JFI,
You don't have to look very far to find all sorts of glaring examples of how out of kilter markets are. According to a recent opinion piece by David Stockman (and assuming his analysis is correct) if you subtract the market gains made by the FANGs (Facebook, Amazon, Netflix and Google) in the last 19 months, the rest of the S&P500 gains have amounted to a big fat zero. There are 500 companies that make up the S&P 500 index and only 4 of them have accounted for the majority of its entire gain over the last 19 months to August. One of these companies doesn't seem to do very much in terms of creating wealth or jobs. It doesn't make movies, it streams movies. Hardly the backbone of an economy IMO. In fact it relies on consumer spending and contributes little to putting money in the pockets of people to spend. Netflix is valued at 300X its net income of $140 million according to Stockman. Below is an extract from the opinion piece. Eshmun
..............The Folly Of The FANGs
Needless to say, there have been some spectacular rocket ships in the market’s melt-up during the last several years. But if history is any guide this is exactly the kind of action that always precedes a thundering bust.
To wit, the market has narrowed down to essentially four explosively rising stocks—–the FANG quartet of Facebook, Amazon, Netflix and Google—–which are sucking up most of the oxygen left in the casino.
At the beginning of 2015, the FANG stocks had a combined market cap of $740 billion and combined 2014 earnings of $17.5 billion. So a valuation multiple of 42X might not seem entirely outlandish for this team of race horses, but what has happened since then surely is.
At the end of August 2016, the FANG stocks were valued at $1.3 trillion, meaning they have gained $570 billion of market cap or nearly 80% during the previous 19 months. Not only has their combined PE multiple escalated further to 50X, but that’s almost entirely owing to Google’s far more sober PE at 30X.
By contrast, at the end of August 2016, Netflix was valued at 300X its meager net income of $140 million, while Amazon was valued at 190X and Facebook at 60X.
In a word, the gamblers are piling on to the last trains out of the station. And that means look out below!
An old Wall Street adage holds that market tops are a process, not an event. A peak under the hood of the S&P 500 index, in fact, reveals exactly that.
On the day after Christmas 2014, the total market cap of the S&P 500 including the FANG stocks was $18.4 trillion. By contrast, it closed at $19.0 trillion in August, reflecting a tepid 4% gain during a 19 month period when the stock averages were spurting to an all-time high.
Needless to say, if you subtract the FANGs from the S&P 500 market cap total, there had been virtually no gain in value at all; it was still $17.7 trillion.
So there you have it—-a classic blow-off market top in which 100% of the gain over the last 19 months was owing to just four companies.
Actually, there is growing deterioration down below and for good reason. Notwithstanding the FOMC’s stick save at nearly every meeting during the past two years, each near miss on a rate hike reminded even Wall Street’s most inveterate easy money crybabies that the jig is up on rates.
Sooner or later the Fed will just plain run out of excuses for ZIRP, and now, after 93 straight months on the zero bound, it clearly has.
And at the most inopportune time. As we demonstrated earlier, the world economy is visibly drifting into stall speed or worse, and corporate earnings are already in an undeniable downswing. As we have also indicated, reported EPS for the S&P 500 during the LTM ended in June 2016 came in at $87 per share or 18% below the $106 per share reported in September 2014.
So the truth is, the smart money has been lightening the load during much of the last two years, selling into the mini-rips while climbing on board the FANG momo train with trigger finger at the ready......................
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