Profit Margins, Margin Debt & Margin Of Error.......

Combine the data points with the excellent When Risk-Return Makes No Sense: How To Deal With An Overvalued Market and it should be clear that Mr. Market is walking on very thin ice now... I must admit that this is my view since September/October......Cannot help but it at least smells a little bit like "Flucht In Sachwerte"... I still think that the risk / reward is far more favourable in GOLD... ;-)

Wenn man die folgenden Daten mit dem extrem lesenswerten When Risk-Return Makes No Sense: How To Deal With An Overvalued Market kombiniert wird klar das man sich momentan auf sehr dünnem Eis bewegt.... Muß gestehen das ich diese Ansicht seit dem September/Oktober vertrete.... So langsam kann man zumindest unterschwellig das Gefühl haben das zumindest in Teilen eine "Flucht In Sachwerte" eingesetzt hat.....Bin mehr denn je überzeugt das in Sachen Chance/Risiko die Aussichten für GOLD weitaus vielversprechender sind.... ;-)

William Hester / Hussman Funds

While earnings growth expectations are steep, sales growth expectations are more modest. Sales-per-share for S&P 500 companies is expected to grow about 5.5 percent this year and about 7 percent next year, according to forecasts. The difference between the growth rates of the top and bottom lines is implies a forecast for sharply rising operating profit margins. The graph below is updated from an earlier piece, and includes forecasts through the end of 2012. It plots the long-term level of S&P operating margins in blue. In red, I've plotted the operating margins currently being forecasted by analysts based on their projections for sales and earnings. Last October, analysts were about half way to pricing in profit margins that matched the record levels of 2007. Now, they are just about there.

David Rosenberg / Gluskin Sheff

As for 2011, the consensus is looking for $97 on S&P 500 operating EPS — we did $95 at the peak of the last cycle when the unemployment rate was at 4.5%, the industry CAPU rate was 81%, private sector credit xpanding at a 16.2% annual rate and nominal GDP at a 4.9% YoY pace.

So the consensus believes that barely two years into the second weakest post-recession recovery in the past six decades that we will actually get back to peak profit levels seems to be a tad outlandish.

Stock Market Rally Explained The Mess That Greenspan Made

Ad in the the Money & Investing section of today’s Wall Street Journal

Factoring in the tight junk spreads right now one must assume that looking at the next chart the "Margin Of Error" is probably "slim"......

Da momentan selbst historisch gesehen recht enge Junk Spreads vorherrschen muß man beim Anblick des nächsten Charts wohl unterstellen das in Sachen "Margin Of Error" wenig "Spielraum" bleibt.....

Investors really ♥ junk. We mean really. FT Alphaville

In most discussions of the high-yield bond market, historical spreads play a major role. But comparing spreads today to those of the past assumes that junk bonds are a constant entity over time. Unfortunately, junk is junkier today, as illustrated by this chart [at left] from last October’s Global Financial Stability Report.

The fraction of CCC or lower-rated bonds approximately doubled from early 2007 to early 2009. And according to a recent report from Fitch, the fraction at the end of 2009 was still 27%.

Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.

H/T EconomPicData

The "risk trade" is currently clearly not in the early innings....... Looks like the Mantra Bullish. No Matter What & the "Moon Trade" ( brilliant!) is still alive & kicking.... ;-)

Der sog. "Risikotrade" befindet sich sicher nicht mehr im "Anfangsstadium"..... Sieht so aus als wenn das Motto Bullish. No Matter What sowie Ladies and Gentlemen, We Are Trading On The Moon ( brilliant!) momentan noch immer zu greifen scheint...... ;-)+

UPDATE:

PARTS OF THIS MARKET ARE LOOKING IRRATIONAL PragCap

Why Young People Should Buy Stocks on Margin Time H/T Denninger

We just survived the worst debt-fueled binge since the Roaring '20s. Now two professors at Yale University are suggesting we introduce leverage into a new realm of our lives —our retirement portfolios. TIME's Barbara Kiviat asked economists Ian Ayres and Barry Nalebuff to explain themselves.

You are advocating that people in their 20s and early 30s take all of their retirement savings and buy stocks on margin. Can you explain why that's not as crazy as it sounds?

"It's not as crazy as it sounds because it helps people better diversify risk across time"

Read this twice....

UBS: EQUITY MARKET RISKS APPROACHING EXTREMES PragCap

Irrational Exuberance Is Here: VIX Lowest Since July 2007 As Options Speculation Highest Since Dot Com Days

The VIX has just hit the lowest level since July of 2007 as Sentiment Trader reports that "speculation in the options market has spiked to its highest levels since the spring of 2000."

As i´ve said, not in the early innings.....

Wie gesagt, nicht mehr im Anfangsstadium......

Earnings Quality And Credit Cards

Minyanville Peter has done a great job of digging into numbers at Target. It looks like credit card lenders have in essence become the consumer lenders of last resort and on top of this Target (and others) are getting creative ( I assume this is nothing new) in putting aside lower loss provisions to make their latest number. But why should they act in a different way than lots of banks.....? This move in the face of the coming recession is very shortsighted and underpins my view that the earnings quality ( not only in the US) is often "subprime". This doesn´t make the market more attractive......

