Here they go again. After a mere three day outbreak of a modicum of sanity on Wall Street, the robo-machines and Robin Hooders were back to scooping up the dip yesterday and giving it back today.
But still, what are they thinking? Truly.
With nearly every S&P 500 company having reported its Q2 results, LTM earnings on a GAAP basis posted at $65.00 per share and on a so-called ex-items or “operating earnings” basis the LTM figure was $125.40 per share.
So at today’s 3339 closing price on the S&P 500, the current trailing PE ratio ranges between 51.4X the earnings CEOs/CFOs certify on penalty of jail time or 26.6X the Wall Street curated and burnished version of earnings from which all asset write-offs, restructuring charges and other one-timers/mistakes have been deleted. Nearly Natural 5299 Fi... Buy New $53.94 (as of 04:37 EDT - Details)
Of course, these deleted GAAP charges reflect the consumption of real corporate resources, such as purchase price goodwill that gets written off when an M&A deal goes sour or the write-down of investments in factories, warehouses and stores which get closed; and, as such, they absolutely do diminish company resources and shareholder net worth over time.
But for decades now Wall Street has so relentlessly and assiduously ripped anything that smells like a “one-timer” out of company SEC earnings filings that it no longer even knows what GAAP earnings actually are; and it pretends that these discarded debits (and credits) to income are simply lumpy things that even out in the wash over time.
They do not. If ex-items reporting was merely a neutral smoothing mechanism, reported GAAP earnings and “operating earnings” would be equal when aggregated over several years or even a full business cycle.
Yet during the last 100 quarters there have been essentially zero instances in which reported GAAP earnings exceeded “operating income”. So in aggregate terms, several trillions of corporate write-downs and losses have been swept under the rug.
During Q2 2020, for example, GAAP earnings reported to the SEC totaled $145.8 billion for the S&P 500 companies, while the ex-items earnings curated by the street posted at $222.3 billion. That amounted to the deletion of nearly $77 billion of write-downs and mistakes, and it inflated the aggregate earnings number by more that 52%!
Needless to say, the game is all about goosing the earnings number in order to minimize the apparent PE multiple, thereby supporting the fiction that stocks are reasonably valued and that nary a bubble is to be found, at least in the broad market represented by the S&P 500. Donald J. Trump Signat... Buy New $49.95 (as of 03:36 EDT - Details)
Still, valuing the market at 51X LTM earnings during the present parlous moment in time – or even nearly 27X if you want to give the financial engineering jockeys in the C-suites a hall pass for $77 billion of mistakes and losses this quarter alone–is nothing short of nuts.
Yet the gamblers in the casino hardly know it. Wall Street has already decided that current year results don’t matter a whit: The nosebleed level trailing PE multiples being racked-up currently are simply being shoved into the memory hole on the presumption that the sell-side’s evergreen hockey sticks will come true about 4-quarters into the future; and if they don’t, a heavy dose of ex-items bark stripping will gussy-up actual earnings when they come in.
Still, if you think that a forward PE multiple of, say, 17.5X is just fine and that flushing the one-timers is OK, then you still need $195 per share of operating earnings by Q2 2021 to justify today’s index level.
Then again, we think a 56% gain in operating earnings over the next four quarters ($195 per share in Q2 2021 versus $125 per share in Q2 2020) is not simply a tall order; it’s downright delusional.
Here’s why. You can’t take even passing note of the fraught political and economic landscape and conclude that a “V” shaped economy and earnings path lies ahead.
Yet, obviously, the willing suspension of disbelief currently levitating the market to absurd heights is predicated upon the notion that the Covid vaccines will function as a silver bullet, and that after approximately 15 billion shots to the arm (2 for each of mankind), the pre-Covid status quo ante will be restored fast and in full. Nearly Natural 6720 in... Best Price: $40.91 Buy New $45.35 (as of 04:37 EDT - Details)
But if you accept that bromide, you might as well believe in the tooth fairy. Or stated differently, the White House’s $15 billion Operation Warp Speed has been likened to the Manhattan Project, but the likely similarity is that both produced a bomb at the end.
At the moment there are three leading vaccine candidates, but each is fraught with considerable risks and potential delays. These include one co-developed by Moderna Inc. with Dr. Fauci at the National Institutes of Health and another from Pfizer Inc. and Germany-based BioNTech. A third is from AstraZeneca and Oxford University.
The latter is now on hold owing to a “serious adverse reaction” in one of the trial patients per yesterday’s headlines. The cause of the pause was apparently a case of transverse myelitis, an inflammation of the spinal cord that causes symptoms such as lower back pain, weakness in the arms and legs, difficulty walking, incontinence and digestive problems. According to the National Institutes of Health, roughly 1,400 cases of it are diagnosed each year.
As Paul Offit, a pediatrician and vaccine expert at the Children’s Hospital of Philadelphia, noted,
“….the AstraZeneca shot involves giving large doses of a monkey adenovirus engineered so it can’t replicate. It is therefore important for researchers to investigate whether the adverse event wasn’t somehow being triggered by a reaction to that large viral dose”
Of course, the company and the Pharma Chorus are all saying, “nothing to see here” because such pauses happen in trials all the time out of an abundance of caution and scientific rigor. That may be true, but what is also true is that most vaccines require 5-10 years to develop, not 5-10 months.
