Another day, another ugly glimpse of economic reality, another volume-less bid for every dip in stocks as momentum is all. Today, it seems, the bullish meme remains: earnings, which we know were abysmal if judged correctly (and appear extended longer-term); valuations, which we know are higher than at the previous peak on a forward P/E (and are notably expensive on a long-term cycle basis); dividends and cash on the balance sheet (which has been created by relevering firms significantly and in no way represents ‘flexibility’); and buybacks – if management is buying then we’re all in – which, based on SocGen’s Albert Edwards’ excellent works, turns out to be a great market-timing tool for bulls to run for the hills. Four charts for the bullish faint of heart…


Long-term cyclical adjusted PEs (CAPEs) ratios that clearly demonstrate US absolute and relative expense (Tobin?s Q ratio shows similar results)



It is more essential than usual to make that cyclical adjustment to valuation metrics as the US and Europe are unusually divergent in where profits are relative to trend ? this in our view is not due to anything other than the delay in the US in enacting its own fiscal tightening.


The timing of share-buybacks seems specifically designed to destroy value? buying shares when they are expensive in the wake of a huge rally. I know my market timing may not be up to much but corporate treasurers seem to be even worse!



Albert adds, as he has on many occasions, that share buybacks are typically financed by debt and once again we see this playing out.


Quite frankly to the extent that debt is financing cash distributions, these companies should be on a lower multiple as the higher debt loads mean its balance sheet is more vulnerable to recession.


Charts: SocGen

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