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2018-02-08 07:00 by Karl Denninger
in Market Musings , 1210 references Ignore this thread
The B.S. About 'Valuations'
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One of the common chestnuts is that stocks are "not that expensive" on a forward P/E basis, especially with the recent drop that took about 1 point off that P/E.

While those forward numbers remain above historical averages, down is down and thus this is a buying opportunity, right?

Not so fast.

One must look first at how the earnings numbers we have today are being made.

Let's look quickly at one example from last night: Disney.

In percentage terms all of their business segments lost operating profits except one: Theme parks, which were up big (21%).  The theme park business has seen utterly-monstrous ticket price increases, both on a gross and "best deal" basis over the last several years.  In fact they're gone up 116% for some people (like Florida Residents) over the last decade.  We used to be able to buy Play Four Days tickets that were good from early January until June 30th, were park hoppers, good for any four days during that period of time, and were $100 each.  That's $25/day, per person, and got you into any or all of the Disney parks in Orlando except the waterparks (which were not included.)

Today the "best deal" for a Florida Resident is $179, which sounds fairly comparable except they're not hoppers!  To be able to go between parks the price is $216.50, which is well more than a clean double.

It's just as bad if you want to attend any of the other Orlando parks.  Universal has gotten downright extortionate since their Harry Potter stuff opened up, in that now to really enjoy it you have to buy the two-park ticket because they cleverly put part of it in each of Universal and Islands of Adventure.  So if you only want to do the amusement park sort of ride thing -- no real Potter deal for you. Never mind one-day ticket prices that are now well north of $100 and that's before you pay the daily parking fee and buy a $10 hotdog that cost them fifty cents.

Now take Disney's other businesses.  Films were down by a couple percent, consumer product sales off 4%, and broadcast TV license fees down an utterly-enormous 25%.  But for people buying overpriced park tickets -- a clearly-discretionary purchase that they've ratcheted up enormously to get higher and higher "ARPU"s Disney would be cooked.

They're not alone in this.

Note that virtually all of the so-called "high flyers" measure, in some form or another, their success by rising ARPU. (Average revenue per user.)  Hotels, for example, measure their "success" based on the increase in price paid per night, which of course means prices are being jacked.  Hilton, which owns Hampton Inn, has become one of the masters of this; I used to stay in their properties almost-exclusively, but their price increases have gotten so extortionate over the last few years, well north of 50% at most properties over the last three to five years and in some cases nearing or even exceeding a double while the quality and amenities offered have not increased materially at all and in some cases, such as their "free" WiFi, quality has been reduced to scrap in an attempt to force you to pay a daily fee for actual working WiFi, that I no longer think they're worth it.  As such my room nights on their properties have gone to an effective zero over the last three years, with the exception being the few properties where (probably) they have found themselves with a near-empty hotel and thus are being more-reasonable.

Obviously I'm not in the majority of opinion on this as Hilton's stock has more than doubled over the last couple of years.

What makes this sort of thing possible?

Big spreads where companies and individuals can borrow nearly-unlimited amounts of money for non-productive purpose, whether that be consumption in the case of individuals on their credit cards and car loans, stock buybacks and dividends and other purposes that do not result in net investments being made in productive capacity.

This is especially telling when it comes to banks and other financial firms that have seen stock prices double or more since they can borrow for 1% but your credit card interest is still 14%, 18% or even 24%!  Gee, that's a nice spread!  But, in the case of Wells Fargo, even that wasn't enough for their "desired" equivalent to "ARPU" as they ripped off even more money via scamming customers repeatedly.

And that goes to the next issue, which is that sort of scam.  Wells just plain robbed people.  But Apple, which also has had a big rise in their stock price, appears to have done the same thing by effectively trying to force people to buy new $700-1,000 phones instead of $25 batteries.  They've gotten away with it too for quite some time; it was only recently they got caught.

And then there's the last part of it: Even when caught ripping people off on a blatant basis, say much less by deception, nobody gets indicted and goes to prison.

Of course Apple denies any wrongdoing.

As I have repeatedly noted this sort of ripoff is literally the business model of everything.  Just take one tiny little example, like the find I recently made with regards to Xylitol and how using it as a toothpaste appears to materially improve oral health.  The selective activity of it on "bad" mouth bacteria is published and has been known for quite some time -- years, in fact in formal, medical literature -- yet there have been no studies by the NIH or dental research groups that I can find on this as a specific modality compared against other (very profitable for the dental industry) options, no studies by private groups either and when informed of the cause of improvement the standard dentist's reply is that they cannot recommend doing that for legal reasons as it hasn't been studied in that way.

Well, yeah -- you won't study it because there's no money to be had from using a commonly-available plant extract as a toothpaste where if someone doesn't do that and ultimately requires surgery or you recommend very expensive implanted antibiotic treatments you make thousands.  Worse, for the dentists, if such a study was ever conducted and found it to be materially effective then all the money currently being made by the dental and periodontal practices pushing temporary "fixes" that wind up being an effective forced subscription model that costs the patient thousands a year would go "poof" like a fart in a church and lots of class-action lawsuits would be likely to immediately follow.

