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Generational Dynamics Web Log for 24-Aug-2010
24-Aug-10 News -- Ariel's Bobrinskoy gives price/earnings fantasy

Web Log - August, 2010

24-Aug-10 News -- Ariel's Bobrinskoy gives price/earnings fantasy

Italy wants to follow France in expelling Gypsies

Investment chairman Charles Bobrinskoy gives price/earnings fantasy

In the 2006-2008 time frame, I used to write about some of the ridiculous things that I heard on CNBC or Bloomberg TV, especially when they lied about price/earnings ratios (also called valuations).

I haven't done that as much lately, because it's hard to know what to choose; probably 75% of everything said on CNBC and Bloomberg TV is utter nonsense.

But what I heard on Monday from Charles Bobrinskoy, Vice Chairman, Director of Research, Ariel Investments has infuriated me so much, that I had to do it again.

This is going to be a rant, but in this interview, they discuss price/earnings ratios that are total fantasies. These are the kinds of people who caused the global financial crisis, and they ought to be in jail.

Here is the interview of Charles Bobrinskoy by Bloomberg TV anchor Matt Miller:

MILLER: Let me ask you. They were saying that this was the kind of fear that you wanted to buy that old Benjamin Graham / Warren Buffett cliché. But is it the truth?

Charles Bobrinskoy, Ariel
Charles Bobrinskoy, Ariel

BOBRINSKOY: Absolutely. I would not feel that way if valuations were high.

But they are ridiculously low. You've got high-quality large-cap stocks are trading at some of their the lowest multiples since the 1970s. You've got a higher dividend yield on J&J than a government bond, which is ridiculous. You've got got great value here, even in depressed earnings. You do not want to buy when people are afraid that the earnings are not there, but the earnings are there, and the values are there, so this is absolutely a right time to buy.

MILLER: When you say "ridiculously low," it's sounds like you're talking about some pretty specific names. For the market as a whole at 14 times, that's not ridiculously low - that could get cheaper.

BOBRINSKOY: Well, 14 times the S&P -- I think it's less than 14 times. I don't know what ... people have different estimates for the S&P, but for large cap quality, we would put it under 13 times.

You're right, there are cyclical names that are trading at higher multiples, maybe 14 times trailing, but going forward I would put the overall market at something like 12.5.

MILLER: For the record, 14.2 times trailing, 12.8 times forward looking.

So Brobrinskoy puts the S&P 500 P/E ratio at 14, or maybe 13, or maybe 12.5, and Miller agrees. Are those figures correct?

Well, let's go to the Wall Street Journal page that provides the current S&P 500 price/earnings index:

Price/Earnings Ratios -- S&P 500 P/E ratio circled in red <font face=Arial size=-2>(Source: WSJ)</font>
Price/Earnings Ratios -- S&P 500 P/E ratio circled in red (Source: WSJ)

I've circled the correct figure in red -- the S&P 500 P/E index, based on trailing earnings, is 16.53 -- not 14, not 13, not 12.5, but 16.53.

Also, take a look at the chart on the bottom of the home page of this web site -- it shows the S&P 500 P/E ratio for the last ten years, and it's never been below 16 in the entire decade.

And so Dear Reader, before going any further, I'd like to ask your opinion. Which of the following words and phrases best describes Brobrinskoy?

So where did Brobrinskoy's (and Miller's) numbers come from? Well, I've answered this many times before, most recently in my article several weeks ago, "Updating the 'real value' of the stock market."

In this case, they talk about "forward earnings," which are analysts' estimates of how much these companies will earn next year. They don't have a clue how much these companies will earn next year, and historically analysts' estimates are twice as high as they turn out to be.

They're also using "operating earnings," which are fraudulent earnings values obtained by adding back "one time expenses" into the earnings, and then calling everything possible a "one time expense."

The REAL P/E ratio is based on AS-REPORTED earnings for the last year, and that comes out to 16.53.

One reader criticized me, saying that it's just as valid to use "operating earnings" for everything as "as-reported earnings."

Well that's probably true, but there's a catch. The historical average for P/E ratios based on as-reported earnings is about 14. And so, with the market today at 16.53, the market is a lot more expensive than the historical average. Valuations are certainly not "ridiculously low," as they are in Brobrinskoy's fantasy.

