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Simon Black: Some Thoughts On "The Longest Bull Market Ever"...
08-23-2018, 06:26 PM,
Simon Black: Some Thoughts On "The Longest Bull Market Ever"...
Simon Black: Some Thoughts On "The Longest Bull Market Ever"...

<p><a href=""><em>Authored by Simon Black via,</em></a></p>

<p><strong>Well, it happened.</strong> Yesterday the US stock market broke the all-time record for the longest bull market ever.</p>

<p>This means that the US stock market has been generally rising for nearly a decade straight... or even more specifically, that the market has gone 3,453 days without a 20% correction.</p>

<p><strong>That’s a pretty big milestone. And there’s no end in sight. So it’s possible this market continues marching higher for the foreseeable future.</strong></p>

<p><a data-image-external-href="" data-image-href="/sites/default/files/inline-images/bull.png?itok=Mrl8sRi9" data-link-option="0" href=""><img data-entity-type="file" data-entity-uuid="5429cecf-df2e-4288-af98-67552b75844a" data-responsive-image-style="inline_images" height="261" width="500" srcset=" 1x" src="" alt="" typeof="foaf:Image" /></a></p>

<p><em><u><strong>But if you step back and really look at the big picture, there are a lot of things that might make a rational person scratch his/her head.</strong></u></em></p>

<p>For example– the Russell 2000 index (which is comprised of smaller companies whose shares are listed on various US stock exchanges) is currently right at its all-time high.</p>

<p>Yet simultaneously, according to the Wall Street Journal, a full SIXTY PERCENT of corporate debt issued by companies in the Russell 2000 is rated as JUNK.</p>

<p>How is that even possible– a junk debt rating coupled with an all-time high? It’s as if investors are saying, “Well, there’s very little chance these companies will be able to pay their debts… but screw it, I’ll pay a record high price to buy the stock anyhow.”</p>

<p><strong>It just doesn’t make any sense.</strong></p>

<p>Looking at the larger companies in the Land of the Free (which make up the S&P 500 index), the<strong> current ‘CAPE ratio’ is now the second highest on record.</strong></p>

<p>‘CAPE’ stands for ‘cyclically-adjusted price/earnings ratio’. Essentially it refers to how much investors are willing to pay for shares of a company, relative to the company’s long-term average earnings.</p>

<p>And right now investors are willing to pay 33x long-term average earnings for the typical company in the S&P 500.</p>

<p>The median CAPE ratio based on data that goes back to the 1800s is about 15.6.</p>

<p><strong>So at 33, investors are literally paying more than TWICE as much for every dollar of a company’s long-term average earnings than they have throughout all of US market history.</strong></p>

<p>And it’s only been higher ONE other time– just before the 2000 stock market crash (when the dot-com bubble burst).</p>

<p>33 is higher than right before the 2008 crisis. It’s even higher than it was before the Great Depression.</p>

<p><strong>In addition to the CAPE ratio, the average company’s Price-to-Book ratio is also the highest since the 2000 crash.</strong></p>

<p>In other words, investors are not only paying a near record amount for every dollar of a company’s long-term average earnings, but they’re also paying a near record amount for every dollar of a company’s net assets.</p>

<p>The list of these record / near-record ratios goes on and on. Investors are also paying, for example, an all-time record Price-to-Revenue ratio… meaning that investors have never paid a higher price for every dollar of a company’s revenue… EVER.</p>

<p><em><u><strong>The general narrative is that everything is awesome in the US economy and will apparently remain that way forever and ever until the end of time.</strong></u></em></p>

<p>I certainly agree that there’s a lot of surface-level strength in the US economy right now.</p>

<p>But I really wonder about the long-term.</p>

<p>Just look at the average US consumer: despite the ultra-low unemployment rate in the US, average wages have barely budged.</p>

<p><a href="">Pew Research</a> released a great article earlier this month showing that, for most US workers, their wages have been stagnant for DECADES after you adjust for inflation.</p>

<p><strong>Plus we’ve all seen the statistics about how little the average American has stashed away in savings.</strong></p>

<p>Federal Reserve data from the Survey of Consumer Finances shows the median bank account balance is just $2,900. And for those under 35 it’s just $1,200.</p>

<p><strong>Overall the average US consumer has stagnant wages, little savings, almost nothing put away for retirement, record high credit card debt, record high student debt… and now rising inflation.</strong></p>

<p>So I’m just curious where all these companies are going to get their long-term revenue growth. Who is going to be buying all their products? Because the US consumer seems pretty tapped.</p>

<p><em>(And if things are that bad in the boom times, just imagine what’s going to happen to US consumer behavior when recession hits again…)</em></p>

<p><strong>And aside from the US consumer, there are also a lot of companies that are going deeper into debt.</strong></p>

<p>I write about Netflix quite often, which has to take on billions of dollars of debt each year just to stay afloat.</p>

<p><em><strong>But even bigger companies have bizarre, head-scratching problems.</strong></em></p>

<p>Coca Cola is a great example– one of the oldest, most stable companies in the US market.</p>

<p>Back in 2006 Coca Cola earned over $5 billion in profit. Last year Coca Cola earned $1.3 billion in profit.</p>

<p>In 2006 Coca Cola had $1.3 billion in long-term debt. Last year Coca Cola had $31 billion in long-term debt.</p>

<p>Yet Coca Cola’s stock price is near a record high, more than double its stock price in 2006.</p>

<p><strong>How does that make any sense?</strong></p>

<p>What’s more– Coca Cola’s ‘Free Cash Flow Yield’ is now 2.8%.</p>

<p>This means that, after all expenses, accounting adjustments, and investments, the business generates enough money to pay investors a cash dividend worth 2.8% of the current share price.</p>

<p>Yet Coca Cola’s -actual- dividend yield is 3.4%.</p>

<p><strong>How is it possible that that Coca Cola consistently pays its investors more money than the business generates? Easy. They just go into debt.</strong></p>

<p>General Motors is another great example: GM pays its investors a dividend yield of 4.1%. And that’s super attractive. Yet GM’s Free Cash Flow is actually NEGATIVE.</p>

<p><u><em><strong>There’s so much of this nonsense going on right now– companies going deeper into debt to pay dividends and support their share prices despite lackluster business performance.</strong></em></u></p>

<p>But again, despite the rising debt (and the rising level of JUNK debt), investors are still willing to pay record high multiples for their investments.</p>

<p><u><strong>This just doesn’t strike me as a great way to generate wealth and prosperity.</strong></u></p><img src="" height="1" width="1" alt=""/>

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