«The good times are back. At least that is what everyone is hoping. Consumer spending has picked up again, factory orders and production are on the rise and the stock market is back in bubble mode. On the surface things seem to be holding together. The job market has stabilized, economic growth has accelerated, stock prices are sizzling and day traders have returned to the market. Everything looks good on the surface. Just don’t ask any pertinent or difficult questions.
But I'm a person who asks questions, and I see an economy and a market that is held together by band aids, staples, paper clips, ductape and chewing gum. The less you know and understand, the better you will feel about this so-called recovery. The economy may be on the mend, but it remains fragile and vulnerable to exogenous events from without and from within.»
«I believe that the only important number an investor should concern themselves with is a P/E valuation based on trailing 12-month earnings according to GAAP. These are real numbers. The forward numbers so widely bandied about by analysts, anchors and company PR representatives are nothing more than could be—would be—should be numbers that may—or may not—materialize. By the same token, pro forma numbers—which are really nothing more than earnings before all the bad stuff or expenses and problems the company and analysts would really not like you to know about—are only half-truth numbers. An investor must understand that pro forma numbers are numbers that are derived from no accounting standard. What expenses the company or the analyst decides to exclude are purely discretionary and can change from quarter-to-quarter and from company to company. If you use these numbers to make investment decisions or earnings comparisons is akin to comparing apples to oranges to avocados to walnuts.
Based on 12-month trailing earnings for the S&P, what we know is this: the S&P 500 is currently selling at 29 times trailing GAAP earnings, which equates to an earnings yield of 3.4%. If we use the S&P’s core earnings—which include stock option expenses, write-offs and other normal and recurring expenses—the S&P 500 index is selling at 44 times earnings, equivalent to an earnings yield of 2.3%. Perhaps that is why insider selling is now at near record levels—a concept we refer to as “distribution”. Smart money is getting out and selling their shares to weak hands. John Q. is back in the market again buying in at the top. This will be the subject of next week's Storm Watch, “The 'OK' [unless something happens] Economy, Part II: Distribution”. »
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