Stock Market Warning Siren is Blaring

Are we blinded yet by the brilliance of corporate earnings?

“Adjusted” earnings growth is 10.2% year-over-year in the second quarter, according to FactSet, based on the 91% of the companies in the S&P 500 that have reported results. The energy sector was a key driver, with 332% “adjusted” earnings growth from the oil-bust levels of a year ago.

The sectors with double-digit earnings growth: information technology (14.7%), utilities (10.8%), and financials (10.3%). The rest were single digit. Earnings in the consumer discretionary sector declined.

Revenues grew 5.1%, also led by the energy sector. At the beginning of Q2 last year, the WTI grade of crude oil traded at $35 a barrel. In Q2 this year, WTI ranged from $42 to $53 a barrel.

So the Wall-Street hype machine is cranking at maximum RPM to propagate the great news that earnings are soaring, and that this is the reason why stocks should also be soaring, and forget everything else. The hype machine carefully avoids showing the bigger picture which is dismal for earnings and ludicrous for stock valuations.

Aggregate earnings per share (EPS) for the S&P 500 companies on a trailing 12-months basis rose for the second quarter in a row. That’s the foundation of the Wall Street hype. But here’s the thing with these EPS: they’re now back where they had been in… May 2014.

Yep. More than three years of earnings stagnation. No growth whatsoever, even for “adjusted” earnings. In fact, on a trailing 12-month basis, aggregate EPS of the S&P 500 companies are down about 5% from their peak in Q4 2014. And yet, over the same three-plus years of total earnings stagnation, the S&P 500 index has soared 34%.

This chart shows those “adjusted” earnings per share for the S&P 500 companies (black line) and the S&P 500 index (blue line). Chart via FactSet (click to enlarge). I marked August 2012 as the point five years ago, and May 2014:

And these are not earnings under the Generally Accepted Accounting Principles (GAAP). FactSet uses “adjusted” earnings for its analyses. These are the earnings with the bad stuff “adjusted” out of them by management to manipulate earnings into the most favorable light. Not all companies report “adjusted” earnings. Some only report GAAP earnings and live with the consequences. But others put adjusted earnings into the foreground, and that’s what Wall Street dishes up.

Since August 2012, the trailing 12-month “adjusted” earnings per share of the companies in the S&P 500 index rose just 12% in total. About the rate of inflation – nothing more. Over the same five years, the S&P 500 Index soared 72%.

And there’s another thing: these earnings per share are heavily influenced by the share count. Companies have been on a huge borrowing binge over these years, fueled by historically low interest rates, and a big part of that borrowed money wasn’t used to create new things, expand, invest, or invent, but to buy back their own shares. This type of financial engineering lowered the share count, and thus artificially increased earnings per share. Growth in EPS due to financial engineering is fake earnings growth.

This is the peculiar situation of today: On average, these companies have stagnating earnings per share propped up by “adjusting” these earnings and by financial engineering. The price-earnings multiple (P/E ratio) for stagnating companies should be low. In January 2012, the P/E ratio for the companies in the S&P 500 index was 14.9. And that was high. As of Friday, the aggregate P/E ratio is 24.3:

But look what happened. The P/E ratio peaked in March at 26.6. Since then, the S&P 500 has ticked up 3% and earnings have risen to this glorious level Wall Street has been hyping and the P/E ratio has come down a wee tiny bit…. back to where it had been in the fall of 2016.

In the five-year picture, earnings per share – however doctored they’d been – expanded just 12%. But share prices skyrocketed 73%. And thus the P/E ratio soared. These phases of “multiple expansion” are part of the stock market’s boom and bust cycle. They’re invariably followed by periods of multiple contraction.

Multiple contraction doesn’t stop at the average long-run P/E ratio but falls far below it, because that’s how the long-run average P/E ratio is formed: by periods far above the average (right now) and by periods far below the average. In the past, this type of multiple contraction from the top of the range to the lower end of the range – the process of “reversion to the mean” – offered some hair-raising rides for the stock market overall and for ludicrously overvalued stocks in particular, with many money-losing companies not making it to the next phase.

No one knows the date when this process kicks off in earnest, though everyone wants to know it so they can scurry out of the way beforehand. But when enough folks are trying to scurry out of the way, they’ll will precipitate the beginning of that process. That’s always how it happens.

The last big enthusiastic buyer, China, is leaving the party. Read…  This Hits the Wheezing Commercial Real Estate Bubble at Worst Possible Time

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  114 comments for “Stock Market Warning Siren is Blaring

  1. cdr says:

    People are sheep. Machines swap paper endlessly without regard to economics. Central banks buy equities using money created on demand. The Swiss National Bank needs profits to pay for public benefits. The Japanese buy ETF shares in massive amounts. Interest rates are held low by Central Banks for the stated purpose of maintaining high and rising equity prices.

    Yes, someday this will all end. Corporate earnings have nothing to do with this eventual event.

    The better guessing game is what will it take to end the government subsidy of the stock market?

    • Jake says:

      Yes, that is a good way to put it. The central banks are subsidizing the stock and bond markets, a form of welfare for the wealthy.

      • Raging Ranter says:

        Welfare is exactly what it has become. It’s remarkable how many “frugality” and “retire early” blogs have popped up over the past decade. While most modern consumers could certainly use a lesson in frugality, there is almost a cult-like belief among modern frugality preachers that financial markets will allow them to retire at age 30, and live a life of leisure from that point on. This cult has attracted some very skilled and qualified individuals. Naturally the higher one’s income, the sooner one can reach this blissful level of personal wealth.

