO a decidedly unsatisfactory “buy-hold-sell” signal, for lots of reasons.
First, looking at the overall PE of the SPX is just too crude/broad brush of a measurement technique. I say that because in CNBC-land a PE of 15 is “pretty good”. But, for many years, the automakers had PEs of 7 and paid fat divs. The brokers were high priced at a 10 PE, but somehow became massively more valuable when they figured out how to engineer all manner of garbage paper to sell and originate. Now, this practice is coming back to bite them. For years, the big NYSE drug stocks were considered among the bluest of blue chips; now the market HATES them because they are giant companies with bloated R&D dept’s, with portfolios of expiring blockbuster drugs, targets of multi-year class-action lawsuits....and not fleet enough to develop the quirky drugs now coming to market...and thus likely to have to overpay for smaller, more nimble companies that CAN develop the latest and greatest drugs. Oh, and we can add the negative implications for drug prices going into a quite-possibly socialized medicine environment. Yuck!
Second, PEs are backwards looking in most cases and don’t have a great ability to capture the precise types of (negative) influences we have now: 1: High oil (and chemical) inputs and 2: tightened credit and 3: MASSIVE price increases if their product(s) is/are agriculture-commodity related. And even #3 can be tricky, the best example I know of being Deere (DE). For several years now, DE has been a market darling; first for construction gear, then for the initial part of the agri boom. But of late, the market does not like DE even tho ag remains insanely hot.
Meanwhile POTash is probably going to post the biggest Y-O-Y gain in earnings ever seen in a company of this size, just staggering. I mean, you go to Yahoo financial (and Yahoo is a dirtbag source, but there you go) and POT shows $4.52 in EPS, so its $228 seems ghastly high, but this thing is probably going to put up $17 in earnings this year, computing out to a PE of 13.5 which is cheap. (POT, IMHO goes to 300 easily) See, fertilizer has more than doubled in price, and POT did a deal with the Chinese where last year’s $110 fert sold for $576/ton. What does that do to their earnings?
Likewise with the coal stocks, whose earnings power are absolutely beyond staggering. Here are companies that, for decades, simply sold their coal for a $1, $2, $4, $7 over their production costs, which at this juncture are roughly $50 a ton. Now, high BTU steam coal is selling for $140 a ton and high quality met coal is selling for $250-$350 a ton. It is impossible to imagine coal being in shortage, but it is, and met coal, in particular, an absolutely essential component of steelmaking, is in incredible short supply. So, according to Yahoo, PCX Patriot Coal loses $4.50 a share. Uhhh, OK, PCX produces 24.3 MM tons/year, 1/3rd of which is met, margin = $200/ton * 8 MM , 2/3 of which is steam, let’s say they sell that at cost, profit = ZERO. The profit (NOT the gross, the PURE PROFIT) on 8 MM tons met coal = $1.6 billion divided by 27 MM shs = $59 a share. FIFTY NINE DOLLARS EPS??? That’s 12 times MMM @ $70. That’s 7 times FCX at $120/share. At a PE of FOUR, PCX is worth $240! This is a $400-600 stock!!!
(My brain is absolutely blown on coal stocks, in case it isn’t clear, I do not think I will see a more compelling opportunity in my lifetime)
So....my point is....PEs are really really warped. And I haven’t even mentioned how corrupt most accounting and financial reporting is.
Good examples.
Look at BRGYY chart:
Yet P/E is n/a and EPS is -2.50. Yet it owns 25% of new Brazilian find.
yitbos
BRGYY is British Gas.
It is all about the forward earnings, not the trailing earnings.
http://investorsfriend.com/S%20and%20P%20500%20index%20valuation.htm
http://normxxxruminates.blogspot.com/2008/02/real-pe-ratio.html
http://oldprof.typepad.com/a_dash_of_insight/2005/12/pe_vs_sp_500_50.html
Good post.
In trying to predict the course of the market, some have noted that when the transport index outstrips the DJI, after some months a marked rally ensues. Could be. Could be not. As a long time investor, I am amazed how certain some people feel in their predictions.
For shadowing an obama presidency and tax increases.
Obama’s faault.
