Immediately, I think to the Price-to-Earnings ratio of the S&P 500 index, as shown in Barron’s, and sure enough, earnings have been trending down for the entire year, which is, of course, bad news, as is proved when you see that the market value of the S&P 500 is down by about half in the last year, meaning that if you owned the stocks in the S&P 500 for the last year, then you have lost half of your money, and you are probably plenty upset!

So you would think that, you know, the P/E ratio would have fallen, especially since the prices of the stocks in the index (which are the P in the P/E ratio) have fallen by half, and you have lost half your damned money, about which you are still plenty peeved.

But surprise! Even though the S&P 500 index itself has fallen from about 1,590 a year ago (with a P/E of 18.9) to where the index is actually down by about half, earnings are down by half, too!

So this means that although the company made half as much money, and you, the hapless investor, lost half of your money investing in their stocks, both the P and the E went down, and thus the Price-to-Earnings ratio is still at an elevated 19! It’s actually higher! Hahaha!

Anyway, the point is that this current Price-to-Earnings ratio of 19 for the S&P 500 index is so high (audience shouts out, “How high, Mogambo?”) that it is still near where, historically, the market soon started down in a huge bear market, and is still high even after losing half its value! Gaaaah! I’m scared!

In fact, you can still have a high P/E of 19, indicating a high price, even if the earnings of the entire S&P 500 fell to a measly 1-cent and the shares in the index sold for a collective 19 cents! Hahaha! It’s weird!

You can tell by their faces that they are aghast that I would be ruining their presentation with my stupidities, and so they immediately get away from P/E ratios altogether, and instead turn to consumption and interest rates, whereupon they write, “consumers have started a spending strike, so any business that sells to them is heading into a huge headwind. This in itself is probably enough to do the damage but there’s more. Credit markets are at worst, closed and at best, much more expensive”, which they prove by noting, “Spreads for investment grade corporate bonds are 550 basis points over treasuries; even worse, junk bonds are a huge 20 percentage points above treasuries.”

They then cite a statistic that I have never heard of before, perhaps because I am an ignorant and stupid guy, but I was surprised to learn that “Looking forward, companies have no option but to slash capital expenditure, which is to say, slash other companies’ earnings, a vicious spiral that carries with it so much potential consequence that the Markit iTraxx Crossover Index is above 1000 for the first time since it was created, inferring that a record…number of companies are on the verge of default.”

Now, naturally I have no idea what in the hell any of this means, but I am always very interested in indicators that are in record territory, and I am willing to believe anything bad after hearing the words “on the verge of default”.

Then I remember that I am in gold, and I am calmed. Whew!

Of course, I’ll be ecstatic when gold zooms in price in response to such fiscal and monetary madness, but right now I am calmed. But really looking forward to ecstasy! And at these rates of monetary insanity, it can’t be far away! Whee!

Source: Markets Get an ‘F’ in P/E

This from Today’s Financial News:

You have to search the equities market pretty hard to find any companies still trading at overvalued prices, but if you look hard enough they are still out there.

One of them is making headlines today. Thanks to the company’s better-than-expected earnings report, shares of Under Armour (NYSE:UA) are trading significantly higher.

Right now, buyers are paying a 12% premium on yesterday’s closing price. Share price was even higher earlier in the day. Buyers are making a big mistake.

Out of all the undervalued gems on Wall Street right now, I cannot imagine why in the world investors are willing to shell out a sizeable premium for this already overpriced stock.

It doesn’t add up

Just look at the earnings figures released today. Over the last three months, Under Armour recorded revenues of $231.9 million, a year-over-year increase of 24%.

Get rid of manufacturing expenses, taxes, and all that other stuff and the company reported a quarterly profit of $27.5 million, or $0.51 per share. Analysts were expecting revenues of $227 million and earnings per share of $0.50.

Sure, the company exceeded forecasts, but not by the margins you would expect to see when investors bid share price up by double-digit proportions.

Because of today’s valuation surge, Under Armour now has a market capitalization of over $1 billion and a price-to-earnings ratio of over 24. That figures is nearly twice as high as the S&P 500 average.

With the company lowering its annual revenue forecasts to $750 million from as much as $775 million, its P/E ratio should be dropping, not rising.

Do not fall for marketing hype

This stock is a prime example of emotional investing and a marketing team’s effect on investors. Share price is artificially propped higher because investors believe the company truly has a long-lasting, high-demand product. But in reality, Under Armour has a terribly weak business model.

Its competitive moat is tiny, which is made obvious by the huge amount of comparable alternative products flooding the market. Plus, the company is right in the middle of an industry highly susceptible to recessionary pressures.