        These people are in for a shock when they find out that the market will not fund a 50 or 60 year retirement just because they are frugal. They will be forced to go back to work, likely at a time when jobs aren’t as plentiful as they are today. They might wish they had stayed in the workforce.

        Don’t bother arguing with the “FIRE” crowd (that’s their little acronym for “Financially Indedendent – Retired Early”). They’ll just tell you you’re being negative, and of course, they didn’t achieve financial independence by listening to negativity. That’s of they don’t outright call you a “loser wage slave” who is envious of them. Let them discover for themselves that financial markets were never meant to be, nor capable of being – a form of welfare that allows young, healthy adults to abandon paid employment. We are living in anomalous times that have allowed this to happen. Anomalies by definition are temporary.

        I should add here that not all frugality bloggers/commenters are arrogant. I’ve gotten good advice and tips from many of them. Many are decent, helpful people who are rightly critical of the modern rat race and the consumerist treadmill it feeds. They’re just wrong in their belief that the markets will replace paid work.

        • alex in san jose says:

          Raging Ranter – I think you’ve summed up “Mr. Money Moustache” to a T.

          People forget that he’s Canadian, so free education and health care, plus he and his spouse came from a high enough run on the social class ladder to both be engineers, plus his idea of a hobby wasn’t rock climbing or fly fishing, but fixing up old houses that he’d then rent out or sell. This was his side-gig, for fun.

          In other words, he’s had HUGE advantages that are simply, as a matter of law and circumstance, not available to subjects of The Land Of The Free.

          That being said, frugality is always good. I have my own informal curve… that each decade (unless you’re in the top 10%) you’ll be half as wealthy as the decade before. It’s certainly tracked that way for me.

        • DanR says:

          Yes, with the current market valuations and rising interest rates, would not count on stock market or particularly FANG stocks to fund a nice early retirement.

          At the same time, frugality is a great plan for riding out downturns.

      • hidflect says:

        I remember Denis Kucinich saying that capitalism will always survive because there’ll always be socialism to bail it out.

        • George McDuffee says:

          The U.S. policy makers, regulators and legislators seem to have lost sight of the fact that Wall Street is not the economy, and that the economy is not some VR game where their macho fantasies can be played out, but a real world where people must eat to live. The actions of the speculators, market manipulators, and rentiers have real world consequences for real people [the 99% majority].

    • Ambrose Bierce says:

      The real question is when does Janet Yellen come to the party? That should allow for even more money from the sidelines to come in. Congress has control for the moment, but any emergency will do.

      • Stan L says:

        By “money from the sidelines” do you mean the FED reserve making a phone call to the NY FED who then calls Citadel and has them and their endless money supply Spoof S&P mini contracts so the price never comes down, while at the same time selling VXX and VIX contracts?? Is that what you mean Ambrose?????

        • Ambrose Bierce says:

          With full central bank authority Yellen can buy stocks just like Kuroda. Meanwhile Congress still has control of the matter, what Yellen can and cannot buy. So far 45 hasn’t said much, but he should consider this approach. Make a statement that the Fed’s balance sheet has the full backing of the US treasury, an arrangement which has been implied but is not a given. Then invite Yellen in and offer her a deal, come into the cabinet, under my direct authority, or take the alternative, in which case there is no guarantee. If he wants to off balance sheet a lot of bad paper it’s a great solution.

        • cdr says:

          Ambrose Bierce,

          45 won’t publicly say anything to Yellen or about the Federal Reserve other than standard compliments. There will be no way to see if he means the platitudes or is simply being non-controversial to avoid ‘upsetting the markets’.

          The Globalists (formerly called Robber Barons in the 19th century) probably privately say to him that he will cause great harm if he publicly criticizes the Fed or their policy. They probably hold out the image of old widows starving if the market falls even a little.

          Interest expense to them is interest income to me. The Globalists are good at obfuscating that. Not criticizing the Fed is not protecting old widows. Just the opposite.

    • Maximus Minimus says:

      The truth is, the government is supporting every market there is: the stock market, and the bond market because printed money has to go somewhere. In addition, the housing market is supported government insurance removing responsibility from the lenders. Indirectly, the market for yachts is supported because a big house needs a big boat. Tourism is supported because why be responsible with your finances, and you can always sell your overpriced house. Did I say this pyramid is built on sand?
      The SNB, and BoC are buying stocks because they ran out of bonds worth buying? I mean, why by bonds with negative yield?

  2. Anon says:


  3. Realist says:

    May you live interesting times or how did that Chinese curse go ? Indeed interesting times the day reality will show its ugly face ….

  4. Quadra says:

    If you where the head of SNB. (Swiss National Bank)
    When do you take profit on your vast US Eq blue chip portfolio?
    They have been buying USD to lower the CHF.
    During a period of soaring markets. What happens when the market drops and everyone buy´s Swissy as safe haven and your dollars will be worth a lot less?
    On the other hand if you decide to start selling now and start the snowball? You get a bit more profit in the Bank, but the other CBs will blame you for starting the mess.

    So the logic option left is be to buy more Equities and foreign currency.
    To be honest if this goes bunkers I don’t know how they will justify any of this including why the bought the US Equities in the first place.
    Makes me wonder if all these positions are not just a holding for FED.

    • Ambrose Bierce says:

      The stock market has always acted this way, concerning block trades. A block trade is a large transaction, done at the current market price. Someone wants to unload on a large position and the buyer may know they are buying a lemon so they extract some implicit agreements like an extended warranty on a used car. And when a hedge fund player bought a really large block of UST which China dumped on the secondary market, the manager vetted Bernanke, to make sure he wasn’t going to raise rates and cut him off at the knees, and Bernanke in turn wants to be sure the fund won’t dump that paper. Once the agreements start to unravel anything can happen.

