November 19th, 2014 "It's Official: Party Now, Apocalypse Later"
"This is the new theme: we see the problems, they’re everywhere. We track them, we chart them, we understand them, we know they’re huge"
Tech Stocks: Sizing Up the New Bubble
"Judged by profits, the stock market is much more reasonably priced [now] than it was in 2000. The Dow now trades at 15 times next year’s expected earnings, versus 18 times back at the peak of the boom."
Profits as a percent of GDP are 175% higher now than they were in 2000. Meanwhile, since 1947, the average ratio of profits to GDP was 6.4% versus the 10.7% today. Therefore, normalizing the Dow's 15 P/E to historical average profit margins, gives a P/E of 25.
Corporate Profits % of GDP:
Priced for Obliteration
More importantly, the recession of 2008 caused GDP to drop 3.3% year-over-year at the lows. Whereas profits dropped 52% at the lows. Indicating a 17:1 leverage ratio. Since 2008, leverage has grown massively due to 0% interest rates and "leveraged recapitalizations" aka. debt-funded stock buybacks and *special* dividends:
17:1 financial leverage visualized (Profits versus GDP - the 3.3% dip in GDP in 2008 is barely visible):
During the Great Depression, U.S. GDP fell 45% between 1929 and 1933. Yes, you read that right. At current levels of leverage, even a recession of 6-10% would likely bankrupt most corporations.
Single Stock Reality Check
Remember this company?
Intercept Pharmaceuticals
The $7.8 billion dollar company with zero revenues:
Today:
Or how about all of those recent Fracking IPOs?
Now
Or we can just look at the long-term chart of Canadian Pacific Railway, the 135 year-old company recently sporting a 45 P/E, having gained 400% since 2011:
Priceline Deja Vu
Top performing large cap stock since 2009
Up 2600% at its recent peak
Airlines
Up 60% since mid-October i.e. 7 weeks ago (1600% annualized):
That's the whole point: There was never just one Bernie Madoff on Wall Street, it was all of them
