World View: Stock Market Share Prices May Go Parabolic

This morning's key headlines from

  • Stock market share prices may be going parabolic
  • Facebook users reveal a great deal of personal information about themselves
  • Chávez's death may cost Russia tens of billions of dollars
  • International Criminal Courts drops charges against Kenya official

Stock market share prices may be going parabolic

New York Stock Exchange
New York Stock Exchange

Long-time readers are aware that on a dozen or so occasions, I've transcribed the words of several of the most prestigious financiers appearing on CNBC and Bloomberg TV and pointed to specific lies. (See "World View: Libor-rigging scandal and lying on Wall Street" from last month.) 

In most cases, the lies are about the S&P 500 price/earnings ratio, also called "valuations." In order to encourage investors to buy more stocks, they openly lie about stock valuations, often claiming that stock valuations are at historic lows, whereas in fact they've been at historic highs continuously since 1995. By the Law of Mean Reversion, stock prices are going to fall to below Dow 3000, and stay there well into the 2020s. 

The Wall Street Journal addressed this situation on Monday:

That earnings came in a few percentage points higher than analysts had expected also isn't as impressive as it seems. In a typical quarter, more than 60% of companies "beat" the consensus, a ratio of about 3 to 1 over those that "miss." 

What may be more significant is the guidance that some companies gave about the current quarter. According to Thomson Reuters, the ratio of negative guidance to positive was an unusually high 4.1 to 1. As a result, earnings growth for the first quarter is expected at just 1.4%. That would be the second-weakest performance since 2009. 

Earnings can be volatile, even for the entire market. That is why revenue deserves more attention than it sometimes gets—and it provides scant reassurance. 

After falling slightly in the third quarter, the S&P 500's revenue grew by an estimated 3.7% in the fourth quarter and is expected to grow by just 1% in the first quarter. The implication is that much of recent earnings growth relies on expanding profit margins. Those already are above historical averages, though. The S&P 500's price multiple of trailing 12-month earnings is nearly 18. That multiple would rise into the low-20s if margins reverted to past form. 

Investors seem unconcerned, but they are paying prices today that assume a lot more great quarters.

In other words: 

  • Fourth quarter earnings were slightly higher than expected.
  • Even fourth quarter earnings are low by historical standards.
  • First quarter earnings are expected to be substantially lower.
  • The S&P 500 P/E ratio is almost 18, far higher than the historical average of 14, indicating that stocks are far overpriced.
  • First quarter earnings will push the P/E ratio into the low 20s, the astronomical levels that preceded the stock market crisis of 2008.
  • Investors appear to be totally oblivious to what's happening.

The recent rise in Wall Street prices is extremely alarming, because they've been rising rapidly since the December fiscal cliff and sequester crisis was postponed, apparently convincing investors that anyone who expressed any concern was wrong. The rise may even be accelerating to parabolic levels, indicating that the hard crash, which must occur sooner or later, may be close. WSJ

Facebook users reveal a great deal of personal information about themselves

Researchers at Cambridge University's Psychometrics Centre have developed computer algorithms that gather a great deal of personal and information from Facebook "likes" from people's profiles, including the following: 

  • 95% right distinguishing African-American from Caucasian.
  • 85% accurate distinguishing Republican from Democrat.
  • 88% accurate determining male sexuality
  • 65-73% for relationship status and substance abuse.
  • 60% for whether parents separated.

A lot of the data is inferred. For example, the algorithms infer whether the person is gay from his "likes" for music and TV shows. Cambridge University

Chávez's death may cost Russia tens of billions of dollars

The death of Venezuelan President Hugo Chávez has put into jeopardy tens of billions of dollars in contracts that Russia had signed with the purpose of giving financial support to the socialist anti-American leader Chávez. Chávez was personally behind all the major projects with Russia in energy, transportation, weapons purchases, and banking. 

But now Russian officials fear that the new president will turn to China for military and technical cooperation or even the United States for other investments. Venezuela is deeply in debt to Russia, and with Chávez gone, much of that debt may have to be written off. 

The first signs of trouble have already occurred: Although Russian president Vladimir Putin called Chávez a "big friend of Russia," Putin only sent a low-level delegation to Chávez's funeral, headed by a businessman, Igor Sechin. On his way to the funeral, Sechin stopped in Houston, Texas, in order to convince U.S. investors to financially back Russia's energy firm Rosneft. 

What irks Putin most, however, was Chávez’s natural ability to connect with his electorate, while no amount of political "technologies" could check the alienation of Russia’s scandalously corrupt elites from the "masses."

Moscow Times and Jamestown

International Criminal Courts drops charges against Kenya official

As we reported last month, dozens of Kenyan witnesses who were expected to testify against Kenyan leaders being charged with crimes against humanity have been disappearing and are presumed dead. Three Kenyan officials, including the president-elect Uhuru Kenyatta, are expected to go to trial this summer at the International Criminal Court (ICC) in the Hague. The charges stem from the bloodbath that occurred after the December 2007 elections, where death squads killed more than 1200 people and committed multiple atrocities, including torture, rapes, mutilations, and murder. 

But now the ICC has dropped charges against one of the officials, retired Public Service head Francis Muthaura, saying that key witnesses had either been killed, died, bribed, or were too afraid to testify. The prosecutor also accused Kenya of being uncooperative, refusing to provide required witnesses and documents. It's not known whether the charges against Kenyatta will have to be dropped as well. 

The ICC charges appear to have done Kenya a favor by reducing the chances of a new ethnic bloodbath following the current elections. Ethnic battles in Kenya stem from conflicts over land, as populations for different ethnic groups continually grow and occupy each other's farmland and grazing fields; land is usually the biggest issue in elections. But in this election, the land issue was in second place behind the ICC charges issue. The ICC charges polarized the traditional supporters of each candidate, but the middle ground swung over to Kenyatta's side, since many Kenyans view the ICC as favoring the West and biased against Africans. The Nation (Kenya) and Daily Monitor (Uganda)

KEYS: Generational Dynamics, stock market, earnings, Law of Mean Reversion, Facebook, Hugo Chávez, Venezuela, Russia, Vladimir Putin, Igor Sechin, Rosneft, Kenya, International Criminal Court, ICC, Francis Muthaura, Uhuru Kenyatta 

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