Chris Lau - Seeking Alpha

Monday, June 22, 2009

A Rally Without Earnings-less Recovery is...

On TradingSystemGuru this week, Matt and his team returned from a nice vacation in Europe (I believe). He expressed his doubt about the stock market rally in the following points below:
  • Average Price/Earnings ratio for the 8,011 US stocks of the VectorVest Composite Index (VVC) was 131.21

In the chart above, Matt notes that "the broad range of publicly trading companies is in uncharted territory and well above any previous rally or recovery high."


Canada may also be vulnerable to a sell-off:

Canadian stocks rallied 40% during a period in which earnings dropped more than 100%! When earnings get this bad, there is no point in looking at PEs – recently they went from +1000 to –1000 in the space of a week!

* So are US and Canadian stocks overprices now? You can judge for yourselves but either we have entered a new paradigm in which earnings don’t matter or the market is betting that earnings are about to take off like a thoroughbred on steroids.
About U.S. Debt:
Net foreign private flows were negative $58.4 billion [in April 2009], and net foreign official flows were $5.2 billion.


Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $39.4 billion and foreigners sold $44.5 billion of Treasury bills in April.

Why is this important? With a looming deficit north of $2 trillion, the US Treasury will have to sell approximately $200 billion in government bonds per month just to pay the bills, a level that is far higher than currently levels of investment in US capital assets. Unless the Treasury is able to attract new levels of foreign investment, there will be growing upward pressure on interest rates and rising rates are bad for housing and nearly every aspect of economic growth.