Have stock prices raced ahead of reality? Maybe not
Filed under: Economy, Investing, Earnings
As the stock market powers ahead again, many nervous investors are asking themselves if shares are now overvalued. The Dow Jones and the broader S&P 500, after all, are now up more than 50% off their recent lows and picked up again this week.For many bears caught off-guard by the sharp upturn, like Gluskin Scheff analyst David Rosenberg, the answer is obvious: Stocks have again reached valuations not seen since the Internet bubble. But it's not that easy.
After facing the worst recession and financial catastrophe in decades, the stock market may be justifiably anticipating better times ahead. And given the backdrop, focusing entirely on the last year's results isn't just like driving by looking in the rearview mirror -- it's expecting a roadblock ahead because of the massive pileup behind.
Bears like to point out that stocks are trading far above their historical averages by some measures. At 27.3, trailing 12-month operating income for the S&P 500, for example, is well above its more usual level of about 15. But a look at the operating income that analysts forecast for 2010 shows that the index is trading largely in line with historical averages, says Howard Silverblatt, a senior index analyst at Standard & Poor's.
That view assumes a sharp 33% yearly jump in earnings, even as the economy continues to wrestle with major issues like massive unemployment and the aftermath of a housing bust. But given where the markets are coming from, that isn't such a stretch. Recall that just a year ago, major banks like Lehman Brothers were failing and a paralyzed credit market was leading iconic companies like AT&T (T) to complain they were having trouble getting more than overnight loans.
"All the Gears Closed"
Companies in the S&P index saw their worst earnings period in history during the fourth quarter last year, Silverblatt says, and the credit evaporation that was then spreading had disastrous consequences for business. "The credit crunch was a killer because credit greases the wheels of everything, and it means all the gears closed."
Fearing a replay of the Depression, many companies cut costs to the bone, some analysts have argued. But that means even a small pickup in business can have a big impact on profits -- and indeed margins showed significant improvement this quarter, Silverblatt points out.
As a result of the sharp cost cuts like massive layoffs and inventory reductions, companies are now sitting on huge piles of cash. Along with that cash sparking a boom in mergers -- which also helps boost the market -- signs are emerging that companies are now preparing to embark on a new spending cycle.
A survey of big European companies by investment bank Credit Suisse (CS) showed that two-thirds planned to maintain or increase their spending over the coming year, compared to just 6% in the past year. "The message was unambiguous -- the tide is turning in corporate spending," analysts wrote in a report on Friday.
Of course, major problems still linger, and the markets are unlikely to reach new all-time highs, as some outrageously bullish investors have predicted. But if a solid economic recovery materializes -- as more Wall Street stalwarts are now predicting -- the market appears to have the earnings it needs to hang on to recent gains.
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Reader Comments (Page 1 of 2)
11-13-2009 @ 5:54PM
Andy said...
YES!!! Wall street is ruining and ruining our country. We live in a facade, we think we are free we think there is a two party system, it is all coming to light.
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11-13-2009 @ 5:56PM
BigJerry said...
With most companies stating record sales losses, small business and housing related trades almost non existent, the only thing they can be investing in is empty space with no value and using our money to do it with. When and if our economy does come back the stock market will be history. All the money at street level will never get into the market, we will all keep it at home! Buy a safe.
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11-13-2009 @ 7:46PM
stan said...
Stock prices are way ahead of reality. Wall Street blows up the ballon until it bursts and then they let the air out until its flat. How do you think they make so much money. A few get fabulously wealthy and most wonder what happened. If you are smart you would not invest in the market.
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11-13-2009 @ 6:48PM
dan said...
