The B.S. About ‘Valuations’


by Karl Denninger, Market Ticker:

One of the common chestnuts is that stocks are “not that expensive” on a forward P/E basis, especially with the recent drop that took about 1 point off that P/E.

While those forward numbers remain above historical averages, down is down and thus this is a buying opportunity, right?

Not so fast.

One must look first at how the earnings numbers we have today are being made.

Let’s look quickly at one example from last night: Disney.

In percentage terms all of their business segments lost operating profits except one: Theme parks, which were up big (21%).  The theme park business has seen utterly-monstrous ticket price increases, both on a gross and “best deal” basis over the last several years.  In fact they’re gone up 116% for some people (like Florida Residents) over the last decade.  We used to be able to buy Play Four Days tickets that were good from early January until June 30th, were park hoppers, good for any four days during that period of time, and were $100 each.  That’s $25/day, per person, and got you into any or all of the Disney parks in Orlando except the waterparks (which were not included.)

Today the “best deal” for a Florida Resident is $179, which sounds fairly comparable except they’re not hoppers!  To be able to go between parks the price is $216.50, which is well more than a clean double.

It’s just as bad if you want to attend any of the other Orlando parks.  Universal has gotten downright extortionate since their Harry Potter stuff opened up, in that now to really enjoy it you have to buy the two-park ticket because they cleverly put part of it in each of Universal and Islands of Adventure.  So if you only want to do the amusement park sort of ride thing — no real Potter deal for you. Never mind one-day ticket prices that are now well north of $100 and that’s before you pay the daily parking fee and buy a $10 hotdog that cost them fifty cents.

Now take Disney’s other businesses.  Films were down by a couple percent, consumer product sales off 4%, and broadcast TV license fees down an utterly-enormous 25%.  But for people buying overpriced park tickets — a clearly-discretionary purchase that they’ve ratcheted up enormously to get higher and higher “ARPU”s Disney would be cooked.

They’re not alone in this.

Note that virtually all of the so-called “high flyers” measure, in some form or another, their success by rising ARPU. (Average revenue per user.)  Hotels, for example, measure their “success” based on the increase in price paid per night, which of course means prices are being jacked.  Hilton, which owns Hampton Inn, has become one of the masters of this; I used to stay in their properties almost-exclusively, but their price increases have gotten so extortionate over the last few years, well north of 50% at most properties over the last three to five years and in some cases nearing or even exceeding a double while the quality and amenities offered have not increased materially at all and in some cases, such as their “free” WiFi, quality has been reduced to scrap in an attempt to force you to pay a daily fee for actual working WiFi, that I no longer think they’re worth it.  As such my room nights on their properties have gone to an effective zero over the last three years, with the exception being the few properties where (probably) they have found themselves with a near-empty hotel and thus are being more-reasonable.

Obviously I’m not in the majority of opinion on this as Hilton’s stock has more than doubled over the last couple of years.

What makes this sort of thing possible?

Big spreads where companies and individuals can borrow nearly-unlimited amounts of money for non-productive purpose, whether that be consumption in the case of individuals on their credit cards and car loans, stock buybacks and dividends and other purposes that do not result in net investments being made in productive capacity.

This is especially telling when it comes to banks and other financial firms that have seen stock prices double or more since they can borrow for 1% but your credit card interest is still 14%, 18% or even 24%!  Gee, that’s a nice spread!  But, in the case of Wells Fargo, even that wasn’t enough for their “desired” equivalent to “ARPU” as they ripped off even more money via scamming customers repeatedly.

And that goes to the next issue, which is that sort of scam.  Wells just plain robbed people.  But Apple, which also has had a big rise in their stock price, appears to have done the same thing by effectively trying to force people to buy new $700-1,000 phones instead of $25 batteries.  They’ve gotten away with it too for quite some time; it was only recently they got caught.

And then there’s the last part of it: Even when caught ripping people off on a blatant basis, say much less by deception, nobody gets indicted and goes to prison.

Of course Apple denies any wrongdoing.

As I have repeatedly noted this sort of ripoff is literally the business model of everything.  Just take one tiny little example, like the find I recently made with regards to Xylitol and how using it as a toothpaste appears to materially improve oral health.  The selective activity of it on “bad” mouth bacteria is published and has been known for quite some time — years, in fact in formal, medical literature — yet there have been no studies by the NIH or dental research groups that I can find on this as a specific modality compared against other (very profitable for the dental industry) options, no studies by private groups either and when informed of the cause of improvement the standard dentist’s reply is that they cannot recommend doing that for legal reasons as it hasn’t been studied in that way.

Well, yeah — you won’t study it because there’s no money to be had from using a commonly-available plant extract as a toothpaste where if someone doesn’t do that and ultimately requires surgery or you recommend very expensive implanted antibiotic treatments you make thousands.  Worse, for the dentists, if such a study was ever conducted and found it to be materially effective then all the money currently being made by the dental and periodontal practices pushing temporary “fixes” that wind up being an effective forced subscription model that costs the patient thousands a year would go “poof” like a fart in a church and lots of class-action lawsuits would be likely to immediately follow.

The same is true for Type II diabetes. I’ve literally lost count of the people who have reported on this very site that they were either Type II diabetic formally (diagnosed) or knew damn well they would be if they went to the doctor, stopped eating carbs and within days their blood sugar normalized.  Not only is there plenty of evidence that the medical system knows this works and has deliberately ignored it for decades (indeed it was the only option for severe diabetes before insulin was isolated and produced – and doctors were well aware of itthere is a formal association, the ADA, that recommends the exact opposite.  Just as with gingivitis progression being sold as an “inevitably progressive disease” the same is said about Type II diabetes.  Allowing medical practitioners to run this crap results in literally $400 billion or more of spending by the government on Medicare and Medicaid for diabetes and related medical issues alone, and likely double that in total when private medical spending is included.

All of the government spending is financed since we run huge deficits that would be nearly erased if we cut that crap out and a huge part of private spending is as well.  How much of the so-called “earnings” in the market today is a direct consequence of not just these two areas but the dozens if not hundreds of similar schemes and the near-zero cost of late in financing all that crap?

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