2020-12-03 22:10
publication
2020-12-03 22:10
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Valuations of US stocks broke the 1929 record, followed by the memorable crash and the Great Depression. The situation on Wall Street in terms of valuations is starting to resemble what happened in the late 20th century.
The S & P500 and Nasdaq set new all-time records during Thursday’s session, but only the latter managed to finish the day above the line. The Dow Jones gained 0.29% but was still below 30,000 points. The S & P500 fell by a modest 0.06%, finishing with 3,666.72 points. The Nasdaq, after an increase of 0.23%, set a new record closing price at 12,377.87 points.
However, this is not about nominal records. The thing is that the market is far ahead of the companies’ actual earnings. Despite this year’s collapse of corporate profits, the S & P500 has gained 13.7% since the beginning of 2020, and the Nasdaq Composite has grown by as much as 38.2%.
As a result some index valuations surpassed the 1929 levels, made during the speculative bubble of the ‘crazy’ twenties. At least, this is the result of the calculations of Deutsche Bank analysts who refer to the CAPE ratio. This is the c / z ratio modified by Professor Robert J. Shiller which takes into account the inflation-adjusted earnings of companies in the last 10 years.
The CAPE for the S & P500 index is currently 33.4. This is more than at the peak of the boom in the 20s of the previous century. Higher valuations of companies were only recorded in the late 20th century during the Internet bubble frenzy. It is also roughly twice the historical average.
Examples of speculative “balloons” do not need far to look. Tesla shares on Thursday increased by more than 4% to $ 592. Since the beginning of 2020, the capitalization of Elon Musk’s company has increased by 609%. The small auto company is now valued at $ 540 billion, despite having earned only a quarter of a billion dollars in net profit in the last four quarters, and it’s hard to find a better example of a valuation completely out of touch with reality.
The deeper we dig, the worse it gets. Zombie companies (that is, companies that cannot generate enough cash to cover interest payments) are for amateurs. The new wave are vampire companies whose operations are unprofitable even at the level of EBITDA (i.e. operating profit without depreciation, taxes and interest). According to Bloomberg’s calculations 47 out of approximately 600 US corporations with non-investment (so-called junk) ratings generated negative EBITDA in Q3. This absurd situation would not have happened had it not been for the extraordinary actions of the Federal Reserve, buying corporate debts, maintaining zero interest rates and “printing” money to buy Treasury bonds.
Krzysztof Kolany
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