I find it interesting that most of you think you are capitalists and believe that capitalism is the cure all for democracy. If you look up the word capitalist you'll find that most of you aren't in that picture. A capitalist is the owner of wealth used in business, loosely an owner of wealth. Do you fit this picture if you're a worker? I think not and that is where the rub is because we all can't own a company or small business which in a capitalist society leaves you with no right to any of the benefits of living a middle class life if you can't make a decent living when labor has no leverage to garner good wages, resulting in a distortion in the economy as we are seeing today. When Goldman Sachs is making money there is disconnect from working class people, other than their 401k's , which have been drained by the capitalists taking advantage of them. Hence low wages leads to less capitalism and more concentration of wealth in too few hands, a thought that Henry Ford realized, and raised the wages of his workers. The owners of Wall Street wealth don't like it when the workers are middle class because it means they are equal in a democracy and influence in government so will always keep laborers poor and meek to keep their influence and control over them. Capitalists don't believe in democracy so must be constantly reined in by government, or they corrupt the whole system and democracy fails, welcoming in anarchy, as it did during the depression. They become what FDR coined, economic royalists, using their wealth to control government and anyone who threatens their control and wealth. They use paid economists to support their capitalist goals of monopoly and ponce schemes to keep the working class intellectuals misinformed as to what is the cause of our countries economic failure. They use surrogates in the government to get protections and support their interests, to get favorable regulation that keep any competition from lowering their wealth and control. In essence these capitalist royalists are what the British Red Coats were in 1776 and have become our nemesis to democracy and economic stability and the more they ship the jobs out, take tax payer money for the profit of too big to fail banks to make money in the stock market, the more we as citizens become dissatisfied with the capitalists in control and will find someone to change this broken system. We are in the mafia stage of capitalism and will take a Teddy Roosevelt or FDR to get out of it.
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11-13-2009 @ 8:41PM
charles said...
what a great post!!!!, this is why i cannot take sides of being left or right, both sides are as corruptas the other
11-14-2009 @ 5:19AM
James said...
The only thing that got us out of the Great Depression was WWll, not FDR, unless one believes he was responsible for Pearl Harbor.
11-14-2009 @ 9:48AM
pscott1045 said...
James: True, WWII got us out of the Great Depression; conservatives feared the massive debt that liberals were wracking up with their social programs, and FDR backed off in 1936, which caused the U.S. to slide back into a sort of mini-depression. But when the war broke outk who paid for all the arms manufactured and full employment? Yes, the U.S. Government, and ultimately the U.S. taxpayer. Oh, and the 50 million or so people who died worldwide.
11-14-2009 @ 12:55PM
rob said...
Very well said untill the end. It was Teddy Roosevelt, Woodrow Wilson and Franklin Roosevelt that put us on this course. The only thing that will get us out is to repeal the fraudulently passe 16th admentment and to get rid of the FED.
11-13-2009 @ 8:13PM
glesh said...
Stocks are overvalued because of loose money at low interest for wall street investors including banks. This coupled with the retirement funds being invested because of the low interest into stocks the values are over the true worth of the companies.
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11-13-2009 @ 7:14PM
BOOWAH said...
Why is it ok for the Stock Market to fall six thousand points in 3 months but it's not ok for it to rise by three thousand points in 8 months? Somebody's math is fuzzy here.
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11-13-2009 @ 7:50PM
Jim said...
This market is moving based on technical analysis and the value of the dollar. If interest rates stay low for a long time and the gov't keeps spending money we don't have, then the dollar will fall. People then move their money to where they can get the best return even if the ymust take on some risk. That is what is happening now. People are taking on more and more risk to get a return. Because CD's pay nothing, money markets pay nothing. And we have traders moving in based on technical numbers and buying in certain levels. This is why we see the market up 100 points one day, it hit a certain technical level and down the next day 50 points, the value of the dollar is up for the day. But when the dollar goes down in vale and the technical level hits, the market goes up over 100 points. Fundamentals have been thrown out the window right now. The bears are looking at the fundamentals. Bottom line, if nothing changes we are looking at hyper inflation and another bubble. Sooner or later the Fed will raise rates and when they do, the money will leave the market fast.
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11-13-2009 @ 8:01PM
MGordon514 said...
"Have stock prices raced ahead of reality? Maybe not."
Or maybe so.
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11-13-2009 @ 8:18PM
Paul said...