  5. raxadian says:

    Considering that more and more of the stock market is being controlled by bots, can we just keep blaming people?

    Anyway I say that by the end of the year with FED interest rates being higher, there will be some sort of crash start somewhere, probably Mexico. Followed next by any other country that borrowed a lot of dollars taking advantage of the almost flat interest rates.

    If you have debt in dollars, the time to convert it into another currency (not the euro) is now.

    Of course take this with a grain of salt because I am just someone posting on the Internet.

    • Nicko2 says:

      Why not the Euro? It’s beating out the UK Pound.

      • raxadian says:

        Because is debt, if your debt is in a strong currency you will end paying more as the currency as the price of the currency rises.

        Hence the old trick of getting debt in a weak currency since inflation will end making so the debt you have lowers as the currency prize lowers.

    • Frederick says:

      So you believe the dollar will strengthen from here?

  6. Tom says:

    This kind of report has been around since 2011, the fear is driving the markets higher as there too many people still in cash! Until everyone starts to feel they have a fool proof plan to making money in the stock market this remain a bull market

    • intosh says:

      The people are playing the cryptocurrency game now. The stock market is “last year’s” game.

      • ASP says:

        Russia’s banks are investing heavily in blockchain.

        “A built-in virtual currency tentatively called “gas” will be used to reward users and third-party miners for validating transactions within Masterchain, according to the whitepaper.

        Russia’s central bank has already deployed an ethereum-based blockchain pilot to process online payments and verify customer data with lenders including Sberbank. According to the whitepaper, Masterchain may also let Russia’s banks search through each other’s database of blacklisted clients to reduce fraud risks and expenses.

      • Frederick says:

        From the frying pan into the fire than Intosh What happens to Cryptos in the event of an EMP attack?

        • Petedivine says:

          I don’t know…but without water, power, a working car, etc.. I would not be too concerned about crypto currencies. I don’t think your government script will mean a lot in an EMP scenario either.

        • alex in san jose says:

          Frederick – A “Carrington” event is something to actually worry a bit about. Read up on it. it was in the 1860’s, when electric communication was in its infancy (not I use the term electric not electronic) and it basically fried the system. And it doesn’t depend on the state of the fat kid in Korea’s, or the fat kid in the White House’s dyspepsia; it happens when it happens.

  7. michael w Earussi says:

    Stocks aren’t bought based on company fundamentals, they’re bought on the hopes that some bigger fool will drive up the price even higher.

    This is the inevitable byproduct of ZPR, there’s no safe place to park your money that earns even a modest return anymore so they have to choose something and that is stocks which drives up prices.

  8. George McDuffee says:

    An insightful article, however be reminded that the S&P indici, and indeed most of the common indici are not “fixed” in the sense that the same companies are tracked. The “losers,” e. g. Enron, are dropped and replaced with the current hot companies, thus the indici are in one sense “best case.” What companies were removed/added between Aug 07 and Jun 17?

  9. TJ Martin says:

    ” Are we blinded yet by the brilliance of corporate earnings? ”

    Yup ! 1928 revisited .. almost verbatim . 5-4-3- ..

  10. Max Power says:

    One of the things I remember from finance class is that over the long term the price of stocks should be a function of the present value of a future stream of dividends. In that context it’s interesting to note that except for a short spike during the low of the market in the depth of the financial crisis, the S&P500 annual dividend yield has been consistently stable at around 2% for the last 15 years or so, despite the huge run up in the value of the index. In this context, actual earnings paid to shareholders, at least on the face of it, appears to have kept up with the run up in stock prices.

    • andy says:

      So many wrong assumptions. A good place to start is understanding what is value and what is price.

      • Max Power says:

        Can you please elaborate on what is wrong?

        The S&P500 dividend yield is calculated as dividends/price and this ratio has stayed basically constant for the past 15 years, even though the denominator has increased a lot.

    • cdr says:

      “One of the things I remember from finance class is that over the long term the price of stocks should be a function of the present value of a future stream of dividends”

      Good joke. I also remember that. So quaint. Kids probably pay $300 for that textbook, too. Then comes paying back the school loan. Bigger joke on them.

      • Max Power says:

        Sorry, but you answer is rather irrelevant. I wasn’t talking about the level of dividends but rather their odd consistency in yield in face of the run up in stock prices and PE ratio over a long period of time. In a way what I am talking about actually proves the textbook correct (in that its trend IS consistent with valuation theory)! My point is to contrast this with the PE ratio, whose behavior is NOT consistent with classic valuation theory and to wonder why the two are diverging this way.

        I am disappointed that the couple of responses so far to my post have been neither insightful nor thoughtful.

        • cdr says:

          ” My point is to contrast this with the PE ratio, whose behavior is NOT consistent with classic valuation theory and to wonder why the two are diverging this way”

          Same answer as above. Stock prices have little to nothing to do with “classic valuation theory” or anything textbook oriented. That world does not exist any longer and, probably, existed only some of the time long ago.

          Algos, spoofing, abnormally low interest rates, central banks printing money to pad their equity portfolios (SNB and BOJ), and monetary policy intended to raise equity prices to enhance the wealth effect, per Bernanke, control stock prices. After that comes greater fool – which, I relent – is a part of Classical Valuation Theory as a footnote.

          As I said, “Valuation Theory” how quaint and, let me add, irrelevant except to pad $300 textbooks.

        • cdr says:

          Long ago when I was in IT, there was a joke about the Demo vs the real thing. The Demo could do anything and do it perfectly according to the customer’s specific needs. It was a perfect solution. Always.