Let’s face it. The first thing consumers will cut out of their budget over the next few months will be trendy, over-priced underwear. If Under Armour wants to keep its products moving off of store shelves, it will be forced to greatly reduce prices. That means margins will be significantly reduced and earnings will be hammered.

My head is spinning watching investors waste their money in this stock. There are much, much better choices. The only investors that will make money on this company are the ones that are smart enough to short it.

Under Armour should be one of the worst performing companies, not one of the top performers. It is as simple as that.

Source: Marketing hype: Watch out for Under Armour (UA)

Junior Mogambo Ranger (JMR) Rick K. thinks that I am being too critical of the Dow Jones Industrials when I snort in derision at that index sporting the unheard-of price-to-earnings ratio of 87, as “almost all of the insanity comes from just one company: General Motors (NYSE:GM).”He explains that “GM lost $74.29 per share over the last year (on a stock priced at only about $17 per share), compared to earnings for the rest of the Dow of $92.37 per share. So GM alone lost 80% of what the rest of the Dow companies made over last year! If GM’s loss was excluded from the Dow’s earnings, its P/E would be around 16 rather than over 80.”

Naturally, I figure that, as the old saying goes, “What’s good for GM is good for the country,” and so it reflects what is actually going on in the country. And besides, it really makes no difference anymore, anyway, since accounting itself has gone to “the dark side of the Force”, like everything else.

And to show you what I mean, Bloomberg.com reports that regulatory filings show that “Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets.”

And so everything is lies, lies, lies! Hahaha! We’re freaking doomed!

This saved me from having to mention that the other indexes are just as weird, as the historical average for a Price-to-Earnings ratio is 14, with a P/E of 20 being near the extreme of “overvaluation”, and while currently the P/E of the DJ Industrials is 86, the DJ Transportation Index has a P/E of 24, the DJ Utility has a P/E of 16, the S&P500 has a P/E of 23, and the S&P Industrial Index has one at 22! Hahahaha! Apparently meaningless, as the prices of these stocks are actually rising! Hahahaha!

And the reason is that nobody is buying, because nobody has any money! I say this as a way of introducing this week’s episode of “What is wrong with this picture?” The scene opens with the Commerce Department reporting that consumer spending rose 0.2% in April, which is down from the 0.4% increase in March.

The more stupid of us are busily trying to multiply this 0.2% increase for April by 12 months (to get an annual figure), and screwing it all up pretty badly, and we keep re-entering the data over and over and making stupid mistakes until we are so frustrated that we are jamming the calculator’s keys with murderous force, and our fingers hurt.

Coincidentally, the Commerce Department also said that incomes grew 0.2%, which even included the $134 billion in the government’s tax rebates that are only half sent out! Hahaha!

If you are like me, you are suddenly realizing that your income did not go up by 0.2%, or any percent, because if it did, it seems like you would have remembered it. And anyway, if my income DID go up, then where in the hell is all of this money?

In fact (and I think I speak for everyone), we’re slaving away at our stupid jobs like the caged, workaholic rats we are, and all we ever get is an ungrateful boss, an ungrateful spouse and ungrateful children whining, whining, whining that you don’t give them enough money, and how I “owe” them money just because they were born and how they didn’t “ask to be born”, even though I sure as hell did not ask them to be born, and pretty soon we are yelling about who is responsible for their being born at all, but everyone knows it’s about the money.

In fact, everything is about the money these days. Mostly the lack of it. But mostly, mostly because of businesses and governments lying about it. Ugh.

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

Source: A Phantom Increase in Income

“Chimerica stocks are Chinese companies,” says Tom. “They do business in China, with Chinese management, Chinese employees, and Chinese currency. They make products for Chinese consumers.

The key is that these Chinese companies list on US stock exchanges.

Chimerica stocks list in the US because they can’t list in China or Hong Kong. “Going public” in China takes about three years. But in America, it only takes about six months. According to Barron’s, “Even now, for every company that goes public [in China] there are probably a hundred in the queue, and a lot of companies want money sooner rather than later.”

How does this happen?

A shell company is a stock without a business. The business has no assets or operations, but it still has a name and a stock symbol. To list in America, Chinese companies find an American shell company and back themselves in. Lawyers call this a “reverse merger.”

Why are Chimerica stocks good for investors?

According to Barron’s, they sell for an average 10 times earnings. The price-to-earnings ratio of the Shanghai Composite – China’s main stock exchange – is 27. Chimerica stocks are cheap because Chinese investors cannot open brokerage accounts in the United States to buy these stocks. American investors don’t know about them. Analysts don’t cover them.

Tom has put together a list of these stocks, which can be found here: Tom Dyson’s list of Chimerica stocks.