Wednesday, April 1, 2015

Reason #4: Why Bear = Earnings and Evaluation

The revised GDP came out last week. It's official! We grew at 2.2% in the forth quarter of 2014. Funny thing about that was back in January 2014, the pundits for the government stated GDP would be 3.1%. Not only the "yes man" but the IMF said it would be 3.5%. The EU agreed with that figure and the shills, not to be outbid, called for 4% plus!
Dear reader, we haven't had 4% in twenty years! Reality is that our GDP has only averaged 1.2% for the past eight years. In fact, I can and will make a case that our present stock market record highs is nothing more than funny money and manipulation. Doubt that? Read on!
Debt & Credit
Just prior to the financial crisis in 2007, world debt which is only exercised credit, was at $142 trillion. Today, it is $199 trillion. All we did was rollover our debt to the tune of 42% and this is the only answer central banks offer. The Swizz were smart to unpeg the euro because it has a long way to fall. Of course, Greece holds the poster on rollover debt as they are seeking to do it again for the umpteenth time. It gets worse.
Related
Consider this tidbit. Congressman Paul Kanjorski stated that people withdrew $550b in less than two hours back during the first moments of the financial crisis of 2008. In another 24 hours every bank in the nation would have been bankrupt if the Fed didn't give them money. The first and only purpose that the Fed was created was due to liquidity and this shows it failed. No, you say?! They provided money to cover the problem. I see it different. If people demanded their money instead of credit like with cards, checking and now, with their phones, there wasn't enough money in circulation to cover our needs or demands. We do have a liquidity problem.
Slight of Hand
Now, you ask what does this have to do with earnings and evaluation? Glad you asked.
Companies in the S & P 500 spent $2 trillion on their own stock since 2001. When there is less stock, the company can meet estimates with less earnings which keeps the evaluation high. This gives the stock market a floor. The present market rally is correlated to this buyback money and it equals the S & P earnings since 2009. Many times these same companies borrowed money to use to buy their own stock and or, offer dividends. When you borrow to buy stock even your own, that is MANIA!
Consider this: Since the market peak on 6 March more companies are making a 52 week low than a 52 week high. In addition, the fourth quarter of 2014 saw earnings of only 1.6% on average and I predict that the first quarter of 2015 to be negative. Now, the present P/E is 18.2. What will it be with negative earnings?
NASDAQ
all the pundits talk about Nas...5000. They refer to the index of stocks back in 2000 which was the last time that it was over the 5,000 mark. They say today it is different. They forget to mention that they all had buy ratings just before the crash. Nevertheless, they show the present earnings and evaluation which on first look appear O.K. However, many of the companies in 2000 are no longer in existence. Money gone forever! The prices of the stocks will never get your money back. Do you think Yahoo will be over $300 again? How about Cisco at $75? I could go on and on. So, as you see dear reader, a closer look reveals it is not the same and there is one bubble waiting to pop. The bio segment of NASDAQ, labeled $NBI or Bio-tech has a P/E that is over110. It has tripled in price from November 2013 at 1329 to the market peak on 6 March to 3902. It is not due to earnings or revenues, but hype and speculation. Many of enclosed companies won't even exist in a few years. Do you know what your blood pressure will read when your favorite bio company is delisted? 200 plus!
Bottom Line:
The Fed kept rates so low, companies went into debt to buyback shares and offer dividends because their stock options will make them rich and you will be left holding some paper that says you have so many shares of the billion that they printed. How much is a delisted stock worth? If the Fed didn't entice CEOs with cheap money, maybe they would have actually did some R & D work to develop their company which is another reason why I say, End the Fed!

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