          Reality, after the sale, required a lot of expensive customization and the quality of the end product was a function of the skill of the programmer – analyst. Some were good. Most were mediocre at best. Back in the Y2K ’emergency’ many project managers were warm bodies only who were billed out at high cost. Consultant fraud was common and I never saw it questioned by the customer.

          “Classical Valuation Theory” is the demo. Reality is a bucket shop only now Central Banks are in on it and they can control interest rates and print money to buy all they want. Globalists (called Robber Barons in the 19th century) set the tone and outline the results they expect. The 99% are fodder.

    • Brad says:

      Good point. But is it not possibly because companies have been buying back their own shares at such a high rate these last few years which has allowed the dividend yield to keep up? If buybacks weren’t this high would the dividend yield not have been much lower and therefore a better reflection of the truth?

      • Max Power says:

        Yes, but if you use that rationale you’d expect the PE ratio to stay relatively constant too. Instead, not only has it risen, but it’s risen quite substantially.

        • Brad says:

          Sure, but considering all the adjustments, write-offs and charges made to push up earnings I would expect the PE to rise. I’m not sure how much the financial trickery adds to earnings but it’s not an insignificant figure.

        • Max Power says:

          Brad, I can no longer reply to your post (I guess we’ve hit the the max level of replies this comments system supports).

          Anyway… I’m afraid you’re not looking at it right… the adjustments, write-offs, and charges serve to make the PE ratio go down, not up.

  11. Maximus Minimus says:

    Have the earning been adjusted for inflation, and I mean the real inflation, not the number manufactured by the bureau whose name ends with stics, or stink?

  12. Anon1970 says:

    Overpriced bonds. Overpriced stocks. Overpriced real estate. No easy answers.

    • Frederick says:

      Underpriced precious metals is the obvious answer to me and NOT all real estate worldwide is overpriced by the way

  13. Rates says:

    As long as the muppets are still buying iPhone and clicking ads to power Facebook and Google, nothing would change.

    Anyone saw Apple’s projections on iPhone 8 sales? “Blockbuster”. Supposedly Americans would have a hard time coming up with money for emergencies, but they certainly have no problem coming up with moolah for Apple phones. Perhaps it’s myself that’s stupid i.e. emergency == iPhone 8? The economy goes on.

    • Maximus Minimus says:

      Have you seen a replaceable battery gadget lately? I bet not. Have you seen an iCrap that lasts beyond the two year plan with regular muppet use? Regular car replacement cycle? Maybe 10 years. Regular phone replacement cycle? Two years. The business model is backed into the cake.

      • alex in san jose says:

        I was an Apple loyalist from the advent of the blue and white G3. The last Apple product of any quality was probably the Icebook, and that’s not saying much at all. Their real downfall was about the time of the Air, and now the build quality, service quality, and software quality is very low. A years-old Thinkpad or Dell Latitude will run circles around the newest Mac, in software (yes Win10 is better than OSX) hardware, build quality, and service (because the old Vietnamese guy up the street will happily fix it for you for $50 – $100 or sell you a newer one for $200).

        Now I’m a “hater” because facts = hate to the Apple crowd.

        • d says:

          A lot of your criticism of the changes (All negative) at apple, are valid.

          Particularly the return to soldered memory with lead free solder that fails quickly.

          The obscene over pricing of equipment with large memory capacity, only available on delayed cash with order basis, the introduction of over priced proprietary flash storage to replace generic drives. And the gluing of batteries to prevent any owner user service what so over.

          However the claim that OSX is inferior to M$, is, M$, BS.

          I shall wait a while with older Apple equipment to see if there is any improvement with the current entity policy’s.

          Since i moved from M$ to apple I have had 2 SW problems in 11 years and both were third party browser related.

          Some sort of M$ SW problems/issues were at least monthly from 1993 to 2005/6, and still are, even with M$ 10 which is a bloated pig.

          M$ still updates (unless you learn how to stop it) with out warning killing the functionality of Non M$ applications. This is deliberate on behalf of M$.

          M$ spyware turns off/restricts non MS firewalls and virus protection and turns on the M$ garbage even though it appears the Non M$ products are on.

          As for daily BUY NOW M$ nags. lets not start on that topic.

        • alex in san jose says:

          d – I’d rather deal with OS/2 Warp than anything involving Crapple.

          A while back, my boss’s wife gave me her old iPhone 5. Neato – I’d have a smart phone. I took it home to the shop here and put it on the charger, listened to my NPR and went through my day, no problems.

          The next day, well shit, NPR must be having a signal problem. I tuned across the dial … Hm, Fm’s f*cked up. I switched out various things, changed sockets, well hell’s bells, looks like my beloved Sangean radio’s given it up. Well, it served me faithfully for a few years, I’ll just walk over to Fry’s and get a new one. Came back with the new one, hooked it up, woops FM’s still just fuzz across the whole dial. Man! Must be the power strip … let’s unplug this-here iPhone that’s all charged up… Clarity!

          Apparently iPhone 5’s announce they’re all charged by wiping out FM reception, probably more than just the FM broadcast band but a much wider swathe of the VHF band.

          I returned the new radio, hooked my old one up, it’s blasting KGO right now, hehe. The Crapple phone was sold to the local “Fix Laptop” place downtown for $20.

          I will not have an Apple product in my house. As a ham radio op, I’m very offended by any device that wipes out any part of the RF spectrum, and it’s illegal to boot.

        • d says:

          Never had an Apple phone, never will. Grossly overpriced, status symbol.

          I wasnt writing about phones.

          Which are simply a modern sex aid.

          Used as an instant, how much is he/she ruler, replacing pocket watches, Guns, and Earring’s.

