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Stock market counting on record earnings growth

Tuesday, September 2, 2008, 6:34 AM

U.S. Stocks at 25.8 Times Profit Means Rally May End (Sept 2 – Bloomberg)

Sept. 2 (Bloomberg) -- The best already may be over for the U.S. stock market this year.

The Standard & Poor's 500 Index, which had the worst first half
since 2002, added 0.2 percent this quarter, the only gain among the
world's 10 biggest markets in dollar terms. Shares in the benchmark
index for American equity climbed to an average 25.8 times reported
profits, the highest valuation in five years. The last time that
happened, the S&P 500 fell 38 percent.

Wall Street
forecasters, who were too optimistic about earnings for the past four
quarters, predict income at America's biggest companies will grow by a
record 62 percent in the final three months of 2008, according to data
compiled by S&P.

Analyst estimates were at least 26
percentage points too high since the fourth quarter of 2007 as they
failed to anticipate more than $500 billion of subprime-related bank
losses and a slowing economy, according to data compiled by S&P and
Bloomberg.

You have to
recognize that either you live in a world where nothing makes the
slightest bit of sense, or you live in a world where various
prices of things are heavily influenced by officials seeking to sustain
the unsustainable.

In order to believe that “investors” have
collectively decided that this is the perfect time to price in a record
final quarter of earnings for stocks (62%! Never been seen before!! Now?),
and that the combined budget and trade deficits of the US make this a
perfect time to buy the dollar, you really have to suspend some
disbelief.

The way I see it, our markets are now largely out of
the hands of “investors” and are mainly controlled by large trading
funds, which use “black box” computers to trade the markets in a very
highly-aggressive and rapid fashion. I have it on pretty good authority
that there is a single hedge fund (just one) that constitutes 10% of all shares traded on any given day.

How do these black box programs operate? They sniff out trends in
sub-millisecond time frames and place enormous trades, knowing, more or
less, how their trades are positioned against the entire market. What
would be required for official intervention to have a temporary, if not
intermediate, impact? Not as much as you might think.  Is it possible
that officials are intervening in the midst of the largest financial
crisis in several generations?  Please....suspending disbelief is one
thing; checking your brain at the door is another.

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