US stocks obviously overvalued on economic fundamentals
Posted on 04 October 2011 with 3 comments from readers
Rising profits at US companies over the past couple of years have depended on savage cost cutting that cannot be repeated, and stock dividends only look valuable because yields on US treasury bonds are at an all-time historic low that cannot be maintained indefinitely.
These are the economic fundamentals that lead to the obvious conclusion that the US stock market is still way overvalued after recent falls. It is not enough to blame the sovereign debt crisis in Europe. The big issues are closer to home, although a global recessionary environment and over-valued dollar hardly helps US companies either.
Analysts wrong again
US stock analysts are still pencilling in a 17 per cent profit rise for 2011 and further increases in 2012. How companies are supposed to deliver such profits in a recession is not clear, and the never-before-wrong ESCI says a recession is now reality. In fact any logical mind would surely have to conclude it impossible because all the major cost cutting is done.
Unwinding these completely unrealistic expectations on profits will mean lower stock prices and then some. At the same time the highly unsustainable condition of the US dollar and interest rates is being almost forgotten.
Stocks only appear cheap when their dividend payments are compared to the interest rates available on treasury bonds. But it is the T-bond that is unnaturally and unsustainably low, not the stocks that are offering a good reward to investors. A few percentage points return when inflation is running at a higher level is a losing position, and not worth the risk of staying invested!
Low bond yields
How long can the Fed hold bond yields at this level? If you look at the experience of the southern countries of the eurozone you can see what happens to the bond yields of nations that run unsustainable deficits and debt levels. The US is more overborrowed than the eurozone as a whole by a long stretch.
What should happen to US stock prices on these fundamentals? Should they be as low as in Greece or Spain? How long is it before the pendulum swings against the US dollar and the miserable returns on treasuries? This economic fundamental is being completely ignored in the stock market today.
But this is not going to go away, is it? If the eurozone falls apart that will produce a systemic crisis. If the eurozone gets its act together then the focus is back on the unsustainable debts and deficits in the US. Either path is bad news for US stocks whose profit outlook is obviously grossly inflated for the recessionary path ahead.
Remember the US did not lose its triple-A debt rating this autumn for no reason while the UK, France and Germany still have it.
3 Comments posted by readers:
Actually stocks are undervalued based on economic fundamentals. That is why Warren Buffet is currently buying while the herd worries about volatility and macro-economic factors.
Who or what is ESCI? Mr Google suggests European Society for Clinical Investigations!
Warren Buffett had he had his start in our time he would have lost his shirt. he does not understand economics. He bought BofA and look were it is now, with all his connections and power he cannot pick a winner. Go ahead Banker put your most of your money were your mouth is and buy. If the gouvernmet does not bail you out you will loose big time.
The power to reason and think logically comes after one has mastered language.
For an example of one who has failed in this regard, check out “Joseph” above. The Internet is full of such characters. Sadly one has to sift through their babble in order to get the insights that are freely available.