Minyanville Peter hat Ihr wirklich einen tollen Job gemacht und hat sich stellvertretend für etliche Firmen die genauen Daten des Target ( nach Wal Mart die Nummer 2 in den USA) Ergebnisses angesehen. Und die zeigen zwei wenig erbauliche Trands. Zuerst bleibt festzuhalten das die Kreditkarte nach Wegfall der Immobilienrefinanzierung und anderer Kreditmöglichkeiten mehr denn je der letzte Strohhalm für den bis über beide Ohren in Schwierigkeiten US Konsumenten ist. Zum anderen wird einmal mehr deutlich wie "kreativ" (sicher nichts neues) die Firmen werden müssen um Ihre letzten Quartalszahlen zu "treffen". Immerhin haben die ja in etlichen Banken erstklassige Vorbilder (bloß das es dort um Mrd geht....). Und das ganze im Angesicht der kommenden Rezession. Sieht für mich doch extrem kurzsichtig, fahrlässig und auch offensichtlich aus. Das Pendel wird dafür in den kommenden Jahren umso stärker zurückschlagen. Einmal mehr ein Beleg für meine These das die Gewinnqualität (nicht nur in den USA) oftmals "subprime" ist. Das macht die schon jetzt nicht billigen Märkte nicht gerade attraktiver......

Minyan Mailbag: A Bird's-Eye View of the Credit Conundrum
Finally, no one is talking about it yet, but I think the market will soon begin to realize that the credit card lenders have in essence become the consumer lenders of last resort.

As consumers have been shut out of the mortgage and home equity world, the last available credit is plastic. One statistic that I have found very troubling is the degree to which credit card balance growth is running ahead of retail sales growth - a key sign that the consumer is stretched.

In normal times, you would expect aggregate credit card balance growth to run about in line with GDP and retail sales growth. This year it is running almost 2.5 times that. Clearly consumers are using their cards for far more than purchases. And my guess is that for many Americans their credit cards have become the latest, but potentially last, source of financing available.
Because of the oversized credit card balance growth, however, I think the market is missing what is really happening within card issuer portfolios – particularly loss and delinquency data. Today, no one seems to be very concerned about the increases in reported losses and delinquencies. However, when you start to normalize these statistics for the enormous balance growth we’ve seen, the increases in both are quite dramatic.
To put this all together, take Target’s (TGT) latest financial results and you can see the numbers for real. First, credit card balance growth was up 14% year-on-year - almost 1.5 times Target sales growth of 9.5%. Second, thanks to this balance growth, reported year-on-year delinquency ratios are up only a little bit (60+ days delinquencies of 3.5% versus 3.4% a year ago), but the dollars of delinquent accounts are up almost 18% - to $242 mln from $205 mln – and, as an aside, “late fees and other revenue” are up more than 36% year-on-year.

Digging even deeper, you come away with more unanswered questions. First, annualized net write-offs for the quarter were up 17% - 5.4% of loans versus 4.6% during the year ago quarter. But behind that, masked by 14% balance growth, there is a 32% increase in the dollars charged off.

Further, and to me more troubling, Target dropped its loan loss allowance from 8.3% of loans at the end of July 2006 ($501 mln) to 7.4% at the end of July 2007 ($509 mln). Had Target kept its provision at 8.3% of loans, the incremental cost would have been over $64 mln or almost 40% of the pre-tax quarterly earnings of Target’s credit card business.

Alternatively, had Target kept its provision at the same 1.8 times net charge-offs as last year (an 8.3% allowance on 4.6% in net write-offs), the required ending provision would have been over 9.7% of loans - at an incremental cost to the company of almost $144 mln – all but eliminating earnings from the credit card operation for the quarter. Put simply, when measured in dollars (rather than percentages of balances) Target’s nearly flat year-on-year loan loss allowance does not synch with the increase in loan balances, delinquencies, charge-offs, and late fees.

Subprime Danger Limited - But What About Chinese Stock Market Exposure? / China

It´s yet time for another update on China. The FT is reporting some very interesting details on the earnings quality of Chinese companies. If you take this into account the PE that is calculated on the operating level would be far higher than the already sky high ratio. To my knowledge only Slovenia rivals China with an even higher PE. But as we all know it´s all about liquidity and most shares are probably still a better buy than Washington Mutual & Co .......

Es ist mal wieder Zeit für ein Update aus China. Die FT hat ein paar extrem interessante Details zur Gewinnqualität der chinesischen Firmen ausgegraben. Wenn man lediglich die operativen Gewinne zur Berechnungsgrundlage des KGV´s heranziehen würde kommt man zu einem noch deutlich höheren KGV als dies jetzt ohnehin schon der Fall ist. Nach meinem Kenntnisstand kann es z.Zt. lediglich Slovenien in Sachen astronomisches KGV mit China aufnehmen. Aber bei der Liquidität spielen Bewertungen momentan halt keine Rolle und ich würde immer noch fast jede chinesische Aktie lieber kaufen als zum Beispiel Washington Mutual & Co ....... But it could be that in China investors should be looking closer to home for worrying exposure inside the nation’s lenders and other companies.

Strong earnings growth in China has been used by some to justify the higher valuations there than elsewhere in Asia.
But, reports Jamil Anderlini in Tuesday’s FT, what if it turns out that growth is underpinned by the country’s soaring stock markets, rather than core profits?

Profits rose on average by 71 per cent in the first six months of the year for the more than two-thirds of listed Chinese companies that have already published results. But operational profit growth was only about 35 per cent, according to Jerry Lou, equity strategist at Morgan Stanley.

