Please note, many will argue that the p/e ratio on the S&P 500
was higher in 1999 than it is now. However, there’s two problems with
the comparison. First, when there is no “e,” price does not matter. Many
of the tech stocks in the SPX in 1999 did not have any earnings and
never had a chance to produce earnings because many of them went out of
business. However – and I’ve been saying this for quite some time and
I’m finally seeing a few others make the same assertion – if you adjust
the current earnings of the companies in SPX using the GAAP accounting
standards in force in 1999, the current earnings in aggregate would
likely be cut at least in half. And thus, the current p/e ratio
expressed in 1999 earnings terms likely would be at least as high as the
p/e ratio in 1999, if not higher. (Changes to GAAP have made it easier
for companies to create non-cash earnings, reclassify and capitalize
expenses, stretch out depreciation and pension funding costs, etc).
We talk about the tech bubble that fomented in the late 1990’s that
resulted in an 85% (roughly) decline on the NASDAQ. Currently the five
highest valued stocks by market cap are tech stocks: AAPL, GOOG, MSFT,
AMZN and FB. Combined, these five stocks make-up nearly 10% of the total
value of the entire stock market.
Money from the public poured into ETFs at record pace in February.
The majority of it into S&P 500 ETFs which then have to put that
money proportionately by market value into each of the S&P 500
stocks. Thus when cash pours into SPX funds like this, a large rise in
the the top five stocks by market cap listed above becomes a
self-fulfilling prophecy. The price rise in these stocks has nothing
remotely to do with fundamentals. Take Microsoft, for example (MSFT).
Last Friday the pom-poms were waving on Fox Business because MSFT hit an
all-time high. This is in spite of the fact that MSFT’s revenues
dropped 8.8% from 2015 to 2016 and its gross margin plunged 13.2%. So
much for fundamentals.
In addition to the onslaught of retail cash moving blindly into
stocks, margin debt on the NYSE hit an all-time high in February. Both
the cash flow and margin debt statistics are flashing a big red warning
signal, as this only occurs when the public becomes blind to risk and
and bet that stocks can only go up. As I’ve said before, this is by far
the most dangerous stock market in my professional lifetime (32 years,
not including my high years spent reading my father’s Wall Street
Journal everyday and playing penny stocks).
Perhaps the loudest bell ringing and signaling a top is the market’s
valuation of Tesla. On Monday the market cap of Tesla ($49 billion)
surpassed Ford’s market cap ($45 billion) despite the fact that Tesla
deliver 79 thousand cars in 2016 while Ford delivered 2.6 million.
“Electric Jeff” (as a good friend of mine calls Elon Musk, in reference
to Jeff Bezos) was on Twitter Monday taunting short sellers. At best
his behavior can be called “gauche.” Musk, similar to Bezos, is a
masterful stock operator. Jordan Belfort (the “Wolf of Wall Street”)
was a small-time dime store thief compared to Musk and Bezos.
Tesla has never made money and never will make money. Next to
Amazon, it’s the biggest Ponzi scheme in U.S. history. Without the
massive tax credits given to the first 200,000 buyers of Tesla vehicles,
the Company would likely be out of business by now.
Once again the public has been seduced into throwing money blindly at
anything that moves in the stock market, chasing dreams of risk-free
wealth. 99% of them will never take money off the table and will lose
everything when this bubble bursts. And only the biggest stock bubble
in history is capable of enabling operators like Musk and Bezos to reap
extraordinary wealth at the expense of the public. The bell is
ringing, perhaps Musk unwittingly rang it on Monday with hubris. The
only question that remains pertains to timing…
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Dave Kranzler spent many years working in various Wall Street jobs. After business school,
he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in
accounting and finance, and graduated Oberlin College with majors in Economics and English. Dave has nearly
thirty years of experience in studying, researching, analyzing and investing in the financial markets. Currently
he co-manages a precious metals and mining stock investment fund in Denver and publishes the Mining Stock and
Short Seller Journals. Contact Dave at dkranzler62@gmail.com.
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