Banks are run by BANKSTERS, they are corrupt lieing ,thieving leeches that prey on middle class american workers with high credit card intrest rates , high overdraft rates, high pre loan grab rates for high cash advance or balance transfer fees and other high rip off bank fees. Corruption has taken over the current banking system, we now have a mafia style of USA banking, causing the rip off of middle class america. People are not going to spend money with rip off intrest rates. The teaser rates eventually expire leaving middle class americans paying 21 to 30 % intrest.Don't bank on america, you will loose, our system is corrupt. The banks have become nothing more than rich leeching rip off thieves.Go on line and research what is called " THE RULE OF 72 " Then ask your self why does it take 36 years to doubble your money on a 2% CD, but it takes a bank only 2.88 years to doubble it's money on a 25% intrest rate credit card. CAN YOU SAY BANK RIP OFF.
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11-14-2009 @ 7:58AM
John George said...
Great Post Paul(11)!
Here's the current bankster deal; let's say a regular guy American puts 25K into a bank IRA CD (because there is no where else to put such small amounts without incurring huge risks). Then the banksters lend out that same money, say to purchase a used car, at 8 or 9 points.
When the CD matures in two years, the proceeds from the CD are paid out as follows: The bankster CEO takes 7% of the used car deal to buy his new power boat and another home in Barbados then he throws 1% of the CD toward bank employee pay and benefits and writes the whole amount off (with the help of the Fed) as legitimate business expenses.
Meanwhile, Joe Regular gets 1.6% of the money back in interest earned, if he's lucky, then he pays income taxes on the full amount and finds that he has lost more than what was returned to inflation and oil price fixing.
It's a great system, Paul, but only if you're the frigging bankster!
11-16-2009 @ 8:58AM
Goerge said...
Obviously, nobody in government gives a darn about the cleptocracy that rule the whole system! Where and how do you start to straighten this mess out? There should probably be thousands of people in prison, but we don't have anywhere near the number of investigators and prosecutors needed for the task. The whole system has simply been overwhelmed by crooks at every significant institution, working in collusion. It's clear that the frauds are so massive and so numerous that the financial system has descended into total anarchy. For instance, who in their right mind would think that Paulson, as secretary of the treasury, would have anybody's interests in mind except G&S who gave him $500m the moment he walked across the street, from G&S to the treasury dept.? But, no problem, he was confirmed by congress, without a hitch! When are people going to realize that the G&S syndicate, that permeate the Fed and Treasury department, are draining the very life-blood out of this country, and revolt?
11-13-2009 @ 8:17PM
Edwin said...
Many stocks are higher now then they were three years ago when things were good! Go figure.
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11-13-2009 @ 8:30PM
Paul said...
When the FEDS RAISE RATES the economy along with the stock market will collaspe and the country will tilt on the tee ter tot ter into a AMAGEDDON DEPRESSION.Because banks will raise mortgage rates and credit card rates and the country will not survive the increases. Then the stock market will crash and burn as people demand their pension money to be able to pay bills and deplete the pension funds. The stock market will go under1,000 It will then take 20 to 30 years for the economy to come back.
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11-13-2009 @ 8:36PM
kevin said...
Its the only game in town. Where else are you gonna put your money. Bank it at 1%....NO Way. Real Estate...I don't think so.
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11-13-2009 @ 9:29PM
barry said...
Did anyone ever think markets were maybe just a tad oversold in early 2009? Of course it was easy to price in "the end of the world scenario" and others like the genius nuriel robini (aka dr doom) kept saying this was a fools rally and the dow would drop to 3,500. Well here we are closing out 2009 as the markets are poised for their best year since 2003 and will continue to climb over the next 3 to 4 years to new heights as history repeats itself as always! But hey who am i to ruin your parade??? Enjoy those 0% CD's! lolololol
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11-13-2009 @ 9:47PM
amohi said...
Who is buying with the economy so bad? May be one fine day they will say it is aBlack Monday or Black Friday. LOL
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