So up to half of the heralded earnings growth of companies listed in Shanghai and Shenzhen may have originated from piling into the country’s red hot stock market. Almost a third of those companies’ income in the first half was non-operational, up from 13 per cent in 2006, and much higher than most developed markets where non-core income usually accounts for less than 10 per cent of total profits.

And this is the market that sent Bank of China A-shares up 1.3 per cent at the end of last week on the back of news that it had $10bn of subprime exposure. BoC’s Hong Kong-listed H-shares fell about 6 per cent on the same announcement.

Financial companies derived 26 per cent of first-half profits from non-operational income in the first six months of the year, Anderlini adds, up from 8 per cent in 2006.

Subprime be damned - stock market exposure could spell quite some profits slowdown when the easy earnings evaporate.

Thanks to Bespoke

> Somehow this reminds me of the Nasdaq bubble when companies like Intel were reporting billions of profits from unloading some of their ( 12 month later worthless) venture capital investments via IPO. ....

> Irgendwie kommen bei mir da Erinnerungen an die wilden Nasdagzeiten hoch. Ich kann mich noch gut daran erinnern wie Firmen wie Intel Quartalsgewinne in Mrdhöhe dadurch erzielt haben das sie ihre ( im nachhinein wertlosen) Venture Capital Beteiligungen mittels eines IPO an den Markt gebracht haben ......

The problem with financials / Hussman

It is not hard to understand why common sense from Hussman is obviously not good for the business of Wall Street. I wanted to add another point that doesn´t makes thing better. I think if the financials would be forced to account conservatively the lots of the earnings would fall apart. If you want an example of how "creative" this process has become make sure you read Wells Fargo Gorges on Mark-to-Make-Believe Gains

Es ist aus nicht weiter verwunderlich das der gesunde Menschenverstand der jede Woche von Hussman unters Volk gebracht wird nicht gut für das Geschäft von Wall Street ist. Ich habe noch einen Zusatz zum Report zu machen. Ich bin mir ziemlich sicher das die Gewinne schon jetzt deutlich geringer ausfallen würden wenn die Finanzkonzerne konservativer bilanzieren würden. Als anschauliches Beispiel wie weit die "kreative" Auslegung der Bilanzvorschriften inzwischen gediehen ist bietet sich dieser Link an Wells Fargo Gorges on Mark-to-Make-Believe Gains

The problem with financials
We continue to carry a very low weight in financial stocks. Though the recent weakness in these stocks has prompted a great deal of interest in “bottom fishing,” my impression is that such efforts are based on the same untempered assumptions of high and growing earnings in this sector that existed months ago. P/E ratios ought to be well below historical norms when those P/Es are based on record earnings and record profit margins. In my view, existing valuations are based on untenable assumptions of permanently high profit margins in this sector, with optimistic growth assumptions as well.

In 2000, this was the essential problem with the technology sector. It was some time before Wall Street's expectations caught up with the reality that profit margins are cyclical and that early declines off of overvalued peaks do not constitute bargains.

I expect that in the next year or two, we will observe at least one quarter, and more likely a full year, in which the entire profit of the U.S. banking sector is consumed by loan losses.

Consider, for example, the latest FDIC Banking Profile, which was published based on June 30, 2007 data (before the recent liquidity crisis emerged). In that report, the FDIC noted that the ratio of loan loss reserves to total loans remains at a 32 year low. As for the portion of those loans that are in trouble, the FDIC notes “for the fifth quarter in a row, reserves failed to keep pace with the increase in non-current loans.” The industry's “coverage ratio” of reserves to non-current loans fell to the lowest level since the third quarter of 2002, while non-current loans posted the largest quarterly increase since the fourth quarter of 1990. Recall that 1990 and 2002 were periods when recessions were already well underway. If we're already seeing these signs of credit stress at the peak of an economic expansion, the figures we observe in a recession are likely to be a lot worse.

> Make sure you read Is WaMu the Next Countrywide? to see how ugly the situation and the quality of earnings already is.

> Ich kann jedem empfehlen Is WaMu the Next Countrywide? zu lesen um zu verstehen wie übel die Lage selbst bei einigen großen Instituten inzwischen aussieht.

> The impact on total S&P 500 earnings is if you take this table from Bespoke already over 30 percent. I have seen charts that include the impact of the financial arms from companies like GE, GM, F, Harley etc and the number is closer to 30 perecnt and 40% of the profits. Either way you look at it this number is going to decline significantly.

> Der Gewinnanteil an den gesamten S&P 500 Gewinnen liegt wenn man nach der Übersicht von Bespoke geht bei über 30%. Ich habe auch schon Aufstellungen die zusätzlcih die Finanarme von GE, GM, F, Harley usw miteinrechnen. Dann verschieben sich die Zahlen Richtung 30 und 40 Prozent. Wie man es auch dreht und wendet diese Anteile werden sich in den nächsten Jahren massiv gen Spüden bewegen.