Amazing. We just very decisively and convincingly broke through the support level on a very long very classic head and shoulders pattern at the end of the longest secular bull run in the history of this planet (fuelled by Greenspan and easy credit), with high PEs compared to usual market bottoms, lots of debt, rising oil prices, a slowing economy, rising inflation, and folks think it is a BUYING opportunity. It is the sell signal of a lifetime.
You need to plot that chart back a couple of decades to BGE (before Greenspan era). You will see PE rations dropping to 7-8 at market bottoms and holding there for a year or more. 18 is usually a market top, not a market bottom. Stocks and real estate have been horribly expensive for well over a decade.
Y’know, I continue to be gob-smacked by the outlandish hope and ignorance on Wall Street with respect to the banking sector.
All anyone has to do is read their 10K/10Q’s. Run down the balance sheets and ask “What the f*(&(*^ is THIS?!”
All the fancy SIV’s, conduits, structured products - the whole freakin’ lot of it - all now highly suspect, IMO. And the more complicated it is, the further they move it away from “real accounting” or a real valuation.
All of these issues are signs for me that there’s a lot more dirty laundry to be brought out into the fresh air for everyone to see.
Then we have the regional banks, who have over-lent their balance sheets into construction loans. Oh, yea, that’s going to be a well-performing class of debt going forward, with the housing market continuing to tank and diesel fuel going skywards. Riiiight.
The banks have done it to themselves and to us, the taxpayers of the US. Bernanke’s Fed is slowly learning more about how the banks are run and as they do, getting increasingly contentious in their meetings as to whether it is right for the Fed to bail these clowns out.
The more I look at the aftermath, the more I think they should have allowed Bear to go under. It would have forced a much faster “come-to-Jesus” confessional among these over-levered banks. Sure, the market would have gone down hard and fast - but we’d get this mess cleaned up faster.
As it is, with the twin demons of insolvent banks and high fuel prices — there is nowhere for the economy to go but down. It will be starved for capital and excess cash that was sitting around is being flung into fuel expenses.
While I’m not defending their mentality, I think I understand it a bit.
Too many investors (professional and retail) that came of age during the first term of Ronaldus Magnus have seen very little in the way of market behavior other than a secular bull market. Sure, there were corrections, and within a five year timeframe, they were handsomely rewarded for buying the dips.
This is different. We’re now back to the early 1970’s here. While I was just a kid myself back then, I’ve been going back to review that period of history very carefully and here’s what I have to tell investors:
The market went up during the 60’s. Then it came down hard during the Arab oil embargo. Then it went up again. And down again. And when Reagan came into office, unless you were a short-term, trade-the-swings sort of guy (which was VERY difficult back then, because we’re talking back in the days when your broker would clip you for a percentage on every trade, so if you wanted to really trade, you had to go to the market itself - ie, be AT the market site or have a seat on the exchange), you were basically flat from ‘73 to ‘80. Seven years of almost no long-term gains for the “buy and hold” investor.
Oh, and inflation eating your guts the entire time.
Oil prices started going up in ‘73. They didn’t stop going up until about 1981 to 1982.
People like to point to the Reagan tax cuts as being what ignited the secular bull market of the 80’s. Well, another factor was oil dropping from very high levels (for that day) down to very moderate levels for a very long time.
The truism is this: whenever oil has spiked upwards by more than 100%, really poor economic times have followed, sometimes lasting a decade, and the markets just chopped around up/down during those times.
Those of us on FR who have a clue about this history need to start teaching the young whelps about it, because I think history is about to repeat itself here, nice and hard. People who say “this is a great time to buy” are just whistling a merry tune while they’re walking past a whole lot of open graves....
You bring up so many good points in your posts, like this one, it really helps me to stick with my convictions. You are more sophisticated than me in your knowledge of the markets and I appreciate reading all of your posts. I agree with so much you’ve said.
The liquidity crisis is not nearly over. Some say we are in the 3rd inning, some say the 6th? Who knows? There is much more toxic paper hidden from view and full transparency is needed to go forward.
I am dumbfounded by the optimism out there as well. A lot of people are less sophisticated investors than I am and just stick to the basics like dollar-cost-averaging or buying dips, without even trying to think through if the fundamentals warrant being in equities at all.
