Equity Markets are a Farce!

What drives an investor to buy a stock? Is it the fundamentals? The technicals? A combination of the two? Well I'm not quite certain anymore. You can basically throw all of the textbook answers out the window when it comes to today's equity markets.   Why do I say that?    Because I believe that the only thing that is driving this market is the notion that the government is going to bail out everyone and their brother. 

One of the reasons that I say this is because the fundamental picture just does not add up. In a recent blog article I wrote about the earnings fallacy and how the economic picture looked bleak as declining revenues and rising unemployment were the catalysts for the "good news" in the equity markets.   Well here something else to chew on:

The S&P 500 P/E Ratio has more than DOUBLED from the end of 2008, which at 60.7 was a historic figure at the time!

Why is this happening and what's the outlook going forward? 

The current P/E Ratio for the S&P 500 Index is at a whopping 143.95, per their website. That's more than 3 times its historical average!!! Is no one shocked by this figure???

 To put this figure in perspective, the S&P 500 P/E ratio throughout and after the Internet Bubble of the late 1990s/early 2000 was in the high 20s and low 30s. And we all know how that turned out! 

So what needs to happen? Either corporate earnings need to go up, or stock prices need to come down.

 The only way I can foresee earnings catching up with current prices is if companies are able to slash costs such to the point that a guy like "Chainsaw Al Dunlap" would be receiving humanitarian awards from labor unions! 

What seems more likely however is that prices need to come down to become more in line with historical averages. As it stands now, there is NO value in this market and I would caution anyone looking to invest today to be extremely careful.

Does this mean that it's time to get short? Not necessarily. The old adage that "the market can stay irrational longer than you can stay solvent" applies now more than ever. While the P/E ratio is not the only metric one can use to measure value, I'm surprised that no one even mentions it.

Which brings me back to my original point, that the only thing driving this market is a false belief that government spending is going to somehow support these levels. Perhaps the government IS supporting these levels through the mythical "plunge protection team" (PPT).  Right now there is a lot of institutional money pouring back into the market as the mortgage-backed debt markets have pretty much blown up and that game is over.

Once cooler heads prevail and the "smart money" sees this market for what it is, the decline could be precipitous. Until that time I will proceed cautiously, and I'd advise you to do the same.