2 Trillion Dollar Thursday – ECB Policy Shift Not Enough to Continue?

It has been an incredible month.

Since day one of the Trumpocalypse, money has been flying out of bonds and into equities, with much of the money going into ETFs (aka “dumb money”) as bond traders don’t tend to be stock pickers so we have widespread, indiscrimintate buying that has been boosting our indexes to record levels.  

This morning, the markets looked to Mario Draghi and the ECB to keep the party going and they have, indeed left their interest rates at 0%, punishing savers at least through March and they continue to buy bonds for as little as NEGATIVE 0.4% – effectively paying people to borrow their money.  That bond buying program, however, has been trimmed a bit, from $86.4Bn to $64.8Bn and that in itself is miles down from the Summer, when the Euro was at $1.15 ($92Bn).  We’re waiting for Draghi’s press conference but, even in the statement – they are already promising more easing if necessary.  

The question is, necessary for what?  Euro Stoxx have already climbed to within 20% of their pre-crash highs but, of course, the EU may have S&P envy, as our own leading index is now 60% higher than it was at the 2008 peak.  Yes, 60% higher!  

Amazingly, no one seems to care that the ECB has now bought $2.5 TRILLION worth of 0% interest bonds and our own Fed has bought $3.5Tn at an average of about 1.25% and that both entities have lost 20% in the last month (a combined $1.2 TRILLION) and that those losses will ultimately be passed down to the citizens, who are the ultimate funders of this massive corporate bailout program (they didn’t buy your bonds did they?).

They will, of course, argue that they have caused rates to remain low and that has helped you buy a home or a car but, had they not kept rates artificially low, then the price of the home you bought would have been lower and probably the price of the car too because those markets tend to adjust to the payments people can afford so, by design, all the Central Banksters have done is caused the inflation that now threatens to spiral out of control – yet Draghi just extended his easing program!  

And, of course, those low rates rob you of your retirement every single day of the week as the money you try to save and your retirement accounts, etc. pay you less and less interest to the point where some people are actually PAYING the banks to hold their money.  So you can’t buy bonds and you can’t put your money in the bank and complicit Governments are eliminating large bills so you can’t fit as much money in your mattress – so the money goes into stocks, which couldn’t seem safer as they have done nothing but go up since 2009 – what could go wrong?

Should we be paying 60% more for stocks than we did in 2008.  Let’s keep in mind that in 2009, 10 and 11 it was widely regarded that investors had drastically overpaid for stocks in 2008 but let’s just assume that the pre-crash investors were wisely BUYBUYBUYing at record highs and the crash had nothing to do with the ridiculous prices they were paying at the time.  OK, pretend REALLY hard.  Got it?  

The record for earnings of the S&P 500 was in 2014, when the 500 companies in the index made $105.32 per S&P share.  Other than 2013 ($103.93), the previous high was 2006, when they made $97.64 per share.  Now $105.32 – $97.64 is $7.68 which is 7.8% more than $97.64 so the 2014 all-time earnings high was just 7.8% higher than 2006.  As a side note, 2007 slipped to $76.17 and, of course, 2008 was a disaster and earnings were only $17.11.

Notice, however, that we have not yet talked about last year or this year.  Surely with this additional 600-point run since Jan 2014, we must be knocking it out of the park, right?  Nope, not at all.  In fact, S&P 500 earnings for 2015 fell back to $88.43 and this year they are running at an estimated $87.17 which is $10.47 or 10.7% LESS EARNINGS than we had in 2006 and almost 20% lower than 2014, when the S&P was at 1,800 (and our Must Hold line on the Big Chart is 1,850).  

That means, at 2,241 with $87.17 in earnings, the S&P has a current p/e multiple of 25.7 while in 2006 – right before the market collapsed because idiots were overpaying for equities – the S&P was at 1,400 with $97.64 in earnings for a p/e of 14.33.  We’re now paying 80% MORE for each Dollar of earnings than we were right before the last massive market crash.  Smart aren’t we?  

And keep in mind these are earnings per share numbers and those too have been manipulated through stock buybacks (also facilitated by ultra-low rates) as reducting the number of shares you divide earnings by artificially inflates your earnings per share and makes your company’s growth look not as crappy as it really is – allowing you to pay yourself yet another insane bonus that further reduces your companies actual earnings.  

15 times earnings is the historical average for the S&P 500 but, as you can see – it can go higher but keep in mind no one INTENDED to pay 65 times earnings in 2008 – it’s just that it turned out that earnings dove to $17.11 and the index could not pull back fast enough by the end of the year (we finished crashing in March, 2009 but bailouts allowed earnings to recover by the end of that year, giving us the huge “earnings growth” seen on the above chart as $17.11 leaves A LOT of room for growth).  Bank America tries to put it in perspective for us with these tables:

Notice that, just like 2006, the FORWARD p/e expectations make things look a little more reasonable.  Forget China, Japan, Italy, Greece, Brexit, Venezuela, ISIS, Trump, Deutche Bank,  Global Warming, Crumbling Infrastructure, Record Debts, Immigrants, Trade Wars, Inflation, the Pension Crisis, the Social Security Crisis and Falling Productivity – it’s rally time!  Actually, we’ve been pressing our hedges and I’m sorely tempted to go back to 100% CASH!!!  Currently, our portfolios are 80% cash and very well-hedged into the holidays.

But before we make it to the holidays, we still have to get past the Fed next Wednesday and that’s something that didn’t happen last year.  In fact, in yesterday’s Live Member Chat Room, we summarized the events that led up to the Fed rate hike and subsequent 12% market collapse.  I tweeted out a link to that comment so, if you want a road-map for the next 5 trading days – it’s all right there for you and we’ll see how closely we stick to the script after each day (and yes, we had the same ECB meeting the Thursday before so – so far, so scary!).

As I said last year, when I called to short the indexes (and a bit early then too) – do not say I didn’t warn you and have I mentioned how much I like CASH!!! lately?

Please, please, please, be very careful out there – it’s always brightest just before the truck runs you over!  

IN PROGRESS

Provided courtesy of Phil’s Stock World.