> Here Bear Stearns as an example. I´ll bet that the real number for 07 and 08 will be much lower. How can any Analyst come up with another conclusion is a mystery to me. They should know that Bear is viewed as the most vulnerable as it generated 44 per cent of its revenue from its fixed-income business, according to Bernstein Research. It also has least exposure to less troubled markets outside the US. Here is another good story why a slump in earrnings is very likely American Investment Banks "Shots In The Dark" Economist

> Nehmt Bear Stearns als Beispiel. Ich gehe jede Wette ein das die tatsächlichen Gewinne in 07 und 08 deutlich niedriger sein werden. Wie ein Analyst hier zu einer anderen Meinung kommen kann ist mir schleierhaft. Ich gehe davon aus das denen der Fakt bekannt ist das Bear 44% seiner Umsätze im Anleihebereich macht und fast ausschließlich auf die USA beschränkt ist. Hier ein guter Link der zeigt warum dei Gewinne aller Investmentbanken wohl demnächst deutlich niedriger ausfallen dürften. American Investment Banks "Shots In The Dark" Economist

EPS Trends	Current Qtr Aug-07	Next Qtr Nov-07	Current Year Nov-07	Next Year Nov-08
Current Estimate	2.32	3.19	12.73	13.62
7 Days Ago	2.78	3.48	13.43	14.47
30 Days Ago	3.36	4.05	14.69	15.76
60 Days Ago	3.39	4.04	14.72	15.78
90 Days Ago	3.50	4.21	15.28	15.95

> And when you look at this table of pending LBO deals via the NYT it should be clear that the investmentbanks are also facing "loan" trouble.....

> Und wenn man sich diese Übersicht der noch zu finanzierenden LBO Deals von der NYT ansieht kann man sich leicht ausrechnen das die Investmentbanken ebenso wie die gewöhnlichen Banken einige "Kreditprobleme" zu lösen haben....

James Grant put it this way – “Benjamin Graham and David L. Dodd, in the 1940 edition of their seminal volume ‘Security Analysis,' held that the acid test of a bond or a mortgage issuer is its ability to discharge its financial obligations ‘under conditions of depression rather than prosperity.' Today's mortgage market can't seem to weather prosperity.”

As of June 30, 2007, the net income of all FDIC insured banking institutions totaled $36.8 billion. At an annual rate, that represents about 2% of all loans outstanding. Meanwhile, net charge-offs for bad loans were already running at an annual rate of about 0.50% in June. That's in a strong economy, before the recent problems, and loan loss reserves didn't even budge from a 32-year low. Net charge offs could easily quadruple in a mild recession.

Importantly, the problems go far beyond sub-prime. In its June 30 report, the FDIC noted “all of the major loan categories posted both increased net charge offs and higher net charge off rates.” Overall, net charge-offs jumped by over 50% from year-ago levels, with a jump of over 60% for consumer loans and over 70% for industrial loans. These percentage jumps are so high because they are off of such a low base, which underscores the extent to which observed profits in the financial sector have been unhindered by loan losses in recent years. Charge-off rates have not soared as much for credit cards, but this is because the existing level of charge-offs is already high (representing over 3% of the total amount volume of credit card balances, year-to-date). In short, the problems are in all categories, and given the thin coverage of the banking system for such losses, rising charge-offs and loan loss reserves are likely to bite deeply into earnings.

For some financials, relatively high dividend yields are being touted as a measure of safety and quality for investors. The difficulty is that if earnings come under pressure, a greater share of earnings will be required to cover those dividends.

> Let us hope that the Analysts are not so far behind the curve as they were with the homebuilders Number Of The Day ....Earnings Estimates for Homebuilders..... But as i said before....Common sence isn´t good for business......

> Bleibt zu hoffen das die Analysten in diesem Fall nicht ganz so daneben liegen wie bei den Buildern Number Of The Day ....Earnings Estimates for Homebuilders..... Wie ich aber schon vorher angemerkt habe ist der gesunde Menschenverstand nicht förderlich um Geschäfte an Wall Street zu machen.....

Now the bust is taking a brutal toll. In January, industry analysts predicted that the 10 biggest builders would have average earnings per share of $3.69 for 2007; the latest forecast is for a loss of $1.18.

Of course, the long-term return is equal to the dividend yield plus the long-term growth rate of dividends. Though I don't expect forced dividend reductions for major U.S. bank stocks, I do believe that the growth rates assumed by Wall Street here are overstated. And while a well-covered dividend can produce a lower “duration” and therefore a smaller sensitivity to broad market fluctuations, it does not in itself produce an undervalued stock. ....

In any event, my impression is that the problems for financials are just beginning, and that the risk premiums demanded by investors are likely to rise. As investors have seen throughout market history, stocks having rich valuations, weakening fundamentals, and rising risk premiums typically don't constitute great bargains.

> Now compare this to the "call" from Wall Street finest.... They obviously didn´t use any realistic earnings estimate. The only way they can justify this target is probably the "Fed Model". But as Hussman also has pointed out in "Fed Model"Knowing What Ain't True every body that has to use this argument is at best clueless (try to stay polite)........

> Nun vergleicht diese Aussagen mal mit den unvermeindlichen Zielen und Prognosen für den S&P 500. Anhand von realitischen Gewinnschätzungen sind diese Ziele sicher nicht erstanden. Die einzige Erklätung wäre das das brüchtigte "Fed Model" eine gewichtige Rolle gespielt hat. Wie abermals Hussman in "Fed Model" Knowing What Ain't True geschrieben hat ist jeder der dieses Argument heranzieht im besten Fall ahnungslos ( höflich formuliert).......

Disclosure: Short KBW Mortgage Finance Index

Mainland China vs H Shares Hongkong

Time for another China update....... Fascinating!

