After 100 Months of Buying The Dips — Peak Crazy

by David Stockman, Daily Reckoning:

Just call it Peak Crazy and move on. There is absolutely no reason for the stock markets to be at current levels, let alone melting-up day after day. The fact that this is happening is a measure of how impaired capital markets have become as a result of massive central bank intrusion.

The robo-machines and day traders keep buying the dips because that has “worked” for the last 100 months. There is nothing more to it than residual momentum.

Under a regime of honest money and price discovery, the stock market discounts the future. There is no plausible future from here that’s worth 24 times S&P 500 value or 96 times the Russell 2000.

Surely the year-ahead earnings boom that Wall Street’s artists have penciled in is not in the slightest bit plausible. With 84% of the S&P 500 reporting Q2 results, LTM earnings are still 1.3% below where they were in September 2014.

Nothing has happened to corporate earnings in the last three years except deflation in the energy, materials and industrial sectors. After hitting $106 per share in September 2014, the global deflation cycle brought them to a low point of $86.44 per share in March 2016 in response to low $30s oil prices. The latter has since recovered to the $50 dollar zone – bringing S&P 500 earnings back to $104.61 during the current quarter.

The question remains: How does an aging business cycle and immense global headwinds justify the expectation of a red hot earnings breakout during the next 18 months? Yet that’s what’s happening on Wall Street. We’ve hit nearly $133 per share of GAAP earnings (and $145 of the ex-items variety) for the LTM period ending in December 2018, meaning a prospective surge of 27%.

Even if you credit Wall Street’s ex-items approach to operating earnings, the story is the same. Why will the eventual 2018 outcome be any different than the cliff-diving of the last three years?

As things stand, 2018 expectations look way elevated.

The current earnings growth estimated for 2018 would amount to more than the 23% gain that has been recorded during the past decade!

In June 2007, reported LTM earnings for the S&P 500 was posted at $85 per share. That would mean that earnings have grown at the tepid rate of 2.1% per annum for the last 10-years; and those are nominal dollars.

Take out inflation and share buybacks and there’s essentially no gain at all on a peak-to-peak basis.

When it comes to robo-traders, there are some very powerful muscle memory aspects pushing the averages relentlessly higher. It’s the deformation you get when the normal mechanisms of market discipline, such as short sellers and economic pricing of options and hedges, that are destroyed by wealth effects based central planning.

It is Wall Street’s extreme vulnerability to violent crashes that come when two-way markets are destroyed in the name of tricking people into believing they are wealthier than they actually are. The bubble reaches its height and then there is nothing left below because stock prices have become decoupled from economic and profit fundamentals.

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