          If find the places where everybody has an iphone to be the places to AVOID.

          When mobile phones where the size of a brick, clunky, and expensive (In relativity) they were great, and useful, they actually made people money.

          Now, ever brat has one, and they are a pain.

          Now the business people who dont HAVE to carry them, and dont HAVE to answer them, are the people to cultivate, as they are generally the people who make the decisions.

          The rest are 247 answer the Phone/Email or else, dummies.

    • Anonymous says:

      “Supposedly Americans would have a hard time coming up with money for emergencies, but they certainly have no problem coming up with moolah for Apple phones.”

      You might want to consider the fact that some of the buyers will have a resale value “funds” to add with their purchase of the Iphone.

      • Dogstar says:

        Sign a contract, get a free phone.. that will fall apart just outside of contract. Those irresponsible, gluttonous, folks with their fancy “telephone” service.

        • alex in san jose says:

          Yep I could go out and get a smart phone today just by signing a contract, $50-$75 a month. I’m paying the upper end of that for a storage unit I’m not sure I really need.

        • Frederick says:

          Alex You have written in the past that your income is very low and yet you waste 75 a month on a storage unit I hope you’re storing something valuable

      • Rates says:

        And you might want to consider the idea that the buyers of the resale will have a phone and thus will not buy the new one. How can a new product be a blockbuster if plenty of existing customers buy the older one?

    • Max Power says:

      The cost of the device is almost irrelevant because it’s all about credit. The Mobile carriers have borrowed a solution to this from the car companies… extend the payment terms. When equipment installment plans (EIP) first came about a few years ago they started with 18 payments, then 20, then 24. Now they offer 30 payments. 36 is surely next. At Sprint their magic method for making the device affordable is to lease it to you — also using a solution borrowed from the auto companies.

      • Frederick says:

        This will end well I’m sure People are extending themselves in so many areas if interest rates go up or the economy crashes there’s going to be a world of hurt out there But we’ve seen this act before haven’t we?

        • alex in san jose says:

          Hell I’m leasing-to-own a trumpet right now. Yep ultimately I’m paying full retail for the thing too. But I’m so sick of used horns and their problems, and the high horn prices in my area that to me it’s worth it. The classic “it works when you’re poor” economics.

          But I can go out and play the thing and make a little dosh. I guess it’s kind of like leasing a car and driving a bit for Uber.

    • Brad says:

      I’m always amazed reading articles screaming “More than half of Americans have savings of less than $1000”. Then the new gadget comes out and suddenly millions can afford these ridiculously expensive devices. Who knows what to believe anymore.

      • Wolf Richter says:

        These folks do have credit cards.

        • Brad says:

          So I guess it says alot more about Americans’ debt-fueled consumerism. We learn from our government, or did the government learn from us.

        • Max Power says:

          Even better, they have what are basically interest-free loans from the cell carriers. And just like cars, most folks shop payment, not total cost — which, again, just like with cars, the cell carriers are lowering by extending the payment terms.

          It’s interesting in that at 30-months we are now past the usual term of the old dreaded cell contract. Now, effectively for most folks, the cell carriers have figured out how they can keep them in house for even longer than the two-years they used to before.

        • Ambrose Bierce says:

          you add on the monthlies, phone contract, car lease , it has always been thus, Bancarotta is $899, so its not just for middle class white folks anymore.

  14. Mike F. says:

    @Anon1970— “Overpriced bonds. Overpriced stocks. Overpriced real estate. No easy answers.”

    How about underpriced precious metals that carry no counter-party
    risk and that have been REAL money for over 5000 years?

    • Mark says:


      I’m with you buddy…stack on.

    • d says:

      Except they are not Under-priced they are also VERY over priced.

      Enable-ling miners to continue to work uneconomical mines.

      The miners did NOT create this situation, they are simply using it.

      • Frederick says:

        Silver is “overpriced” at 17 dollars an ounce Uhh NO

        • d says:

          Silver is currently getting close, to a possible physical buy zone.

          I like silver, always have, its easier to handle in small denominations.

          The divergence between it and the idiots favorite over-hyped one, is now difficult to describe.

          12 -15 is more to my liking.

    • Frederick says:

      Mike F Exactly I posted the same response BEFORE seeing yours bro Stack on Our day is fast approaching

    • Lee says:

      Unfortunately the futures markets in PM’s are still able to call the shots because those markets are where pricing is determined.

      Corrupt and manipulated? Yep.

      PM’s may be a good idea for some people (Venezuela) to protect themselves, most others really won’t be able to use them to protect their assets.

      In ‘normal’ markets the prices will fluctuate and be manipulated within certain price ranges – transaction costs are high and very little profit can be made unless huge amounts of capital are employed. Physical is subject to all sorts of problems.

      In abnormal markets such as Venezuela, one can protect ones assets to the extent that access to markets to convert the PM’s into an asset such as another stable currency or food is available. No good having the stuff unless you can use it!

      • Harambe says:

        Yes, it’s my understanding that the black market in Venezuela runs on US $, not gold, silver or platinum. But that was circa 2014; things have gotten more opaque since then.

  15. Tom Stone says:

    If you don’t buy Uber now you will be priced out forever!
    It’s gonna leave Berkshire Hathaway in the dust…
    Suzanne researched it, it’s a lead pipe cinch.

    More seriously, it’s time to look at return of investment rather than return on investment.

    • Frederick says:

      Gold and Silver Held physically works for me in this environment but call me a tin foiler I really couldn’t care less

  16. Camerons says:

    There were 4,819 public US companies in 1975. Forty years on, that number has fallen by more than a fifth, hitting 3,766 in 2015.

