The markets are eerily quiet. With so many trends and facts to titillate us all, you’d expect a little more excitement. The big sell-off at the start of the year seems incomplete – a kind of financial foreplay without the climactic battering of a real bear market. What to make of it?
One thing is sure: there is still no recovery. First, earnings-per-share (EPS) estimates for the first quarter are dropping faster than ever in history. On the S&P 500, they’re already down by 8% on the previous year. What kind of “recovery” makes businesses less profitable? There is one possibility: a genuine recovery boosts demand for labour, resulting in higher wages. This leaves businesses with more sales but smaller margins. But that is not happening today. Sales are not rising. They are weak or falling. So are wages.
We’re becoming more like India or China and less like Sweden or Germany: more people working (according to the official data), but earning less money! Soon, the job stats will include new professions appropriate to the new economy – “hewers of wood” and “carriers of water”. Yet the Dow keeps rising. This sets up investors for what will either be one of the biggest (and most anticipated) busts ever… or yet another surprise for us long-suffering doom-and-gloomers. We still believe you can’t build real wealth on a foundation of phoney money. And now, with corporate profits falling and recession looming, surely the Day of Judgement must be close at hand.
Finally, we will be able to say: “We were right!” When that happens, there will be hell to pay. Because some of the most popular stocks in the US are trading at some of the loopiest valuations in market history. Remember, our goal here on the back page is not to be smarter than other investors. It is – modestly – just not to be quite as dumb. We don’t have to find the best investments at the best time. We just aim to avoid the worst at the worst time.
Online streaming service Netflix must be one of the latter. It trades at a price/earnings (p/e) ratio of 317. In other words, investors pay $317 for every lousy dollar of annual earnings. Online retail giant Amazon – which we long ago dubbed the “River of No Returns” – is even worse. Buy a share. If things were to continue as they are going now and the company were to pay out 100% of its income in dividends, you would get your money back 450 years from now. Put another way, Amazon’s earnings would have to soar to over $26bn (back of the envelope) to justify today’s price.
This is hardly the market’s first flirtation with lunacy. In the 1960s and 1970s, there was the so-called Nifty Fifty era, when stocks such as Xerox and Avon were the favourites. The broad market wasn’t doing so well. But investors believed they could just buy a handful ofthe 50 largest stocks listed on the New York Stock Exchange and let the profits roll in. Never mind that many were at nosebleed p/es. These “one-decision” stocks were expected to dominate the economy for decades to come. Xerox sold for $25 a share in 1972. Now, it’s $10. Avon traded in the $9 range in 1972. Now, it’s at $4. Amazon is now at $573. So here’s something to look forward to: Amazon at $280 in 2060!
Category: Market updates