Zeit für ein neuerliches China Update.......Faszinierend!

A few days ago the Chinese government has indicated that it will expand a program allowing its citizens to buy Hongkong-traded stocks directly to calm down the mainland stock market and ease the liquidity pressure that has driven stocks into the stratosphere.

So far the only thing that happened is that the Chinese shares that are listed in Honkong spiked and have closed a little bit of the gap (although, some shares jumped 70%). Needles to say that the stock market in Shanghai also climbed to multiple new highs. It will be key to watch if the gap in the future will be closed from the bottom (Hongkong 2008 PE 20 ) or from the top ( Mainland PE 40-50).

The longer the markets refuse to close the gap from the top the uglier the awakening should be.

> see also the chart "P/E Ratios: Nasdaq vs China"

Vor einigen Tagen haben die chinesischen Offiziellen durchblicken lassen das es zukünftig möglich sein wird auch chinesische Aktien in Hongkong ohne größere Einschränkungen zu erwerben. Dieser Schritt soll etwas den Druck von den heimischen Aktienmärkten nehmen und die Liquidität etwas breiter streuen.

Bisher hat diese Maßnahme in erster Linie dazu geführt das die chinesischen Aktien die in Hong Kong gelistet sind einen kleinen Teil der Lücke von unten geschlossen haben (obwohl einzelne Aktien über 70% explodiert sind). Überflüssig zu erwähnen das der Index in Shanghai munter weiter neue Hochs markiert hat. Es wird spannend zu sehen sein von welchsem Ende die zukünftige Bewertungslücke geschlossen werden wird. Momentan notieren die China/Hong Kong Aktien mit einem 08 er KGV von rund 20 während die Festlandaktien noch immer mit einem atemberaubenden KGV von 40-50 allen die Show stehlen.

Je länger die Anpassung von oben aufgeschoben wird desto ungemütlicher dürfte das erwachen sein.

> The table shows the run druing the last 5 days and ytd, estimated pe 2008 H shares Hongkong and mainland China, the "theoretical valuation gap", marketcap

Here another example that shows how different the two chinese markets act.

Hier ein weiteres Beispiel das anschaulich zeigt wie verschieden die zwei chinesischen Märkte zur Zeit noch reagieren.

The Financial Times is asking What’s the real Bank of China price?

On Thursday, Bank of China fessed up to holding just under $10bn in US subprime paper and CDOs. While its ‘H’ shares fell more than 6 per cent in Hong Kong in response, the reaction of investors in Shanghai was to push the price of the ‘A’shares up 1.3 per cent.

The gap between Bank of China’s mainland and HK prices has been widening for nine months now. This week the average premium of A shares over H generally widened to 70 per cent for the first time - and that is in response to Monday’s news that China intends to let its residents buy overseas stock (such as H shares)!

> But this is what happens when the central bank is offering deposit rates that are lower than the inflation rate...

> Aber das sollte nicht weiter verwundern wenn die Notenbank den Einlagenzinssatz unterhalb der Inflation festsetzt......

P/E Ratios: Nasdaq vs China / Bespoke

It´s all about liquidity........We can see the opposite effect from liquidity in the worldwide credit markets.

And it doesn´t help when the central bank is offering deposit rates that are lower than the inflation rate..... At least they try to ease the pressure and now want to open the gates to investments in Hong Kong.

Liquidität, Liquidität, Liquidität......Wir alle können momentan an den weltweiten Kreditmärkten sehr schön sehen wie das Gegenteil von zuvile Liquidität aussieht.

Und es auch nicht gerade nachteilig wenn die Notenbank den Einlagenzinssatz unterhalb der Inflation festsetzt.....Immerhin wird jetzt versucht einen Teil der Liquidität nach Hong Kong umzuleiten .

> Just to clarify : a red quote in China represents rising prices.

> Nur zur Klarstellung : Rote Symbole stehen in China für steigende Kurse

In the past we have made comparisons between the p/e ratios of the Nasdaq Composite and China's Shanghai Composite. Up until mid-July when US equity markets peaked, the price to earnings ratios on the two indices were very similar, and the argument could be made that even though China's stock market was rapidly increasing, its valuation - while high - was still inline the Nasdaq's.

Since mid-July, however, the two p/e ratios have diverged dramatically as the prices on the two indices have moved in opposite directions. The trailing 12-month p/e ratio on the Nasdaq is now 35.88 while the p/e on the Shanghai Composite is now 49.57.

> But probably still better value than a Washington Mutual with a forward p/e ratio of 10.... :-)

> Wahrscheinlich sind selbst diese Aktien noch immer werthaltiger und günstiger als Washington Mutual die ein 2008 KGV von 10 aufweist.... :-)

US Profit Growth Q2 / Thomson Financial

And even the 4.4 percent could be to optimistic. The start with massive warnings from Home Depot, Sears, DR Horton, Ryland, Huntington etc was lousy..... But maybe the oil sector can rescue some of the growth....But i´m not so sure if this is the sector in which you want to see big profits when you are looking for a healthy market......And this at times when you are paying very high multiples with margins and corporate profits to GDP already at record highs.....But maybe the crashing $ will boost earnings...... :-)

So wie es aussieht könnten selbst die 4,4% zu hoch gegriffen sein. Nachdem der Start der Gewinnsaison mal eben gründlich nach hinten los gegangen ist wird es sehr schwer. Ectl. kann aber der Ölsektor die Kohlen aus dem Feuer holen. Wenn man das allerdings als Zeichen eines starken Marktes sehen möchte muß man schon recht nahe der Wall street wohnen oder zumindest Hausmeister von CNBC sein. Und das zu Zieten wenn die Bewertungen, Margen und der Gewinnanteil zum GDP bereits teilweise neue Hochs erreichen..... Aber evtl. wird ja auch der fallende $ den Gewinnen unter die Arme greifen.....