    30 firms earn half the total profit made by all US public companies.

    The top 100 firms have 84% of all earnings of these companies.

    The top 200 companies by earnings raked in more than all listed firms, combined! Indeed, the aggregate earnings of the 3,500 or so other listed companies is negative!

    • walter map says:

      “The fate of the world economy is now totally dependent on the growth of the U.S. economy, which is dependent on the stock market, whose growth is dependent on about 50 stocks, half of which have never reported any earnings.”

      – former Federal Reserve Chairman Paul Volcker, September 1999

      Uh oh:

      How Capitalist Central Banks Have Been Creating the Next Financial Crisis

      • Frederick says:

        Why is everything always about the US There’s a big world out there and those people factor in as well Frankly I’m tired of the Americentric view most Americans have There will come a day when the world ill just ” move on”

        • alex in san jose says:

          Frederick – I agree. You just go and invent your own Internet and make it (your country) centric. We’ll wait here.

        • d says:

          “You just go and invent your own Internet and make it (your country) centric.”

          Bit late china has its own GPS and basically it’s own internet. So does Russia.

          And the US stole the concept’s for, GPS and the net, from the same place, they stole, Aircraft Carriers, TV, Radar, Computers, Nuclear Weapons, and Guided Missiles.


          People who live in glass houses, should not throw stones.

          Trump complains about the chinese theft of US IP. Whilst sitting at the head of the largest IP theft entity on the planet.

          Even IBM’S earliest punch-card programs, where developed for it, by NAZI Germany.

          With out the Tech from NAZI Germany, and the NAZI Technicians to run it. The US would never have gone to the moon.

          Take a careful look at that USA USA trumpet, for before you blow it again.

        • kitten lopez says:

          man you comment section regulars, are fucking HIGHLARIOUS today! thank you alex in san jose!

        • d says:

          “Why is everything always about the US There’s a big world out there and those people factor in as well Frankly I’m tired of the Americentric view most Americans have There will come a day when the world ill just ” move on”

          That overdue point in time, may just about be upon us.

          The thing staving it off, is that the replacement options, in order of declining evil, are: Iran, china, india, and Russia.

          None of which, are really acceptable, or suitable.

          The french have a lot to answer for, they made this mess out of the world, the US is simply making it worse..

        • Rejected By Target says:

          “Even IBM’S earliest punch-card programs, where developed for it, by NAZI Germany.”

          I know this is going OT but…Didja know the punch card was inspired by the jacquard loom… (comes up near the end of the show)

        • d says:


          I don’t think jacquard realized what he had developed. Neither for some time, did many others.

          Rather like the Chinese with Gunpowder and Rockets, they knew it had a warlike application. Beyond using rockets to scare opponent’s and their horses by firing them over their heads (Genghis Khan). They applied no further military development to the concept.

          The first cannons (So Guns) were probably developed in Indonesia and the Philippines, not Europe.

          As both were Blowpipe hunting nations, Exposed to chinese fireworks long before the ME and Europe.

          Some islands in the Archipelago were equipped with “Primitive Cannons” made from wood and bamboo strips, strapped together with copper and steel bands. Noted the first European to travel there. Muslims had been there long before, Muslim’s had Bronze Cannons. Firing balls of marble and other stone’s, before Europe.

          I am unsure who copied whom with original punch-card technology regarding the British, as their development of it was very “STATE SECRET”.

          The British were however, way ahead of everybody with the addition of early valve computers to the punch card Technology. In 1942 when the Americans finally entered the war and came to England. The British were ready to start building the First nuclear weapon. They were being held back by the “Where”. The Americans had no idea what Nuclear weapons or computer’s were, let alone that they might actually exist.

          This method of Punch-card computer technology was still in use in Computerized Bank processing in the 1980’s.

  17. nick kelly says:

    It still puzzles me that borrowing to pay a dividend is ok under GAAP.
    The holders get a buck per share and the company is worth a buck less per share- so net the shareholder gets nothing.
    I guess there is the attraction of instant gratification as distinct from longer term thinking.
    A borrowed dividend should at least come with a subscript (d) next to the number, so everyone understands that this company is not earning its payment, and may not be doing well at all.

    • d says:

      “It still puzzles me that borrowing to pay a dividend is ok under GAAP.”\

      So is borrowing to pay wages.

      Its the same thing.

      What you need to look at when making this criticism, is what the borrowing is or is not secured against and what offshore Cash/Assets the entity has.

      Some Borrowing to pay dividends is long term shareholder positive. For a very small group of companies (APPL Being 1)

      • nick kelly says:

        The Apple borrowing was absolutely and totally about tax, nothing more. This was extensively covered in the media after Icahn shook down Cook after buying 1 percent or something of the stock. Jobs might not have taken Icahn’s call let alone go to lunch and then agree to a dividend.
        Like a shareholder needs more than Apple’s stock price increase?

        If Apple repatriated its offshore money to pay the the divvy, it would have had to pay about a 34% tax.
        So it borrowed the money.

        Obviously, my comment is directed at the majority of situations where this is not the case. For example private equity is notorious for loading up debt to pay itself dividends, often collapsing the company.

        • Petunia says:

          The loan is about repatriating the money. They borrow here in the US and pay there in the EU. Welcome to globalization.

  18. andy says:

    Adjusted earnings are BS because one off costs are “disappeared”
    Trouble is, one of costs keep re-appearing.
    As a rule, if relying on adjusted earnings, add 30% to resultant PE ratio.
    Makes PE of 24 above closer to 30.
    Caveat emptor.

