The forward 12-month P/E ratio for the S&P 500 now stands at 17.1, based on yesterday’s closing price (2097.45) and forward 12-month EPS estimate ($122.72). Given the high values driving the “P” in the P/E ratio, how does this 17.1 P/E ratio compare to historical averages? What is driving the increase in the P/E ratio?
The current forward 12-month P/E ratio of 17.1 is now well above the three most recent historical averages: 5-year (13.6), 10-year (14.1), and 15-year (16.0). In fact, this week marked the first time the forward 12-month P/E has been equal to (or above) 17.1 since December 31, 2004. On that date, the closing price of the S&P 500 was 1211.92 and the forward 12-month EPS estimate was $70.79.
Back on December 31, the forward 12-month P/E ratio was 16.2. Since this date, the price of the S&P 500 has increased by 1.9% (to 2097.45 from 2058.90), while the forward 12-month EPS estimate has decreased by 3.3% (to $122.72 from $126.90). Thus, both the increase in the “P” and the drop in the “E” have driven the increase in the P/E ratio to 17.1 today from 16.2 at the start of the first quarter.
It is interesting to note that despite the decline in the forward 12-month EPS estimate for the S&P 500 over the past few weeks, analysts are still projecting record-level EPS for the S&P 500 in the 2nd half of 2015. If not, the forward 12-month P/E ratio would be even higher than 17.1.
Before the world morphed into what it has become, the relationship between stock prices and intraday ranges was somewhat positively correlated (as one would imagine) - higher prices and a steady vol means absolute ranges will trend higher. However, the last few years - and most especially the last few months - as equity index prices soared, so intraday ranges collapsed. In fact, the last 3 times a new low range was made, that marked a local high in stock prices. Along with the fact that the VIX term structure is the steepest since the pre-Bullard collapse, hedging - as opposed to BTFTAH - seems more appropriate in the short-term at least.
The "new" normal - plunging intraday ranges as stocks soar...
The last 3 times (red ovals) range collapsed and rolled over marked short-term tops in stocks.
The "old" normal... not that
And front-end VIX has collapsed compared to mid-term - the steepest VIX curve since the pre-Bullard-save plunge...
Charts: Bloomberg h/t AY
POTENTIAL TO SPOOK MARKETS
REMEMBERING - This Reminds Me of 1987 & 2000
A SIX YEAR BULL RUN COMING TO AN END IN 2ND HALF 2015?
The bad news threatening to capsize what’s shaping up to a roughly seven-year bull-market run in U.S. equities.
1. Business cycle: The current business cycle is 67-month-old, prompting worries that it is soon to expire and lead to a recession. But given that the U.S. economy is still performing at below potential and the typical signs of imbalances aren't apparent, the current cycle will remain intact for now.
2. Strong U.S. dollar: A firm dollar hurts U.S. exports and weakens American products’ competitiveness but it alone won't trigger a recession or a bear market.
3. The Federal Reserve: The Fed turning hawkish is a worry but given the current composition of the Fed, the possibility of an ill-timed interest rate hike is limited.
4. Weak Oil: Lower oil prices is more of a boon than a bane as less money spent on gas and fuel will mean more cash for consumers and businesses.
5. Earnings: “This is a serious problem,” said Kostohryz. The S&P 500 earnings per share risk is flat to negative in 2015 and PE ratios are peaking, limiting the market’s upside.
6. Valuation: Although some experts believe the market is overvalued based on the “Shiller PE10,” the indicator isn't foolproof. “PE ratios are at levels that have historically served as a peak in valuations, but aren't yet at levels that can be considered to constitute a ‘bubble.’”
7. Greece: Investors are underestimating the possibility of a negative outcome in Greece’s debt crisis. But the Eurozone is sufficiently prepared to deal with any fallouts.
8. Ukraine: The West and Russia won't go to war over Ukraine. The situation in the Eastern European country may deteriorate in the coming months but it will have limited impact on U.S. markets.
9. China: The Asian powerhouse is slowing but the Chinese government is expected to deploy aggressive fiscal and monetary measures to prevent a “hard-landing.”
10. Geopolitical instability: Oil-dependent regimes such as Venezuela are likely to face greater instability while rising Muslim extremism in the Middle East could lead to political and social upheaval in the region.
