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Generational Dynamics Web Log for 15-Jun-2009
Wall Street Journal sharply revises its fantasy price/earnings computations

Web Log - June, 2009

Wall Street Journal sharply revises its fantasy price/earnings computations

Do you suppose they read this web site?

I've been writing about this for a couple of months now.

In April, I wrote "Wall Street Journal and Birinyi Associates are lying about P/E ratios." I provided screen shots of WSJ P/E ratio page, and showed how WSJ was fudging the numbers by a substantial amount, apparently on purpose.

The P/E ratio numbers that WSJ publishers are obtained from Birinyi associates. In May, I saw a Bloomberg TV interview with Laszlo Birinyi, and I wrote a report, "Laszlo Birinyi provides insight on his fantasy price/earnings computations." It's clear that WSJ was lying about P/E ratios.

What motive could WSJ possibly have for doing this? Because they'll lose their advertisers if they report negative market news. Most advertisers earn commissions by selling stocks to individual investors, and reporting a high P/E ratio would discourage investors and anger advertisers.

I've been told that a number of WSJ readers have complained directly to WSJ on the same matter.

Here are the charts that I displayed in the April report:

Wall Street Journal P/E charts. Top: 29-Jan-2009. Bottom: 24-Apr-2009. <font size=-2>(Source: WSJ)</font>

Wall Street Journal P/E charts. Top: 29-Jan-2009. Bottom: 24-Apr-2009. (Source: WSJ)

The top chart, from January 29, 2009, shows an S&P 500 ratio of 15.72. Supposedly, that figure is: "P/E data on as-reported basis from Birinyi Associates." But that figure was already wrong, since the P/E ratio was above 18 all year, and has been well above 15 for ten years. There is no possibility whatsoever that 15.72 is a correct figure.

The second chart above, for April 24, 2009, is even worse. Notice that the claim "P/E data on as-reported basis from Birinyi Associates" has been removed. The figure 13.09 is even lower than the 15.72 figure, and is absurd.

WSJ, CNBC, Bloomberg TV and other mainstream financial media have been abandoning the use of actual "as reported" earnings, because they're afraid of losing advertisers. Instead, they've switched to "operating earnings," which equal earnings, but with one-time losses left out. Since all the writedowns of "toxic assets" are one-time losses, "operating earnings" are based on a make-believe world in which we're still in a real-estate and credit bubble, and the credit crisis never happened. If someone wrote a novel about this, it would be rejected as unbelievable.

However, things have changed in the last month. Here's the latest WSJ P/E chart:

Wall Street Journal P/E charts for 12-June-2009 <font size=-2>(Source: WSJ)</font>

Wall Street Journal P/E charts for 12-June-2009 (Source: WSJ)

Now, this new chart is interesting, and presents its own peculiarities.

Note that the claim of "as reported" earnings has returned. This is a complete about-face.

Next, the S&P 500 P/E ratio has jumped to 36.41 from 13.09 last month.

36.41 is a lot more honest, but I still have no idea where that figure came from.

Here are the "official" S&P 500 P/E ratios, from the Standard & Poors spreadsheet, for each quarter since 2007:

             2007     2008        2009
      --    -----    -----      -------
      Q1    17.09    21.90       136.64
      Q2    17.70    24.92      1981.88*  * = Estimated.
      Q3    19.42    25.38      -449.62*
      Q4    22.19    60.70        32.79*

The 2009 figures are not errors. They're occurring because earnings were actually negative in Q4 2008, and the estimates are very low in 2009. (For example, the P/E ratio for Q3 2009 is computed by adding together the earnings for that quarter and the three previous quarters. The reason that the P/E ratio estimate turns positive in Q4 2009 is because it no longer includes the negative earnings of Q4 2008.)

So where did 36.41 come from? Maybe somebody at WSJ or Birinyi Associates has a sense of humor, and said, "The P/E ratio for Q1 2009 is 136, so let's just drop the '1', and make it 36." Who knows?

I've recently read some commentary from someone claiming that P/E ratios (also called "valuations") are irrelevant to the market because P/E ratios are "backward looking," while the market is "forward looking."

This is so typical of the craziness we see today in the mainstream financial media. Obviously, the best guide to next year's earnings are this year's earnings.

Even more important, reported earnings are the only "real" figures that are available. (So are related figures, such as sales.) Everything else is made up by analysts and corporate spin-masters. Furthermore, we have solid trend data on these figures, so we can make historical judgments.

Last week I heard a commentator (perhaps Art Cashin on CNBC) say something like, "Well, if the S&P reaches 960, then it will cross a resistance level, and can go up to 1000."

I find such statements absolutely astounding. He's saying that 960 is some kind of magic number which may or may not be reached, but if it is reached, then there's an easy ride to 1000.

Well, what if the "real value" of the market is S&P 975? It's an astonishing question that no one in the mainstream media would even know how to answer. It's not a question they even think about. To them, the concept that "valuation" really means something is totally foreign to these people.

That's why these people can never see a bubble, even when they're in the middle of it. It never occurs to them that the price of a stock should reflect the value of the corporation that it represents. It's as if the stock market is nothing more than a Monte Carlo casino game, where stock prices have absolutely no relation to reality.

The one thing that relates stock prices to reality, of course, is reported corporate earnings. These analysts and reporters in the financial media hate dealing with reported earnings, because they're the only thing that they can't fake.

There is, of course, a "real value" to the stock market, as I've been saying for years. (See: "How to compute the 'real value' of the stock market.") The real value is around Dow 5000, or roughly S&P 500. So the market is still very far overpriced today.

From the point of view of Generational Dynamics, we're still headed a major stock market crash, with the market falling far below its current level. The market has been overpriced and in a bubble since 1995, and there is absolutely no chance whatsoever that we're going to escape the consequences of that. As I've said many times, no one has yet repealed the Law of Mean Reversion, and the Law of Mean Reversion says that the market will fall very far, and will stay there for many years.

What's really remarkable is the Wall Street Journal has suddenly done an about-face, and is abandoning the fantasy P/E ratio of 13. It's now publishing a value of 36, a value so high that it will stop some investors in their tracks. What effect, if any, it will have on the stock market as a whole remains to be seen.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (15-Jun-2009) Permanent Link
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Generational Dynamics Web Log for 15-Jun-2009 Wall Street Journal sharply revises its fantasy price/earnings computations

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Generational Dynamics Web Log for 15-Jun-2009
Wall Street Journal sharply revises its fantasy price/earnings computations