[quote=AN][quote=moneymaker]On average earnings are down, on average stock prices are up, I would call this dangerous! I’m thinking bubble, but to make money shorting would be very difficult or very lucky. Look how difficult is was for Bill Ackman to short Herbal Life, and he is a professional. Any business can be propped up, that is the nature of the stock market.[/quote]
Historical data for S&P P/E: http://www.multpl.com/table. Today, it’s sitting around 18-19. In 99-2000, it was 29-33. In 96-97, P/E was around 18-19. Here’s a graph of that data: http://www.multpl.com/. Hardly what I’d call a bubble.[/quote]
While P/E has historically been measure of valuation I’m not sure it applies as well during this period of borrowing money to do stock buybacks.
For example I have a company that has 1 billion shares that are $100/sh I have total revenue of $50 billion year and earning or $10 billion per year. So my P/E is 100/10 = 10 and my earnings/share = 10/100 = 10. I then borrow $10 billion to buy back my stock. So now my market cap is $90 billion and I have $10 billion in debt and I still have earnings of $10 billion. Now my P/E is 9 and my earnings per share are 10/90 = 11.11. If I do that is my company anymore valuable than it was before? Before I had 10/sh in earnings and 0 debt. Now I have 11.11/sh in earnings and $10 billion in debt. Assume that my revenues and total earnings are flat. I made company look more valuable than it was before on a P/E ratio but I didn’t change asset value of my company in doing so.