Most Overvalued Stock Market In U.S. History – Here’s Why

I find it to be mind-blowing when financial advisors and stock market gurus get in bubblevision or write Seeking Alpha articles and assert that the stock market is good “relative” value right now.   They are either dishonest, unethical or just stupid.  Likely a combination of all three in varying degrees.

Here’s a chart with which everyone is familiar:

Based on that graphic, it looks like the current stock market is only the third most overvalued in history, right? WRONG.

The problem comparing the current p/e ratio of the S&P 500 with that of previous stock bubble tops is that the accounting used to produce the “e” is not comparable. Over time, FASB and the SEC have colluded to make it easier for companies to hide losses and report non-cash income as GAAP cash flow and earnings..

As an example, in 2010 FASB issued a bulletin which changed the way big Wall Street banks were allowed to account for bonds and other forms of debt issued by others that are held as assets. Originally, banks had to market their bond/debt/loan holdings to market and accrue any market to market gains or losses at quarter-end as either income or expense. FASB decided to let banks classify any and all debt as “hold-to-maturity,” and allowed banks to hold this debt at face (maturity) value without ever marking to market. Any debt that was marked below maturity value (par value) could be marked up to par and moved into a “held to maturity” account. By doing this, the banks created non-cash gains in these holdings that was counted as income. Banks hold $100’s of billions in bonds/loans and, starting in 2011, this rule change allowed banks to create billions in phantom, non-cash income. This of course translates into lower p/e ratios.

There’s several areas of accounting over the years that have accomplished a similar feat for all publicly traded companies. The problem is that it has rendered p/e ratios over time incomparable. Of course, NO ONE points out this fact and certainly any Wall Street analyst would be fired if they went on a truth tirade. The bottom line is that, looking at the p/e ratio graph above, we don’t know how the current p/e ratio for the SPX compares with the p/e ratios at the market peaks in 2007 and 2000 and 1929. What we do know is that the current p/e ratio is significantly understated relative to the p/e ratios in 2007 in 2000 because earnings are overstated relative to those years because of the accounting gimmicks that enable companies to boost GAAP non-cash earnings.  It could be that the current p/e ratio is the highest on record if we could make an “apples to apple” comparison of p/e ratios across time.  In fact, I would assert that applying standardized GAAP across time would prove that the current market is more overvalued than at any time in U.S. history.

The above analysis is an excerpt from my latest issue of the Short Seller’s Journal.  In this issue I presented two retail stock ideas for shorting.   One of them was down 3.7% today and the other was down just under 1%.   In the past couple of issues I have explained in detail why the retail sector is short opportunity right now.  But that window will close quickly as more companies do what happened to Macy’s and Kohl’s last week.    You can get more details on the SSJ and subscribe clicking on this link:   Short Seller’s Journal.

4 thoughts on “Most Overvalued Stock Market In U.S. History – Here’s Why

  1. As you say, no one cares to pay attention. But there must be those participating in the deception who know. And they will profit on the decline, as the rest wonder what just hit them.

    Apparently the analysts are exempt from any fiduciary responsibility as the changed rules protect them from having any understanding of reality. You won’t even be able to sue the bastards. They can just give their ‘deer in the headlights” look like Bernanke did when he was asked if there was a housing bubble.

    Markets are manipulated and totally based on accounting tricks, fraud and corruption. Same goes for the dollar. I’ll be extremely, extremely pissed off if when the illusion crashes down to earth TPTB think they have the right to confiscate my PMs.

  2. Hey Dave and company, this is OT, but am alerting you to something important you need to look at. This is George Webb’s ongoing Youtube video series called “Where is Eric Braverman?” Webb is chronicling the vast web of the Clinton Foundation being outed as a CIA cutout. The dot connecting is amazing – it is research that is all documented and open source, so the guy is not running with his opinions.

    Braverman was Clinton’s head of the Foundation. He has been missing 79 days and is likely in hiding. Much of the larger conspiracy is now surfacing. It involves the whole ball of wax – Oil pipelines, human trafficking, brownstoning (sex blackmail), pay to play, gladio operations, FBI co-opted by the CIA by pushing domestic co-intel pro, asset seizure and entrapment programs. WOW it’s all coming out now!

    Day 79 – Where is Eric Braverman? Part 2 Who Killed Monica Petersen:
    https://www.youtube.com/watch?v=JscBxQCcRwU

    Also a good interview with Webb on Richie Allen’s show yesterday:
    https://www.davidicke.com/article/399639/richie-allen-show-davidicke-com-george-webb-disappearance-former-clinton-foundation-ceo-eric-braverman-pizzagate

  3. In 2002, the SEC allowed companies to not include the expense of debt servicing/interest when calculating earnings reports. This was revealed to me by 2 SEC employees via open ended questions in 2005 or 6. This perversion along with what you mentioned and what the House and Senate banking committees did in 2002 to change the debt to income ratio from prudent to perversion so “poor” people could afford to buy a home on paper, but not in reality. This was all preceded by the rescission of the Glass-Steagall act of ’33 to prevent the conflict of interests of the 3 entity types. We are now living in a time that the GAAP has made ENRON, WorldCom and MF Global the norm; 2+2= to a range of 5 to 10.
    Upon my discoveries of these perversions in 2006, I found no one that could relate to the problems it was about to cause and the Bus. editor of the Arizona Republic thought it would be irresponsible to write about it as it would cause senseless fear.
    I again attempted to notify them of the transgressions of the US Constitution by our law makers as it relates to civil forfeiture and the banks no longer maintaining a fiduciary responsibility to account holders as the account holders are relegated to the last of unsecured creditors; your bank accounts are legally primed for a bail-in and you have no legal recourse. They have yet to notify their readers/public. So much for the de facto 4th branch of government.
    We want to live by principles but our nature compels us to be practical; mathematical paradigm vs communication/word/language paradigm. One is rigid for the tool to function as intended while the other lacks consistency in rules and evolves daily; principled reasoning vs whimsical reasoning. Humans have not changed in 8000 years and this should make it easy for us to capitalize on, if we can stomach the SPXS losses.

    If most of the people embrace the perversion then the perversion is the reality, hence the principled must embrace the perversions to survive. Momentum. Crazy.

  4. As mentioned, it is important to know what the value is based on. So, when was the last time govt trust and confidence collapsed? Where will global capital flows go when the govt bond bubble pops? Since the assumptions you use will be flipped upside down, so will your conclusions.

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