And I too wonder if it would have not been better to just let Bear & other banks fail and get it over with and behind us, despite the pain. But its an election year and no way Bush would let BurnYankee do that, even if BurnYankee had the mind too do that, which he did not.
Quick question... Do you think the losses and write downs are being exposed at a reasonably good rate? It seems to me that financials are continuing to show losses on their balance sheets and are willing to expose the toxic paper. No, they aren’t doing it all at once, but they seem to be willing to expose these losses much quicker than the Japanese banks did.
I guess I’m asking if you think the write-downs will all be exposed in a reasonable time frame, allowing us to maybe avoid Japan style stagnation, or are the banks still hiding most of the losses. I feel like they are doing a decent job of exposing their losses and bringing them to light.
What do you think?
Well, I am among the masses that don’t know my history. I appreciate the lesson and I appreciate your view of the impact of oil prices on the stock market.
My only recollection is that we had DEFLATION in 1986 because the bottom fell out on the price of oil and that caused the Texas depression. I do recall that oil was dirt cheap. I never connected the dots that this was a huge boom to our economy. I knew it had to be good, since most everything is made from oil or moved with oil or both. I just never connected the dots.
Next question... What should the actual price of oil be? I am one of those who believes oil is in a bubble propped up by speculators. I am a dumb engineer with no financial training or education. But when I see a graph that changes from one slope to a hyperbola that shoots straight up like a rocket ship, it makes me suspicious.
Seeing such a graph made me believe the NASDAQ was a bubble in 1998. Seeing such a graph made me believe housing was a bubble in 2004. Now I’m seeing the same type of graph, and I simply can’t reconcile how increasing demand by BRIC could possibly justify oil going from $60 a barrel to $140. It doesn’t pass the “reasonable test” to me.
Some of this has to be the tanking US dollar. I can believe a barrel of oil should be $90 based on demand, a weak dollar, and global inflation caused by the spectacular growth in developing nations. But I can’t find a mathematical justification for oil at $140.
I believe oil is a bubble that will pop and come down to $80. What do you believe?
Another thought exercise occurred to me that might make my comments about “growth” stocks more concise.
In 1995-2000, what were the so-called “growth” stocks? Can you name ten or twenty of them? What were their prices then? What are they now? DID THEY “GROW”??
Without even looking, I can practically guarantee you that Exxon, Conoco, Anadarko, Alcoa, US Steel (hoy!) and maybe Caterpillar and Deere and Phillp Morris weren’t in that “growth” club. (Maybe I am wrong, but I doubt it) And these aren’t stocks you had to dig out from anywhere arcane, these are Dow or big fat SP100 stocks.
No, everything back then was INTC, CSCO, Lucent (Gaaaah!) SUNW (Gaaaaah!) and it was going to go on forever and if you were a little queasy about those high PEs you invested with Jack Welch and bought GE. Or GM!
“Growth stocks” are stocks that Wall St wants to sell you because, well, who wouldn’t want “growth”? Next time your broker urges you to buy some “growth” stocks tell him you want some “shrinkage” stocks, and see how that goes over, LOL.
“Growth” stocks are primarily air, UNLESS, you are in a secular bull market, and my friend, that is the farthest thing from where we are. You cannot fight this or wish it away. In investing, you rarely get rewarded for brilliant, original thought. It is an incredibly exceptional investor who can consistently pick exceptional individual winning stocks. It is far more common to be aboard a train whether by plan or luck, that carries ALL or MOST stocks in a favorable direction. Turn that statement around and you’ll see that if the train isn’t moving favorably for most; “most” being longer-term, long-only investors, you’re far better off not being on it.
We also approach the demographic issue of baby-boomer retirement. The stock market is running out of people to buy their stuff, and if you think investors are eager to take on Wall St’s NEXT tranche of cool stuff after being gutted by the fetid sub-prime and Alt-A crap that’s been pushed out to every corner of the globe....I think that’s wrong.
I would bet good money on the following: That for 85% of investors, the next three to five years, stupid, simple CDs will outperform their stock market picks.
And guess what? IN GOOD times....I’d make the same statement and maybe reduce the number of CD-outperformers to 65%.
Has demand for oil doubled in the last 52 weeks?
I don't think so. Please explain why the price of crude has doubled in that same time period.
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