Delusions and Tyranny in the Time of Covid
Here they go again. After a mere three day outbreak of a modicum of sanity on Wall Street, the robo-machines and Robin Hooders were back to scooping up the dip yesterday and giving it back today.
But still, what are they thinking? Truly.
With nearly every S&P 500 company having reported its Q2 results, LTM earnings on a GAAP basis posted at $65.00 per share and on a so-called ex-items or “operating earnings” basis the LTM figure was $125.40 per share.
So at today’s 3339 closing price on the S&P 500, the current trailing PE ratio ranges between 51.4X the earnings CEOs/CFOs certify on penalty of jail time or 26.6X the Wall Street curated and burnished version of earnings from which all asset write-offs, restructuring charges and other one-timers/mistakes have been deleted.
Of course, these deleted GAAP charges reflect the consumption of real corporate resources, such as purchase price goodwill that gets written off when an M&A deal goes sour or the write-down of investments in factories, warehouses and stores which get closed; and, as such, they absolutely do diminish company resources and shareholder net worth over time.
But for decades now Wall Street has so relentlessly and assiduously ripped anything that smells like a “one-timer” out of company SEC earnings filings that it no longer even knows what GAAP earnings actually are; and it pretends that these discarded debits (and credits) to income are simply lumpy things that even out in the wash over time.
They do not. If ex-items reporting was merely a neutral smoothing mechanism, reported GAAP earnings and “operating earnings” would be equal when aggregated over several years or even a full business cycle.
Yet during the last 100 quarters there have been essentially zero instances in which reported GAAP earnings exceeded “operating income”. So in aggregate terms, several trillions of corporate write-downs and losses have been swept under the rug.
During Q2 2020, for example, GAAP earnings reported to the SEC totaled $145.8 billion for the S&P 500 companies, while the ex-items earnings curated by the street posted at $222.3 billion. That amounted to the deletion of nearly $77 billion of write-downs and mistakes, and it inflated the aggregate earnings number by more that 52%!
Needless to say, the game is all about goosing the earnings number in order to minimize the apparent PE multiple, thereby supporting the fiction that stocks are reasonably valued and that nary a bubble is to be found, at least in the broad market represented by the S&P 500.
Still, valuing the market at 51X LTM earnings during the present parlous moment in time – or even nearly 27X if you want to give the financial engineering jockeys in the C-suites a hall pass for $77 billion of mistakes and losses this quarter alone–is nothing short of nuts.
Yet the gamblers in the casino hardly know it. Wall Street has already decided that current year results don’t matter a whit: The nosebleed level trailing PE multiples being racked-up currently are simply being shoved into the memory hole on the presumption that the sell-side’s evergreen hockey sticks will come true about 4-quarters into the future; and if they don’t, a heavy dose of ex-items bark stripping will gussy-up actual earnings when they come in.
Still, if you think that a forward PE multiple of, say, 17.5X is just fine and that flushing the one-timers is OK, then you still need $195 per share of operating earnings by Q2 2021 to justify today’s index level.
Then again, we think a 56% gain in operating earnings over the next four quarters ($195 per share in Q2 2021 versus $125 per share in Q2 2020) is not simply a tall order; it’s downright delusional.
Here’s why. You can’t take even passing note of the fraught political and economic landscape and conclude that a “V” shaped economy and earnings path lies ahead.
Yet, obviously, the willing suspension of disbelief currently levitating the market to absurd heights is predicated upon the notion that the Covid vaccines will function as a silver bullet, and that after approximately 15 billion shots to the arm (2 for each of mankind), the pre-Covid status quo ante will be restored fast and in full.
But if you accept that bromide, you might as well believe in the tooth fairy. Or stated differently, the White House’s $15 billion Operation Warp Speed has been likened to the Manhattan Project, but the likely similarity is that both produced a bomb at the end.
At the moment there are three leading vaccine candidates, but each is fraught with considerable risks and potential delays. These include one co-developed by Moderna Inc. with Dr. Fauci at the National Institutes of Health and another from Pfizer Inc. and Germany-based BioNTech. A third is from AstraZeneca and Oxford University.
The latter is now on hold owing to a “serious adverse reaction” in one of the trial patients per yesterday’s headlines. The cause of the pause was apparently a case of transverse myelitis, an inflammation of the spinal cord that causes symptoms such as lower back pain, weakness in the arms and legs, difficulty walking, incontinence and digestive problems. According to the National Institutes of Health, roughly 1,400 cases of it are diagnosed each year.
As Paul Offit, a pediatrician and vaccine expert at the Children’s Hospital of Philadelphia, noted,
“….the AstraZeneca shot involves giving large doses of a monkey adenovirus engineered so it can’t replicate. It is therefore important for researchers to investigate whether the adverse event wasn’t somehow being triggered by a reaction to that large viral dose”
Of course, the company and the Pharma Chorus are all saying, “nothing to see here” because such pauses happen in trials all the time out of an abundance of caution and scientific rigor. That may be true, but what is also true is that most vaccines require 5-10 years to develop, not 5-10 months.
What is also not noted is that there has never been a successful vaccine against coronaviruses; that the one developed in 2011 against a previous coronavirus turned out to be a killer when tested on animal subject
Article from LewRockwell