REMINDS ME OF 1987 & 2000
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - Feb. 22nd, 2015 - Feb. 28th, 2015
Confounded Interestjust posted a nice summary of a McKinsey report on the growth of global debt during what some persist in calling the “great deleveraging.” Turns out that since the crisis of 2008, debt has actually risen by $57 trillion, and the ratio of debt to GDP is up 17 percentage points to 286%. Meanwhile, central banks are monetizing 100% of newly-issued sovereign debt.
The obvious response to this is
wow, nothing has been fixed; in fact just the opposite, and
these stats, horrendous as they are, are incomplete because they don’t include unfunded liabilities of governments and private pensions, which are just as real as any other kind of debt.
But unfunded liabilities must be getting better, what with the stocks and bonds in pension fund portfolios soaring lately. Right? Since that’s an effortless Google search, that’s what I did. And the results were both counterintuitive and scary. It seems that even with pension fund investment portfolios booming, obligations to future retirees are rising even faster, making these entities even more underfunded today than in 2007. Here’s a sampling of the headlines just from February, in the order they appear in the search window:
Now, easy money advocates argue that the solution to this and all other unbalanced economic equations is to borrow and spend enough new cash to get asset prices up and put people back to work. But stocks and bonds are currently at record highs and the unemployment rate is below 6% (peak-of-the-cycle kinds of numbers that have historically preceded corrections in which investment returns and tax receipts both plunge, raising unfunded liabilities).
So it looks like we’ve thrown our best punch and the problem is still standing there, wondering if that’s all we’ve got. Which leaves the US and the rest of the world — where debt and unfunded liabilities also continue to rise — with the question: If debt was the thing that nearly destroyed the global financial system in 2008 and debt — both narrowly and broadly defined — is way up since then, what happens in the next downturn? The answer is who knows, because this is uncharted territory both in terms of the size of the imbalances and governments’ policy responses.
The only thing that’s certain is that there are more cities, states and related pension funds poised to blow up than ever before.
Speaking at AARP headqusrters in Washington, President Obama will announce ORDERS to the Labor Department to write new rules for financial managers who handle retirement accounts for working Americans.
As USA Today reports, The White House says the goal is to end "hidden fees that hurt consumers and back-door payments that help Wall Street brokers," deals that costs retirees billions of dollars in savings.
White House officials said they want new fiduciary standards that would require financial advisers to put clients' interests ahead of their own... and "buy our bonds."
We wonder how long before there will be an official asset allocation by dictat...
30 - Pension - Entitlement Crisis
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
US ECONOMIC REPORTS & ANALYSIS
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
STUDIES - MACRO pdf - THE 'MORAL HAZARD RISK' OF CENTRAL BANK INTERVENTION
"This a modern day "Doomsday" Book, the same as William the Conqueror Implemented in 1066 after conquering England. He needed to know where the wealth was so he could tax it"
"This is Not Really About Tax There are Easier Ways to Solve Tax Tracking - Its about a Common Reporting Standard. Its about the ability to track Capital"
"FATCA is a decoy for the Common Reporting Standard"
"There is an incredibly aggressive urgency of implementation - an unprecedentedly quick agreement between 57 governments"
Either to Tax it , Expropriation it or Control Its Free Movement
"Era of Banking Secrecy is Over!"
"A Complete Misunderstanding by Banks"
NEW ACRONYMS IN THE ERA OF FINANCIAL REPRESSION
FATCA - Foreign Accounts Tax Compliance Act
GATCA - Global Account Tax Compliance "Acts"
CRS - Common Reporting Standard
IGAs - Inter Governmental Agreements on FATCA
AEOI - OECD's Automatic Exchange of Information
AML/KYC Procedures - The term “AML/KYC Procedures” means the customer due diligence procedures of a Reporting Financial Institution pursuant to the anti-money laundering or similar requirements to which such Reporting Financial Institution is subject.
There will also be considerable customer backlash to FATCA and the documentation it requires. In the age of social media this matters, if this sounds like hyperbole please have a look at this URL
At a most basic level FATCA, the IGAs and the CRS are about making tax part of standard KYC/AML procedures and then reporting, for tax purposes, to those jurisdictions, in which the account holder has tax residence or citizenship.
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
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