Profit is expected to rise only 4.4 percent!

The estimates have steadily gone down since the start of the year. In January the expectation was for a 7 percent rise.

Despite the recent slowdown Thomson Financial is still expecting profit growth to reach 7.8 percent.

But the quality of this profit growth is worth a closer look. Thomson estimates that almost 23 percent of the grwoth is generated through buybacks


Die großen US-Konzerne starten mit gemischten Aussichten in die zweite Jahreshälfte. Nach goldenen Jahren mit prozentual zweistelligen Gewinnsteigerungen hat sich das Wachstum vor allem im Heimatmarkt spürbar abgeschwächt. Zum Beginn der Bilanzsaison für das zweite Quartal rechnen Wall-Street-Analysten für die im Börsenindex S&P 500 abgebildeten Firmen nur noch mit einem durchschnittlichen Ergebnisplus von 4,4 Prozent. Das geht aus einer Prognose des Finanzdatenanbieters Thomson Financial hervor, der die Schätzungen aller großen Investmenthäuser bündelt

Die Erwartungen an die US-Konzerne sind in den vergangenen Monaten kleiner geworden: Zu Jahresbeginn hatten Analysten noch mit einem Gewinnwachstum von knapp sieben Prozent für die Zeitspanne zwischen April und Juni 2007 gerechnet

Dennoch wird laut Thomson Financial für das Gesamtjahr 2007 ein Plus von 7,8 Prozent erwartet, weitgehend getragen von einem mehr als zwölfprozentigen Plus im Schlussquartal.

Ökonomen geben allerdings zu bedenken, dass viele Firmen ihre relativen Gewinne mit milliardenschweren Aktienrückkäufen aufpolieren. Thomson Financial geht davon aus, dass die Unternehmen inzwischen 23 Prozent ihres Ertragswachstums allein diesen aktionärsfreundlichen Programmen verdanken. Durch den Rückkauf eigener Aktien sinkt die Zahl der außen stehenden Papiere. Dadurch erhöht sich automatisch der Gewinn je Akti.. "Es ist offensichtlich, dass der Einfluss von Rückkaufprogrammen größer wird", sagte Thomson-Direktor Michael Thompson dem Handelsblatt.

Stock Market Valuations Round Trip / Bespoke

Time for a p/e round trip about the globe. Bespoke has some excellent insights. Here is another country that is "beating" even China and the Nasdaq. I also recommend the latest piece from Hussman about the "Fed Model". Here is the data for the Russel 2000. No bargain.....Especially when financials are the largest sector.......

Es kann nicht schaden sich mal wieder einen Überblick in Sachen Bewertungen zu verschaffen. Unter den o.g. Links sind noch Informationen zu anderen Märkten sowie eine Einschätzung von Hussman zum sog. "Fed Model".

There seemed to be quite a bit of interest in our post yesterday about China's Shanghai Composite now having a lower valuation than the Nasdaq. Below we have updated our chart of current P/E ratios for the major indices of selected countries. As shown, the Nasdaq currently has the highest trailing 12-month P/E of the countries we analyzed. The Netherlands, Germany and the Euro Stoxx Index have the lowest valuations


Looking at estimated P/E ratios for the current year, we see that Japan's Nikkei-225 Index is the highest, while the UK's FTSE 100 is the lowest.


We continue to get a large number of requests for current financial ratios of sectors and indices. For your convenience, we have updated them for the ten major US sectors below. Numbers highlighted in green are better than the S&P 500 and numbers highlighted in red are worse. Currently, the Consumer Discretionary sector has the highest 12-month trailing price to earnings ratio, while Energy has the lowest. Not surprisingly, the Utilities sector offers the highest yield at 3.00%, while Technology offers the lowest at 0.58%.

>Here is a different view that is not based on pe´s. When you look at the cash flow multiple for the "cheap" european stocks you will be suprised to see that they are reaching new highs. But when at the same time buyouts ( Hilton at 10 times, Hilton 14,5 times) are topping even this lofty multiple the bulls will argue that there is still more upside. Good luck......

>Hier ein etwas andere Blickwinkel der mal nicht das KGV als Grundlage nimmt. Nimmt man den Cash-Flow als Maßstab sind selbst die angeblich so "billigen" europäischen Aktien nicht mehr ganz so günstig wie evtl. das nackte KGV suggeriert. Au der anderen Seite kann man als bullishes Argument sicher anführen das die letzten großen Übernahmen alle ein 10 faches ( Huntsman, Hilton ) des Cash-Flows gezahlt haben. Viel Glück......

