Stocks Overvalued

Bill Bonner’s posts are always well-written and informative. He posts daily in a free newsletter and is associated with The Daily Reckoning, a site you might want to look at.  Here is Bill’s daily post:

This is One Funny Looking Bull
by Bill Bonner
London, England

The longer the rally persists, the more dangerous it becomes.

The S&P 500 is up almost 60% since March. The Dow just had its best
quarter since '98. 

Yesterday, the Dow slipped 29 points. Is the rally finally rolling
over? Or is this a genuine bull market, just taking a pause?

If it is a real bull market, then it's a funny looking bull - one
that's missing parts! 

For example, corporate earnings are missing. P/E ratios are rising far
above the corporate earnings that support them. This puts the market
35% overvalued, on a cyclically adjusted P/E basis, says Smithers & Co.
And if you look at it in terms of its "q" ratio - a comparison of
capitalization to replacement costs - the S&P is even more overvalued.
As for emerging markets - "they're off the charts," says The Financial
Times.

Another missing part is the consumer. This from David Rosenberg:

"Consumer confidence not only surprised to the downside in September
but the Conference Board index actually fell to 53.1 from 54.5 with
both the 'present situation' and the 'expectations' component failing
to build on the August rebound. Before we go any further on the
details, let's recall the following:To Read More.....

* Historically, by the time the S&P 500 rebounds 60% from the trough,
the confidence index is sitting at 92.0; 

* The month recession ends, the index is, on both an average and median
basis, sitting at 72.0;

* During an economic expansion, the consumer confidence averages 102.0;
in a recession, it averages 72.4.

"Just to put a 53.0 reading into proper perspective. It's still
recessionary... The only categories [that] actually saw their
confidence level rise in September were the ones in the lowest income
strata - less than $25,000 (their confidence rose two points). After
all, they're the only ones really benefiting from all the government
intervention into the economy and the markets."

It's not hard to figure out why consumers lack confidence; this bull is
lacking in jobs, too. A worse-than-forecast report came in from ADP
Employer Services yesterday. It said US companies cut 254,000 more jobs
in September. And Reuters reports that jobless rate rose in August in
all US cities.

The bull is also missing production. Another report told us that
manufacturing activity in the Chicago area is still in recession. In
the United States as a whole, the latest numbers tell us that GDP fell
in the 2nd quarter - but by less than forecast. "Less than forecast"
might be good news if stocks were at an epic low. Instead, at current
levels, it is much like a doctor who tells the family: "Thank God he
got medical attention. He's dead, but not as dead as he would have been
without it."

Another important part this bull market is missing is the retail stock
market investor. Hey, this rally has no legs at all!

We have insisted - with no proof, up until now - that the mom and pop
investor is no longer counting on the stock market for his retirement.
He's seen what can happen. At the low in March, adjusted for inflation,
he was back to where he was 40 years ago. That is, in real terms, he
had not made a dime from the stock market (aside from dividends) during
his entire adult lifetime.

We guessed that he was not buying stocks.

Now, here's the evidence: according to TrimTabs, only $2.5 billion has
gone into equity mutual funds in the last six months. Bond funds have
attracted 13 times as much money as equity funds, says a Morningstar
report. 

"US retail investors...have watched this rally from the sidelines," the
FT concludes.

Wait a minute. Someone is pushing up stock prices. If not the retail
trade, who? We don't know. Maybe hedge funds. Maybe institutional
speculators. The pros have a different outlook. If this rally turns out
to be real, and they miss it, their jobs and reputations are in danger.
If it turns out to be phony, on the other hand, they risk clients'
money. On balance...they are better off getting in than staying out.

But just as the pros jump like lemmings into equities...they could all
scramble out fast. Give them a fright...and this rally is over.

Where might the fright come from? We can think of several
possibilities. One is the housing sector. If foreclosures begin to
increase...and prices fall...even the pros may put two and two
together. 

Likewise, a shocking unemployment number could cause them to connect
the dots.

Then, look out below...
Another thing that might trigger a sell-off in the stock market: a
sudden setback in China...

Today is a big day in China...it marks the 60th anniversary of the
communist victory. "The Chinese people have stood up," said Mao,
announcing the victory in 1949. 

Then, over the next two decades, whenever the Chinese stood up...Mao
shot them down himself. Mao's long march to power was a huge setback
for human political progress - if there is any. The man was a thorough
scoundrel and a complete incompetent at everything, except getting
power and holding onto it. Every program was a disaster. When he set
out to 'liberate' the masses, they ended up as slaves. When he set out
to feed them, they starved. When he proposed to empower them with his
"democratic dictatorship," they ended up with bullets in the back of
the head.

But 60 years later, the commies are still in power. China is still red. 

And yet, thanks to the curious way the world turns, China's economy is
now freer and more competitive in many ways than the United States. Go
figure. 

As economies age, more and more people become 'rentiers.' That is, they
get some special privilege...some inside angle...some conniving
advantage. The latest numbers, for example, tell us that almost half of
all households pay no federal taxes. They collect benefits - jobless
benefits, food stamps, education, day care, Medicare, Social Security -
without contributing to the system that provides them. Add to this
number the millions of households that pay taxes but receive a large
part of their money from the government itself - employees,
contractors, lobbyists, etc. - and you have enough to win any election
in the country. 

But the welfare chiselers and food stamp cheats are small time crooks.
The big crooks go for billions. John Crudele in The New York Post:

"...Sept. 18, 2008 [US Secretary of the Treasury...Henry] Paulson
placed his first call of the day at 6:55 a.m., to Lloyd Blankfein, who
succeeded Paulson as CEO of Goldman. It's unclear whether the two
connected because Blankfein called Paulson minutes later. 

"And then Blankfein placed another call to Paulson at 7:05 a.m. for
what looks like a 10-minute conversation. 

"After that Paulson called Christopher Cox, Securities & Exchange
Commission Chairman twice; British Chancellor Alistair Darling and New
York Federal Reserve head (and now Treasury Secretary) Tim Geithner two
times. 

"Then Paulson took another call from Goldman's Blankfein. 

"It wasn't even 9 a.m. yet - 30 minutes before the stock market was to
open - and Paulson and Blankfein had already exchanged three phone
calls."

It pays to have friends in high places. That was the day the market
learned of Paulson's bailout proposals. Could Goldman have gotten word
before others? Hey, we're not accusing anyone...

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