If you use P/E ratios based on "operating earnings," then you have to compute the historical average for that measure, and it's going to be a lot lower than 14. Nobody knows what the historical average is for P/E ratios based on "operating earnings," since brokers only started using that measure in the late 1990s, as they needed a way to convince people to invest, even though stocks were in a huge bubble. My guess is that it's around 8 or 9, and I would make the same guess for P/E ratios based on "forward earnings."

Thus, if the current S&P 500 P/E ratio based on operating and/or forward earnings is 12 or 13, then it's still "ridiculously high," and stocks are still ridiculously overpriced.

Now let's look at a bit more of what Brobrinskoy said, because he actually lied in two different ways. He also said, "You've got high-quality large-cap stocks are trading at some of their the lowest multiples since the 1970s." Now, maybe he's talking about one or two particular stocks that he has in mind, but I get the impression that he's talking about the bulk of large-cap stocks -- like the 30 stocks in the Dow Jones Industrial Average (DJIA). As you can see from the WSJ chart above, the P/E ratio for those stocks is 13.78.

Is that likely to be their lowest values since the 1970s? Hardly. Here's the graph I included in my article several weeks ago:

S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010
S&P 500 Price/Earnings Ratio (P/E1) 1871 to August 2010

As you can see, the S&P 500 P/E ratio fell to 6.79 in 1982. Well, maybe Brobrinskoy was only exaggerating a little -- he really didn't mean the 1970s. He actually meant the 1980s. Or maybe the 1990s. What's a decade or two?

But even referring to the 1990s is deceptive, because that's when the tech bubble began. So he's claiming that stocks are cheap compared to the tech bubble, which is at best deceptive, and at worst a lie.

Now that the rant has almost exhausted itself, I guess I should apologize for picking on poor Brobrinskoy. After all, he's just doing what everyone else does. He may be a crook and a liar and a thief, but the norm on Wall Street, CNBC and Bloomberg TV is to be a crook and a liar and a thief. And you can't be a crook if everyone else is a crook, can you?

I keep saying that the same people who brought about the financial crisis are still doing the same things today, only more so. This is a perfect example. This is fraud, either through lying or through incompetence. And this is the norm today -- on Wall Street and in Washington.

How pathetic these people are. Take another look at the article that I wrote in April, "Financial Crisis Inquiry hearings provide 'smoking gun' evidence of widespread criminal fraud." This article shows that these financial experts, some of whom have been described as mathematical geniuses, must have purposely committed criminal fraud, in order to collect huge commissions, fees and bonuses. Do I think that Brobrinskoy knows that what he's saying is a lie? There's no doubt in my mind whatsoever.

Additional links

Applauding France for expelling some of its population of Gypsies, Italy now wants to do the same. Italy's interior minister will ask the European Commission to endorse the plan. EurAcriv

French President Nicolas Sarkozy faces nationwide strikes and falling approval ratings, as harsh austerity measures take hold, to reduce the country's soaring deficit. Reuters

Another country is going into a debt crisis. Moody's has cut the rating on bonds from the Kingdom of Bahrain, because of increased spending and debt, and because the price of oil has been falling. Bloomberg

There were two more suicide bombings on Monday in Pakistan's tribal areas. LA Times

The City of Philadelphia has been sending out letters to bloggers telling them that if they're going to blog, then they must pay $300, the price of a "business privilege license" that allows you to have a business in Philadelphia. I wonder how much brotherly love that policy will spawn? Washington Examiner

Due to a diplomatic spat, Saudi Arabia is limiting the number of Saudi students who will be able to attend Australian universities. The policy is being extended to other western nations as well. Arab News

What do women find to be the most annoying of men's habits? According to a new poll, it's leaving the toilet seat up. Don't forget to read the comments on this story. Independent

How to be frugal and still be asked out on dates. NY Times

(Comments: For reader comments, questions and discussion, see the 24-Aug-10 News -- Ariel's Bobrinskoy gives price/earnings fantasy thread of the Generational Dynamics forum. Comments may be posted anonymously.) (24-Aug-2010) Permanent Link
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