unless pa is willing to say that the entire energy sector is worthless due to the massive write-offs, his argument is void. but if he did so, he’d call himself an idiot because obviously trillions in energy infrastructure has value.
by not normalizing earnings, you are explicitly claiming that the entire energy sector has no value.
I think PA did argue that adjustments are valid. He’s just saying that he doesn’t trust anyone other than himself to do them, and he’s not willing to do that for every company in the index because of time constraints. So he defaults to as-reported.
I have been known to go with as-reported earnings, but I do acknowledge that when I do, it’s primarily out of laziness and not out of some view that adjustmetns make things inherrently worse.
Right, Bchad has correctly stated my thinking without any distortions to make it sound absurd. As a logical and reasonable guy who checks people’s math and makes sure numbers are solid before plugging them into my model, there is a CLEAR problem of ETHICS out there. We know that there should be people both competent and unbiased making adjustments to GAAP to adjust for any management optimism, however these people are instead consistently making earnings more optimistic (and many times downright absurd)!
Defaulting back to real GAAP numbers results in a more accurate understanding of reality, and better forecasts from this base, than using the corrupt operating/forward numbers. Sometimes “lazy” is better.
No, you are still doing what you always do. Ignore the big picture (the clear problem in the industry), by arguing a single point (where adjustments might be credible).
End result, these adjustments/forecasts are being used to make things look WAY different (better) than reality, by piling on additional statistical manipulation on top of the analyst’s manipulation…
FactSet says"For Q3 2015, the blended earnings decline is -1.3%, the first back-to-back quarters of earnings declines since 2009, P/E 16X." Their main chart shows historic forward earnings. LOL, is there anything more unethical? The chart shows zero earnings recession, since you are always using forward (corrupt), even after “actual” (corrupt adjusted earnings) become available, you never come back to reality. Bloomberg says"on a share-weighted basis, S&P 500 profits were down -3.3 percent on year in the third quarter, making this earnings season the worst since 2009, and marking a second consecutive quarter of negative earnings growth." Reality says the decrease in EPS (ttm) is -14.2%, -15.3% decline in Q3 y/y aggregate earnings, and the fourth straight quarterly decline, P/E 23X. Nobody in the industry is sharing the real “finance 101” numbers, and that is no accident. Example of the result: I talked with an economist the other day, an industry guy who likes to think he knows what’s happening, he was shocked to hear about this -14% decline. He responded skeptically that he could find no evidence of these -14% 23X numbers in the media, well of course you can’t buddy! You can ONLY find them buried in S&P’s Excel cell J132. I challenge you guys to show me one major financial institution sharing the real numbers? Everyone is on the payroll, same as dotcom and subprime. And it will end badly.
S&P’s own numbers, if we’re going to consider their data reliable. let’s take your 23x trailing and add it to their 17x forward and if we’re conservative, we split it down the middle and call it my number, 19.5x.
you’re officially a crazy person. enjoy your bunker.
do you not realize that if you’re taking the most conservative EPS number, you have to adjust your EPS growth numbers way up to make up for it? or do you not understand how write-offs work?
Company A makes $10B from its continuing operations but a $10B write-off from discontinued operations offsets these earnings that are expect to occur every year. how can you justify ignoring these earnings? you might as well just pick $50 EPS and call that objective because America sucks and clearly they’re going to write-off into oblivion.
another thing that hasn’t been mentioned is the historic decline in the USD contributing the rest of the earnings decline that isn’t accounted for by write-offs. if you’re so bearish on America, wouldn’t you assume the USD is going to depreciate forever and that EPS growth should be multiples of previous decades?
Of course you don’t HAVE to use the adjusted PE. But in order for your “standard” method to be valid, you have to use apples to apples comparison.
I don’t think the “long-term average 15x” calculation is based on reported earnings. Adjusted PE using Bloomberg data since 1955 is 16.4x (average of quarterly P/E, 243 data points), so if you could get hands on the entire data set of reported earnings, I’m curious to know what the long-term reported PE is.
As you pointed out, reported trailing PE is 23x (yes, it’s high), but the average of reported trailing PE on that sheet, which only goes back to 1988, is 24x. In other words, the 23x PE is really no where close to being abnormal.
My point was really that you have to stick to one method when talking about PE multiple. You can’t change the way the denominator is calculated.
I don’t have the entire data set to conclude the exact number of the long-term reported PE, but I’m certain that number will be meaningfully higher than the long-term PE that people refer to.
It has already been posted a number of times, the long term as reported P/E is 15.56X. That’s the longest running history available. http://www.multpl.com
I like that you are doing work and talking about real numbers, most people skip that part.
