Regulars will know that we look forward each day to “Breakfast with Dave,” the regular market musings of David Rosenberg at Gluskin Sheff.
Sometimes it’s called “Lunch with Dave”, presumably when he’s travelling or had a late night. But it’s always a great read.
But the tone – and presentation – has suddenly changed.
HE’S JUST HAD ENOUGH OF THIS BEAR MARKET RALLY.
Kiss goodbye to cuddly Dave. Get your own breakfast/lunch. On Friday we got:
The ‘V’, just to be clear, stands for valuation – since the 60 per cent expansion we have seen in US equity prices has simply been down to an unprecedented expansion in P/E ratios, putting stocks at prices typically seen five years into a period of economic expansion, not just five weeks:
On an operating (“scrubbed”) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x. Historically, when the economy is taking the turn away from contraction towards expansion, which indeed was the case in Q3, the trailing P/E multiple is 15x or half what it is today (and that 15x is also calculated off depressed earnings level of prior recessions — we have more on the historical comparisons below). While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x (see chart below), which is three times the levels prevailing during the height of the tech bubble.
Here’s the relevant table:
And here are the relevant charts:
In truth, while Rosenberg’s special report goes on for another eight pages, Dave doesn’t really know what else he can say on this “very flashy” bear market rally.
He is sitting on his hands:
So the strategy is to sit on the sidelines, be selective in our equity choices, and wait for the correction to come or for the fundamentals to catch up with this overvalued, overbought, overextended market.
Repeating his warning:
Remember, the reason why the tortoise won the race was because the hare got tired.
And repeating some sage advice:
So remember, rallies in a bear market are to be rented; never owned.
Rosenberg is clearly tempted to be apocalyptic – but only just – and so manages to avoid predicting an imminent stock market crash.
If equities do suddenly fold, he will look like a superstar.
If not…
Related links:
Dave’s furious – FT Alphaville
Rosenberg: ‘I stand accused of having missed the turn‘ – FT Alphaville