  19. alex in san jose says:

    “Stock Market Stall Warning Is Blaring” FTFY

  20. Gummy Bear says:

    “Growth in EPS due to financial engineering is fake earnings growth.”


    “This is the peculiar situation of today: On average, these companies have stagnating earnings per share propped up by “adjusting” these earnings and by financial engineering”

    These two unsupported statements seem to be the basis for all else that follows.

    For example, which of the FANG stocks pad their earnings?

    Good insight here and I’m sure there are a few bad apples, but if the problem is as widespread as you claim then it would be useful if you could provide a few concrete examples (even one) of serial abusers. Without data you have mere speculation and its credible to beleive that share buybacks have been baked into the market for the last fifty years.

    “Extraordinary claims require extraordinary proof”

    • Wolf Richter says:

      No problem…

      1. Share buybacks since 2012 total about $2.7 trillion – I’ve written about this many times, and regular readers know this. Here is Yardeni. Check out the chart on page 3…

      Here’s one of my articles on it based on FactSet data, including chart:

      So when the S&P 500 companies spend $2.7 trillion over five years to lower their share count, it’s going to impact EPS in significant ways.

      2. The “FANG” stocks or rather FAANG stocks are just five stocks out of 500. But anyway, of the FAANG stocks, Netflix uses adjusted earnings…

      Among the other infamous “adjusted earnings” users in the S&P 500: Microsoft, Merck & Co., General Electric, and many others. They’re “serial abusers” — meaning they’re doing it every quarter.

      Here’s one of my articles on Big Pharma and adjusted earnings – with some details…

      There are many others that are not in the S&P 500, including Twitter, that adjust earnings (Twitter under GAAP lost money every year, but shows a profit under “adjusted” earnings). Here’s one of my articles on Twitter’s adjusted earnings…

      The SEC is trying to crack down on it, and some companies are now dropping the practice. Most still resist it.

      3. The trailing 12-month “adjusted” PE ratio for the S&P 500 is 21.7 (FactSet). The GAAP PE ratio for same is 24.3. That’s 12% difference overall, including companies that adjust earnings and those that don’t.

      This is all well-known and well-documented. I’ve written about it many times over the years, citing sources all along the way.

      • George McDuffee says:

        Good Summary!

        As a way to reduce the use of non-GAAP [fantasy] “earnings,” I suggest limiting dividend payments and stock buybacks to no more than the previous years [real] taxable earnings, i. e. “revenue” on which taxes have been paid. This would solve several corporate governance and governmental revenue problems at the same time, while no doubt causing problems in other areas. What do you and the other readers think of such a change, and what are some of the downsides for the real investors and general public that you see?

        • Steve says:

          Unnecessary regulation. If investor’s truly understood a financial statement and the associated notes, all the data is there before your eyes.

          Investors are getting lazy (At least the ones using OPM). (So too has the SEC) If you see the capital structure of a company change in any significant way while a large dividend is declared, be wary.

          Published/Audited financial statements DO NOT use ‘Adjusted’ earning but true GAAP… All those ‘Adjusted’ earning are part of footnote disclosures as ‘pro forma’ or ‘adjusted’ and are clearly stated as departures from GAAP.

      • d says:


        This only possible, as it has accounting and reporting practice’s, that enable this, nothing has really changed since enron.

        How can you have 1 set of numbers for the IRS, and another set for the Stock Market/Shareholders Report ??????

        That you have to write the above, demonstrates that the term “Sheeple” is apt for the majority of Americans, that in fact refuse to see or accept, the glaring facts on the ground.

      • d says:

        You probably need to look into doing something about these guys stealing and rewriting your articles.

        • Wolf Richter says:

          Happens all the time. NPR is famous for it (Uber’s car leasing fiasco most recently). It kind of tickles me when see it :-]

        • Ed says:

          It’s what many reporters do. In fact, if everyone wanted to do something, it would generally be the WaPo, WSJ, and NYTs of the world who are due net money. They have big staffs to dig up raw facts.

          (Ideas, though, they come from everywhere. I am reading this blog for a reason.)

        • Kasadour says:

          Too bad the WSJ, WaPo and NYTs waste all that “big staff” on pertpetuating propaganda. I wouldn’t pay them a dime for their version of raw fact(s).

      • MaryR says:

        So why does the SEC permit ‘adjusted’ earnings to be the standard earnings report for many NYSE or NASDAQ listed companies?

        How can anyone rely on any discussion or comparison (except here on Wolfstreet…) of historical PE’s on the S&P 500 if only SOME are GAAP, and others are ADJUSTED, based on what any given company CHOOSES to report?

        Are the regulators so fearful of their overlords that they no longer regulate in any meaningful way?

        No wonder we the sheeple are confused and fearful that the markets are really filled with Enron’s waiting to vaporize what little money remains in our retirement accounts…

        • Wolf Richter says:


          Your questions are excellent. I don’t have all the answers. I do know that the SEC is trying to crack down on companies giving “adjusted” earnings a prime seat at the table. But this is hard to do.

          When I look at an earnings report, I ignore what the media says. I go to the company’s press release (see the Netflix link above) or SEC filing, and I skip all the text at the top and all the promo and how everything is great, and I go straight down toward to bottom to the consolidated income statement, and I check “revenue” and “net income,” and I compare them to the same quarter last year (listed next to it usually). This bypasses “adjusted” earnings. Now I kind of know what happened. From there, I work my way up.

          Obfuscation is the rule. But there are ways around some of it.

        • d says:

          “Obfuscation is the rule. But there are ways around some of it.”

          Its the rule in china’s economic data also.