It is true that valuations have been increasing, even as US GDP and earnings growth slow down, a very interesting thing to study. The 25 year avg as reported P/E is 20.4X. This comes from the S&P data you have, but carefully removing absurd post-crash numbers which tweak the avg. I discarded only the most extreme values (like 100X post subprime collapse, and also post dotcom). As Matt points out, these values are distortions and meaningless, we want to study P/E BEFORE the market crashes.
I’ve also crunched numbers on buybacks. Without the last five years of crazy buybacks due to low rates, as reported P/E would be 25X right now. I wonder why all these so called unbiased analysts always show more favorable numbers than as reported, and never less favorable numbers as I just did?
More analysis on 2015 P/E is done here (using operating P/E). The median P/E is the highest ever (at least back to 1950), higher than dotcom. http://www.wellscap.com/docs/emp/20150108.pdf
So I do not think that it is a true statement to say “the 23x PE is really no where close to being abnormal”. This is a very pricey market, and that is being concealed with a number of tricks.
Of course, all of my analysis and statements use as reported earnings.
Interesting…I’ll take a look at those. Thanks for the links. My boss loves this kind of stuff, glad I got something out of the discussion lol
One final thing I’d add is that taking out the extremes is sort of making the adjustments, so maybe using the median numbers is more objective since the “extreme” is somewhat subjective. But yea, I’m not arguing anything here, it’s pretty much common sense.
Bloomberg finally getting around the reporting the news. This is the first time I’ve seen the financial media reporting the real earning numbers during this profit recession…
At 25 times reported profit using standard accounting , the S&P 500 trades at a higher multiple than it has 90 percent of the time in the past eight decades. The average ratio is 17.
Based on profit calculated under generally accepted accounting principles, S&P 500 companies have posted negative growth for six straight quarters, a stretch that’s been exceeded only once since 1936. That was the seven-quarter slump of the 2007-2009 recession.
For those of you who were involved in markets the last time the S&P was getting into this territory, can you compare attitudes about it. I get the impression now that everyone knows how ridiculous it is getting, but these days you can’t turn down yield so you shut your eyes and buy. It’s like one eye is already on the exit. Before was it the same kind of sentiment or was it more like legit hubris where there was still belief in a bull market.
Also, if I am indeed on point with current attitudes, seems like this action lately is kinda like death knell as everyone rushes in to catch the last bit of yield as they plan to go to cash at the first sign of a top. This buying lately has a panicky feel to it, yes? Feel free to tell me my imagination is running away with me. I have not been involved in markets nearly as long as many of you.
Anyone buying at this point is strictly for yield for the most part and disregarding future capital appreciation. This can end very badly…
That’s my read, it feels forced (could be wrong).
And there sure doesn’t seem much faith once they are holding – any little thing like China moving currency 2%, or Fed moving 0.25%, sends everyone running.
Monday morning, all time highs, during a US earnings recession and global slowdown, Bob places the call…
Don’t worry Central Banks will keep the multiple expanding to over 9999!!!
Actually I disagree about “ending very badly”. I think, as I was saying, if this was “legit hubris” buying based on real bull sentiment then when this thing starts going down and that sentiment breaks… the market is going to get really ugly. This is more controled. If guys are aware that this is nonsense and just buying for yield with the plan to sell, they will also be planning to buy as they wait out the sell off.
I agree this is more controlled, but risk/reward is asymetric to the downside at this point for me to be bullish on the market in general. Look at what S&P has done for the past year, essentially flat with three huge drawdowns in between. Doesn’t look like a market that’s ready to move meaningfully higher especially with weak earnings picture and flattening yield curve.
http://finance.yahoo.com/news/secular-bull-market-beginning-000000062.html
bull market coming based on technicals
Everyone has some sort of dramatic call to make using technicals and correlations. Zero hedge has one predicting a bear market. What I can say, stripping away any correlations or fundamentals is that just plain simple price action looks like, in the near term, we are headed further up or at least not looking at any significant pullbacks (given no triggers)… which makes me REALLY curious to see how this thing plays out the rest of the year.
I get a similar feeling, near term I am not sure what exactly is going to slow the market. There can always be something that jumps up and scares everyone though so not too comfy
Trump.
“I would default on China, I would declar war on ISIS and put boots on the ground”, etc.
A republican president being good for the military industrial complex? Color me surprised (not that dems are much better)
Also wtf does default on China mean? He is going to find the specific bonds that China owns and not pay those? But pay all the other obligations of the US Government? TBH in this aspect he may know what he is doing, he uses bankruptcy better than anyone. How one would actually pull something like that off who knows.