Two weeks ago, the blue-chip S&P 500 index advanced to a Shiller P/E of 24.6 (S&P 500 divided by the 10-year average of inflation-adjusted earnings). Notably, even using 10-year averaging, the implied profit margin embedded into Shiller earnings is about 18% above the historical norm. On normal profit margins, the Shiller P/E would now be at an even more extreme 29. Jim Chanos notes that more stocks are trading above three times book value today than at the 2000 market peak, which is largely because of a speculative runup in secondary issues. Indeed, small cap stocks and over-the-counter Nasdaq stocks have outpaced even the S&P 500 in recent months. Last week, Barron’s magazine bubbled “this is a golden era for initial public offerings,” describing the IPO market as “white hot,” featuring a flood of new offerings – mainly small cap growth ventures.
All of this enthusiasm seems rather encouraging, unless one is familiar with market history, in which case one has to wince at the almost creepy re-emergence of these speculative hallmarks, in sequence. A couple of weeks ago, I quoted the words of former NYSE Chairman Bernard Lasker just before the 1969-1970 market plunge, but I slightly abridged the quote. Here’s a longer version:
“I can feel it coming…. a whole new round of disastrous speculation, with all the familiar stages in order – a blue-chip boom, then a fad for secondary issues, then an OTC play, then another garbage market in new issues and finally the inevitable crash. I don’t know when it will come but I can feel it coming and, damn it, I don’t know what to do about it.”