Interest Rate Intuition / Hussman On The "Fed Model"

Excellent anti spin from Hussman. Keep this in mind when the "eyperts" try to spin bad economic news into gold (lower yields, higher stock prices) . Hussman shows that this is in the longe term just bubbletalk. But i have the feeling that long term is today often viewed until the next jobs report, the next cpi number etc...... Click on the headline to read the entire report

Großartiger Bericht zu dem oft zitierten "Fed Model" von Hussman. Man sollte die "Experten" nicht für voll nehmen wenn Sie dieses Argument undifferenziert bringen. Das passiert immer dann wenn schlechte Daten in positive für die Börsen umgedeutet werden (niedrige Renditen, steigende Aktienkurse). Hussman zeigt sehr schön das dieses Argument langfristig aus dem Reich der Fabel stammt. Da ich aber eh immer mehr das Gefühl habe das langfristig heutzutage (speziell in den USA) häufig nur bis zum nächsten Arbeitsmarktbericht, der nächsten Fed Sitzung etc bedeutet....... Klickt bitte auf die Überschrift um den kompletten Bericht zu lesen

It continues to fascinate me that investors are entirely willing to base their financial security on concepts that can be wholly disproved with even a cursory look at historical data. The Fed Model is the predominant example of this at present. The following chart should be sufficient to reiterate that the effect of interest rates on stock valuations is vastly overrated, and that raw earnings yields (particularly based on peak earnings to date) explain subsequent market returns far better than indicators that “adjust” for interest rates in the way the Fed Model does.

The truth is that the relationship between stocks and interest rates is far more nuanced than the Fed Model assumes.

Since 1950, the average yield on the 10-year Treasury bond has been just below 6%, while the average price/peak earnings multiple on the S&P 500 has been slightly over 14. For simplicity, we'll use those levels to define bond yields as “low” or “high” and to define stock valuations as “cheap” or “expensive” relative to long historical averages. Also for simplicity, we'll classify interest rates as “falling” when the 10-year Treasury yield is below its level of 6 months earlier, and “rising” otherwise.

Our intuition should immediately suggest that stocks probably perform best when valuations are cheap and interest rates are both low and falling. We should also expect that such favorable conditions would not have been observed too often. As it happens, that intuition is correct. That combination of conditions has historically occurred only about 7% of the time, but during those periods, the S&P 500 has achieved average annualized returns of 31.72%.

In contrast, our intuition should suggest that stocks probably perform worst when valuations are expensive and interest rates are both high and rising. Again, that intuition is correct. Such a combination of conditions has historically occurred about 10% of the time, and during those periods, the S&P 500 has achieved average annualized returns of 3.05%, clearly below Treasury bill yields, and generally with a great deal of volatility as well. When interest rates have been high and rising, the total return on the S&P 500 has been muted at about 4.00% annualized even when stocks have been relatively cheap.

Low interest rates are no panacea
Beyond those conditions, however, the intuition of the typical investor is likely to be badly off the mark. The reason is that investors have come to believe that low interest rates are a good thing for stocks in general, when in fact they are only a good thing if stock valuations are cheap. Importantly, low interest rates are of no help to stocks when stock valuations are rich. Contrary to the bad intuition that the Fed Model instills in the minds of investors, relatively low interest rates (at least on the basis of 10-year bond yields) are not nearly sufficient to justify or offset the negative effect of rich stock valuations. ....

In general, high stock valuations coupled with low interest rates (as we have now) have historically been symptomatic of a fully priced, overly optimistic market, with little margin for error.

With stock valuations rich, interest rates still relatively low but clearly rising, just 18% of investment advisors bearish, and short-term trends overbought, my hope is that investors do not allow the excitement (or frustration) of a market near new highs to obscure the very real danger here for long-term investors.

History's Big Bubbles " How does China's bubble compare with previous financial manias?" / Economist

Great take on Greenspan! Probably one of the most overrated people out there. On the other hand i find it perverse to suggest that Chinese stocks have more room to run on the basis that the pe is only 45!

Klasse Kommentar zu Greenspan. Der Typ ist wohl einer der am meisten überschätzten Personen der Finanzgeschichte. Ein Teil seines Erbes wird ja nun gerade in Form der Immobilienkrise sichtbar. Auf der anderen Seite ist es befremdlich hier zu suggerieren/unterstellen das die chinesischen Aktien aufgrund eines verglichen mit Nasdag und Nikkei zu bubblezeiten üblichen KGV´s von 100 noch luft hätten.

ALAN GREENSPAN, the former chairman of America's Federal Reserve, always insisted when in office that it was extremely hard to spot bubbles before they had actually burst. This, he said, is one reason why policymakers should never try to prick them. Today, however, he seems to have no doubts that China's stockmarket is bubbling over. He recently declared that Chinese share prices were “clearly unsustainable”, with a risk of a “dramatic contraction”.

It is curious that China's bubble seems so blindingly obvious to Mr Greenspan and so many other Americans who remained in denial about their own dotcom mania right to the end. For according to The Economist's “Bubble guide” (see chart), China's recent share-price boom is still relatively modest compared with the giants of history. The chart plots the performance of Chinese share prices over the past five years against the three great bubbles of the 20th century: Wall Street in the 1920s, Japan in the 1980s and America's NASDAQ in the 1990s. The NASDAQ composite index saw a gain of more than 500% from 1995 to early 2000. Japan's Nikkei 225 jumped by 300% from 1984 to 1989. The Shanghai A-share index, having recovered most of its plunge in late May, shows a gain of about only 160% over the past five years.
Moreover, Chinese A-shares now have an average price-earnings (p/e) ratio of around 45. At their peaks, the average p/e ratio of the Nikkei 225 in 1989 and the NASDAQ at the start of 2000 were both well over 100. This suggests that Chinese share prices could have much further to climb before the bubble bursts—unless China's policymakers are braver than Mr Greenspan and take bolder action to dampen the market now.