The same is true for Type II diabetes. I've literally lost count of the people who have reported on this very site that they were either Type II diabetic formally (diagnosed) or knew damn well they would be if they went to the doctor, stopped eating carbs and within days their blood sugar normalized.  Not only is there plenty of evidence that the medical system knows this works and has deliberately ignored it for decades (indeed it was the only option for severe diabetes before insulin was isolated and produced - and doctors were well aware of itthere is a formal association, the ADA, that recommends the exact opposite.  Just as with gingivitis progression being sold as an "inevitably progressive disease" the same is said about Type II diabetes.  Allowing medical practitioners to run this crap results in literally $400 billion or more of spending by the government on Medicare and Medicaid for diabetes and related medical issues alone, and likely double that in total when private medical spending is included.

All of the government spending is financed since we run huge deficits that would be nearly erased if we cut that crap out and a huge part of private spending is as well.  How much of the so-called "earnings" in the market today is a direct consequence of not just these two areas but the dozens if not hundreds of similar schemes and the near-zero cost of late in financing all that crap?

The take-away from these facts is that while the desire to scam will not go away the ability to finance it at near-zero cost and the spread "enjoyed" by the financial system are both disappearing by the day.  The Fed cannot evade doing this either, as they've gone way too far with "stimulating" and between the employment situation and commodities they can either continue at an increasing rate or suffer severe consequences in the broader economy.

My point remains today as it has for the last few years: The 30+ year trend, starting in the early 1980s, which has driven the acceleration of asset prices including stocks, bonds, real estate and virtually everything else is all predicated on falling interest rates.  The reason is simple: If $1 million costs you $100,000 to borrow and keep out for a year at 10% interest when rates fall to 1% you can and will borrow $10 million instead for the same $100,000!  This results in a multiplication of leverage by 10 times what it formerly was, and that flows directly into asset prices.

However, for that change (e.g. upward move) to continue rates must continue to fall.  If they stop falling then asset prices stop going up as leverage can no longer be expanded.  If rates rise then asset prices go down, and are at risk of collapse because those who borrowed cannot either roll over their debt at an affordable rate nor can they pay it off since they spent the money.  The result is that those borrowers inevitably go bankrupt!

Absolutely nobody in the media -- nobody -- is talking about this mathematical fact or what it must result in with regard to the price of all assets, whether the asset is stocks, bonds, houses, commercial real estate or anything else.

Now put this into the mix: Congress just voted to add $150 billion/year to the deficit and Trump supports same.

 by tickerguy

Without The Fed monetizing that additional Treasury issuance rates will rise, and may I remind you that $150 billion is more than the $100 billion a year in "tax cuts" which means you didn't get a tax cut -- you in fact got a tax increase.  So take whatever "valuation change" you think the market should have for the "tax cuts", remove it, and then remove another 50% because $150 billion a year is -- quite simply -- 150% of $100 billion.

Finally, for those who think the "broader economy" is fundamentally strong tell me what the "E" would look like without the buybacks and dividends funded with near-zero cost borrowing, just for openers -- because that's essentially disappearing now and the impact will start to show up within the next couple of quarters.  Oh, and without the so-called "tax cuts."

Then recompute that P/E with the much-lower "E" and tell me what you think about valuations.

Let's put this in simple terms: You can have the "budget deal" which will add hundreds of billions to the deficit this year, producing a trillion of new issuance and much higher interest rates, which ultimately will collapse the DOW to under 10,000 and the SPX to under 1,000 (a 50-70%+ selloff) or you can cut the crap with the budget, deficit, and spending coupled with your claimed "tax cuts" that are actually a tax increase.

You cannot have both that budget and "soaring" markets.

In short: We're headed for the crapper.  Maybe not today, but I assure you -- that's where we're going.

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I agree that P/E as a measurement isn't a reliable way to make a valuation. I could also make a strong argument that stocks in and by themselves are not even really "shares" of a company. When you and I buy a stock we don't really buy a fractional share of physical ownership of a company.

Stock ownership is merely a *subjective* bet in a casino-like market.

I'm quite happy I'm currently sitting on the sidelines without any money at stake.. It was fun watching the machines catch fire as they ran to the exits ... Apparently, some of the machines got turned off during the big ass drop and the humans took over. Volume was low, but massive swings in the price action and abnormal bid/ask activity created a volatile market which broke the back of anybody who bet against a rising VIX. All kinds of rumors ( e.g., PPT) and conspiracy ( e.g., the Fed is out to get Trump) only provided more sauce for the goose.. It was fun, and this **** is just getting started...

As I said before the BIG story is the spiking interest rates (It's the interest rates stupid). Government(s) around the world are now going to be shortly facing a crisis because of record deficit spending.

Sooner or later governments are going to default on national debt. That's right. All of those trillions of dollars/yen/RMB/euros worth government bonds which are supposed to be the gold standard of "investing" and a secure place to park money are ALL going up in smoke...

