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The Numbers Look Great — As They Always Do Before a Crash
" ... It's quarterly report time for US stocks. If you just casually glance at the earnings news, you might think companies are having a great year. Many are beating expectations and reporting impressive revenues and profits.
In a world where GDP growth may be in the neighborhood of 2%, do you think it makes a whole lot of sense that earnings are going to grow by 20% in 2017? Really? Honest?
When bullish analysts talk about the price-to-earnings ratio (P/E ratio) being roughly 20 today, they are using operating earnings in their calculation.
If they used reported earnings, they would find that the P/E ratio is roughly 24, a 20% difference and certainly up in nosebleed territory. I should note that using the much more useful CAPE (the cyclically adjusted P/E ratio created by Professor Robert Shiller), today's P/E is 26.79.
That is back up in 2007 range and was exceeded only in the irrational markets of 2000 and 1929. And it's higher than when the bear markets of 1901 and 1966 started.
Digging a little further, you find that analysts are projecting earnings to grow roughly 30% from where we sit today by the end of 2017.
It rather boggles the mind that people take these estimates seriously. But that is the problem. A very large number of people and market advisors do. That is why, of course, you hear that you've got to be bullish and stay in the market. ... "
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