          The chinese have slowly found ways to choke the sources, you, I, and Zero hedge, via the CIA. Formerly used (Many of the suppliers of chinese economic data to the CIA simply disappeared, after some chinese data hacking in the US and Zero hedge no longer gets that data “Posted” on it(Did Zero even know where it was coming from, before the sources were killed off)). To get a more realistic picture of china’s economy.

          Evil doers are always looking for ways to choke access to the truth. I there a message in this chinese behavior. For observers of American corporate lies, AKA Financial reporting. Which grow even more opaque with time under the administration of the orange.

    • Petunia says:

      It hasn’t been 50 years since stock buybacks took off. It was Bill Clinton that allowed any and all stock options to be tax deductible and by doing so created the management thievery we see today. Compensation is so distorted now, that large companies mostly focus on increasing management compensation. Most of the money pushed up the food chain comes at the expense of R&D and cutbacks to real productive assets. These companies, most of the large listed ones, are hollowing out. By all means, invest in a company where the CEO makes 500 times the average pay of employees who haven’t had a real raise in 30 years. You can probably smell the innovation coming out of those companies.

      • kitten lopez says:

        “By all means, invest in a company where the CEO makes 500 times the average pay of employees who haven’t had a real raise in 30 years. You can probably smell the innovation coming out of those companies.”

        oh my GOD! i’m LAUGHING!

        ain’t NOBODY like Miss Petunia. nobody.

  21. Brian Richards says:

    The US stock markets are so disliked that it’s probably one of the better places to put your money. On the other hand, crypto currencies are being hyped everywhere, so probably one should be cautious in investing in them………
    just some thoughts and observations from an old guy

  22. Joe Bertuloci says:

    Who’s going to cash out of the stock market when they close it down?
    Paper burns, the sheeple burn and the system is not the same forever.

    • Frederick says:

      Most will go down with the ship When the panic selling starts there will be no way out Same as always only magnitudes worse Won’t be long now Tic Tic tic

  23. Truth Always says:

    We have entered a new normal of financial wizardry across the world and all central banks and simultaneously engaging in it. No one really wants to stop because it is like the prisoner’s dilemma. If one Central Bank stops buying Maybe very disadvantages for their economy therefore no one stops. And everyone is party to the charade which can be stretched until the valuations of all asset classes becomes too big that they topple on themselves. ‘How big is too big a valuation’ is really the question that no one knows in answer to. Hence the show must go on forever.

    As long as the middle class is well fed and has a roof over their head and an iPhone the system will not collapse. The upper class will always take care of themselves, the lower class unfortunately has never counted.

    • d says:

      “‘How big is too big a valuation’ is really the question that no one knows in answer to. Hence the show must go on forever.”

      In many places we are just about there, its called Housing un-affordability.

      Cities are starting to drive out the, poor, unemployed, homeless, and replace them, with robots.

      At a point not to far forward, these cities will become “Detroit’s” with to small a tax base to survive as cities, servicing the elites that are milking them.

      Then the value of the “assets” in the ghost city must IMPLODE.

  24. Cynic says:

    Very true: while democracies of some sort still function, the only precarious hold the common people have over the politicians is their vote – but we have seen that they are more than happy to vote for those who will end up blatantly abusing them and their office.

    There is no need to end the universal franchise to maintain this status quo, even ‘populists’ and wild cards can be out-manoeuvred and subverted by the CB’s.

    Rather like the body count after battle in the old days: how many dead? ‘One duke, three earls, fifty knights and esquires. And a great mass of common soldiers, not worth the counting, my lord. ‘

    Beautiful tombs for the nobles,and a mass grave on site for the foot soldiers. :)

  25. raxadian says:

    There are way too many crypto currencies so if you are going to invest in that be careful. Not all horses can win the race.

  26. Ambrose Bierce says:

    The money has to go somewhere if institutions buy bonds on margin, hence they do not care about yield, they collateralize them and buy stocks. and right now US treasuries look the best, ergo the S&P is rising and with rates remaining low it could continue.

  27. Willy2 says:

    – A number of things don’t send “a positive” message:
    1) The Transports have been “underperforming” the Dow Jones since late 2014/early 2015.
    2) the 2 year, the 1 year and the 3 month T-bill yield(s) seem to be rolling over (i.e. heading lower), as a sign of investors getting more cautious. Less willing to take on (more) risky bets. Reducing their risk exposure.

    (in the 2nd quarter of 2007 these 3 yields also started “roll over” and continued to head lower in both 2007 & 2008 and we all know what happened in those 2 years ……………… )

    3) Car sales are heading lower
    4) The socalled “Vice Index” (source: Andrew Zatlin’s is also heading lower. It means that households have less money available for “evil” things like drugs, alcohol, hookers, …………. (to be paid for in cash).

    – Although I haven’t seen yet that the US trade & current account deficits have shrunk/are contracting (= shrinking US demand for imported stuff)
    – The price of the Manpower stock (MAN) took a beating last july. Was the message they brought “not so good” ? (@W. Richter: suggestion for a new blogpost ?)
    – Are there more stock exchange listed companies that make their income with mediating temporary workers ? Kelly’s ? …….. ?

  28. Dr G says:

    There is still a lack of participation of main street in the market. Until WS has sucked in the little guy, the markets will not be allowed to crash.

    • d says:

      “There is still a lack of participation of main street in the market. Until WS has sucked in the little guy, the markets will not be allowed to crash.”

      That model is now broken, as the little guy

      1 has know money to loose in WS

      2 can no longer afford to borrow money to loose in WS.

      3 understands WS is rigged against him.

      Evereything has gone up a lot since 2008 except wages.

      Little guy is tapped out.

      Hence you are suggesting we wait for the Millennials children to be old enough to fund the next Wealth transfer up????

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