The bond market crisis will cause something that 99% of investors don't see coming: first the stock market will drop. Then, as big money seeks a safe place to hide from the bond ****-storm, the result will be a parabolic move up in the US stock market as big money seeks shelter from the **** storm.

Big money loves Donald Trump's tax cuts and big money is going to love the safest place to park that money, i.e., Wall Street Parking lot..

Yeah, I know how corrupt Wall Street is. I know what a racket it is, too, but the Dow is ultimately headed for 30,000 and beyond.

I'm just waiting for the moment somebody cries fire!--- and then sell, sell, sell! --- and the Dow goes south to 20,000.. And if that doesn't happen and the Dow makes new highs past 27000, I'll be looking for a reentry point....

Buckle up!

Curbyourrisk
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CNBC should have a "TICKER" hour everyday...good journalism, hard nosed questions.

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Time is up.

I hate to burst your bubble, but there is no Santa Claus, the tooth fairy does not exist and American justice does not involve the courts.
Jtmo3
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"You cannot have both that budget and "soaring" markets."

I'm not calling BS on this, but, I've been hearing this same thing for 10 years now. While I generally agree with the idea, reality is showing us why there was/is an old saying, don't fight the fed. Every time you think reality is rising to the top, they throw in another trick and markets seem to respond.

There will come a day this stops, but I believe it won't be when budgets bust. It'll be when the rest of the world either decides or is told, that the us dollar is no longer the reserve currency. Until then, these bastards can play games all day and create almost any reality they want. Other countries will decide when the us markets are done.
Tickerguy
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Meh. Put your chips in the pot and see how it works out for you.

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Winding it down.
Bagbalm
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I'd say the nature of the market at which the theme parks are aimed has changed.
A market class that didn't really exist in sufficient numbers when they were conceived. It used to be middle class families. The divide between rich and poor has widened and there are many more newly rich who see theme parks as worthy of their spending, also when I went to Disney CA back in the early 80s there weren't that many foreigners to be seen. Just a few Japanese. There are more people with the funds now who are acclimated to the depressing regimentation of lines and crowds. They fly don't they? Their tastes aren't those that used to be associated with wealth.
The parks will probably do well until a major economic dislocation reduces their attendance. The sort of crash that used to be felt in loss of business to boat builders and big name jewelers.
Tickerguy
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It's pretty insane on the "theme park" side however. The "kid" (now 21) and I checked out going down to Orlando for a few days about a month back, which used to be a "about this time of year" thing we did regularly.

What was a $500 or so trip all-in a few years back was WELL NORTH of $1,000 just for the tickets today. We said "**** that" and went skiing in Ober Gatlinburg instead, which was hella cheaper and a ****load of fun.

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Winding it down.
Asimov
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If you get a chance, the aquarium in gatlinburg is not huge, but is nice - when it's not crowded.

We live ~1.5 hrs away and have taken the kids there over the last 2-3 years.

(BTW, turn left coming out of their parking garage for a wonderful little drive with some amazing views of the town from above.)

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It's justifiably immoral to deal morally with an immoral entity.

Festina lente.

Ckaminski
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Mass-Hole!
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Universal and WDW went full-retard with the gate-scanners and xray machines after the Orlando Pulse event.

I refuse to subject myself to that anymore. I used to be a yearly WDW/Orlando visitor. No longer.

I'd rather go to the beach.

My last trip to Florida in October had me pretty much sitting on a lakeside beach kayaking, canoeing and relaxing.
Ilikecoffee
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cold , AK
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You are not going to like this but there are many commercial dental xylitol products. Our clinic gives them to patients. You can buy toothpaste on the market with xylitol and other goodies. It is unfair to slam the profession and at the same time take credit for what you believe to be a discovery because you just recently discovered it. Please do the right thing and restate. Also, if you dont mechanically remove stuff off of your teeth, it really doesnt matter.

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Tickerguy
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Quote:
You are not going to like this but there are many commercial dental xylitol products. Our clinic gives them to patients. You can buy toothpaste on the market with xylitol and other goodies. It is unfair to slam the profession and at the same time take credit for what you believe to be a discovery because you just recently discovered it.

I guess you missed the part where my hygienist said, and I quote:

"For legal reasons I cannot recommend that you use such a product as it has not been studied."

I take no credit for "discovering" any such thing -- that was done by others. The only thing I DISCOVERED was that the cocksucking pieces of **** in the so-called "profession" EITHER HAVE BEEN INTENTIONALLY IGNORING RESEARCH OR NOT KEEPING WITH IT, and in either case that's a breach of what ANYONE should expect from a professional in ANY line of work.

Unfair to slam the profession? For deliberately omitting discussing things known (in a NIH study no less!) for YEARS, while recommending protocols they KNOW produce NO lasting improvement AND an annuity-style revenue stream for them instead?

Here comes my upper-body workout for the day -- and I just did the right thing.

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Winding it down.

Geckogm
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Awesome Ticker!!
Geckogm
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Canyon Lake
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Hide the truth because its profitable .... He has been here long enough to know that was not going to fly!

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