Compare this to Stories from the eye of the storm in china....

Vergleicht das mit Berichten aus dem Auge des Sturms in China.....

I try to translate as good as possible

The stock market fever has taken taken over China. How big the euphoria really is witnessed one top asset manager from Fortis Investments. A new Driver was greeting him at his arrival at the Beijing Airport

The old driver just quit his job to spend more time on his stock trades.

On top of this he wondered at a capitals market conference why the majority of the visitors were watching at their laptops all the time. They all were online so they were always connected to their brokerage accounts and always on top of the stock market action.

China ist im Börsenfieber. Wie groß die Aktieneuphorie wirklich ist, erfuhr jetzt William de Vijlder, Chef-Anlagestratege von Fortis Investments. Bei seiner Ankunft auf dem Flughafen von Peking begrüßte ihn ein neuer Chauffeur.

Der alte hatte gerade gekündigt, um mehr Zeit für Börsengeschäfte zu haben. Der Banker erfuhr dann, dass viele Chinesen inzwischen nachts vor den Toren der Banken schlafen, um morgens rechtzeitig da zu sein, um eines der limitierten Wertpapierdepots zu eröffnen. Auf einer Kapitalmarktkonferenz schließlich wunderte sich de Viljder über die immense Zahl von Zuhörern, die nebenbei ihren Laptop aufgeklappt hatte.

Es waren keine Journalisten. Auf fast allen Bildschirmen flimmerten Kursinformationen von der Börse. An einem heißen Markt will eben niemand etwas verpassen.

New Economy, or Unfinished Cycle? / Hussman

tough times for rational investors like Hussman. to me it more an more obvious that only a major "credit event" in the lbo/takeover mania can shake the markets. to be honest i thought that this event happened in February in subprime........

harte zeiten für rationelle investoren wie Hussman. es sieht immer mehr so aus das eizig und allein ein "unfall" im kreditsegment der lbo/übernahmen etwas ändern kann und die märkte nachhaltig urchschütteln kann. um ehrlich zu sein dachte ich das dieses ereignis bereits im februar im bereich subprime kredite stattgefunden hat......

Presently, the market's valuation on the basis of price/revenue, price/book, and price/dividend is higher than at any prior historical market peak on record except the 2000 peak.

On the basis of normalized profit margins, the current P/E for the S&P 500 would be about 25 times record earnings rather than the (still elevated) multiple of 18.4.

Even if we give only 25% weight to that normalized value, and give 75% weight to the prevailing multiple, the resulting P/E for the S&P 500 is still over 20, and is about the same as what prevailed prior to the 1929, 1973-74, and 1987 market plunges.

This market is only “cheap” if one couples non-GAAP “forward operating earnings” with the Fed Model. As I've detailed in recent weeks, that approach has ridiculous implications even in the data sample (1980-2000) that was used to construct it, and is quickly and easily verified as pure garbage in pre-1980 data, using any proxy remotely close to estimated “forward earnings

How Overvalued Is China ?

i don´t know any Chinese company enough to judge them on a fundamental basis but when you read stories with a pe in the triple digit you should get nervous...especially when it is a meat company and just over the (stock) border you can buy a similar company for a steep discount........ but as long as the music plays........

ich kenne nicht eine chinesische aktie um mir fundamental ein urteil erlauben zu können. aber immer wenn ich geschichten mit einer dreistelligen kgv lese werde ich hellhörig ...das gilt besonders wenn es sich um einen fleischproduzenten handelt und vergleichbare werte die an einer anderen börse gelistet sind für einen bruchteil erwerben kann.....aber solange die musik noch spielt.....

June 11 (Bloomberg) -- What's a Chinese meat producer really worth?

On the mainland, investors pay 147 times earnings to own Fortune Ng Fung Food (Hebei) Co. Hong Kong-listed China Yurun Food Group Ltd. trades at 26.7 times profit. And in Singapore, People's Food Holdings Ltd. is valued at 11.7 times earnings.

``There is not that big a difference in their businesses, so there shouldn't be such a difference in their prospects and valuations,'' says Greg Lesko, who helps manage $900 million at New York-based hedge fund Deltec Asset Management.

Trading restrictions are partly responsible for the variations. That has sparked a search for more rational price-to- earnings valuations in Chinese equities. To some investors, even Hong Kong is looking overvalued. Increasingly, they are finding the most sensible multiples in one market: Singapore. .....

China's benchmark CSI 300 Index would need to fall as much as 54 percent to come in line with the price-to-earnings ratio of Hong Kong's Hang Seng China Enterprises Index, which tracks shares of 41 mainland companies listed in the city. The CSI 300 would have to drop 65 percent to match the average multiple for Chinese shares traded in Singapore........
`I've Made Mistakes'
Tan Jiong, 33, a security guard in Shanghai's Lujiazui financial district, invested 90,000 yuan ($11,737), equivalent to about half of his savings, in local stocks in March. He said he was ``extremely upset'' by the government's decision to triple the stamp duty but decided to maintain his holdings.

``To sell now would be admitting I've made mistakes, which I can't reconcile myself to,'' Tan said. .......

>this attitude could be an expensive one.......

>diese einstellung könnte am ende teuer werden......