What is also not noted is that there has never been a successful vaccine against coronaviruses; that the one developed in 2011 against a previous coronavirus turned out to be a killer when tested on animal subjects; and that the Moderna and Pfizer vaccines are as novel as the disease itself: That is, they involve tampering with your genes, not the injection of small bits of a cultured virus designed to induce immunity to the disease via the production of antibodies against it. Besti Make America Gre... Buy New $14.95 (as of 04:37 EDT - Details)
This latter point is crucial because it turns out that the White House ballyhoo about a mass scale vaccine by election day was based on the availability of these two novel vaccines. To wit, the CDC recently sent documents to state officials that lay out various scenarios, including availability of a limited number of doses of two vaccines by the end of October, but as the Wall Street Journal noted this AM,
The CDC document doesn’t name the two vaccines that could become available but describes characteristics that match those of the vaccines from Pfizer and Moderna.
Now, what those novel vaccines do is inject so-called mRNA (m=messenger) into the patient for the purpose of instructing cellular DNA to generate the spiked proteins that cause Covid-19. Stated differently, your body becomes a virus factory in order to trick its own immune system into manufacturing antibodies to counterattack these self-generated pathogens.
This approach to vaccinated immunity may well turn out to be one of the great medical breakthroughs of the present age, but it is also the case that there has never been a vaccine based on RNA and DNA engineering, let alone approved for and tested under conditions of mass use.
Obviously, when the public learns that the ballyhooed shot in the arm turns their bodies into a virus factory, or if there are just a few cases of serious or fatal illnesses from runaway virus production in vaccinated patients during the trials or early weeks of use, the screaming chyrons of cable TV are likely to produce huge resistance to use of the Moderna and Pfizer vaccines; and that’s especially the case because in his inimitable way, the Donald will like crow so much about his success in bringing them to the market super-fast that they will be viewed warily as the “Trump Vaccines” by a considerable share of the public.
Beyond that, the mRNA-based COVID-19 vaccines from Moderna and Pfizer could run into severe supply chain and logistics hurdles owing to the ultra-cold handling and storage requirements of both vaccines. According to some experts, these super-cold temperature conditions may become “severely limiting” to distributors’ ability to ship the shots and to clinics’ ability to administer them to a wide swath of patients.
And we do mean super-cold. The Pfizer vaccine, dubbed BNT162b2, has especially raised eyebrows: The vaccine reportedly needs to be held in storage at -94° Fahrenheit, and will last for only 24 hours if refrigerated at normal temps between 35.6° and 46.4°. Likewise, the Moderna version requires handling temperatures well below zero Fahrenheit. MyGift Set of 3 Artifi... Best Price: $26.13 Buy New $29.99 (as of 04:37 EDT - Details)
Undoubtedly, these logistical requirements will be eventually solved with the development of new storage equipment and handling infrastructure, but again, this will not happen overnight and not in a manner which will permit a scale-up to the delivery of tens of millions of shots before the fall/winter flu season is again in full swing.
That is to say, the symptoms and the counting of ordinary influenza and pneumonia cases have now become so thoroughly conflated with the Covid that there is nearly a guaranteed “second wave” of cases and deaths coming during the October-April flu season, whether they are attributable strictly to the Covid or not; and there is precious little prospect that the purported silver bullet – mass scale Covid inoculations – will arrive in time and on the scale needed to change the picture.
And that is surely the case if we end up with a hung election and Electoral College stand-off, and if in the interim the Dems go on the warpath, as Nancy Pelosi has already hinted, against what will be alleged to be the rash and unsafe release of the “Trump Vaccines”.
In practical terms, therefore, what lies ahead is another entire flu season in which the Virus Patrol will be fully mobilized and empowered to implement the very kind of non-pharmaceutical interventions (i.e. lockdowns and mass quarantine orders) that brought the US economy to its knees last spring.
Indeed, the Blue State governors and mayors have turned the unconstitutional and economically destructive garroting and regimentation of their own economies into a form of anti-Trump virtue signaling that will cast a heavy pall for years to come. That’s because most of the worst offenders (Cuomo, Murphy, Pritzker, Whitmer, Newsom) are not up for re-election in November.
Moreover, beneath the unstated anti-Trump reasons for the extreme lockdowns is the now embedded predicate that state and local officials have the right and obligation to use vaguely authorized or even imaginary executive powers to order absolutely capricious forms of economic marshal law in a misbegotten quest to extinguish the coronavirus.
Call it Covid Prohibitionism and you are not far off the mark. In fact, this week’s announcement by the twin Gauleiters of the New York Virus Patrol, Governor Cuomo and Mayor DeBlasio, that New York City restaurants can open for indoor dinning on September 30 under conditions that are guaranteed to mean their extinction is all the proof you need. Incrediblegifts Donald... Buy New $13.90 (as of 04:37 EDT - Details)
For crying out loud, a limit to 25% of capacity and six foot table spacing (per the chart below) would be fatal for most any seated restaurant in the nation. But in New York City, where sky-high real estate costs cause tables and patrons to be jammed check-by-jowl in small spaces, it’s a virtual death sentence.
Last time we checked there were about 26,000 restaurants in NYC including 10,000 in Manhattan alone. These eateries, bars and delis employ upwards of 400,000 workers and generate more than $35 billion of gross receipts per year. But by the time you get done table spacing, temperature checking, contact info extracting, HVAC upgrading, mask-enforcing and bar closing those numbers are going to shrink drastically.
And devastation of the restaurant sector is barely the half of it. NYC is fast losing the finance industry to remote locations and work-from-home modalities and the tech firms don’t need to locate there, either, when more accommodating places like Austin, Raleigh, Charlotte, Dallas, Boulder, Columbus and Jacksonville will do.
So NYC has only two remaining industries – the giant hospital/sick care complex and tourism – to sustain the economy for more than 8 million citizens.
We doubt, however, whether the overwhelmingly non-profit and low-pay health care sector can support the city; and we are quite certain that with heavily regimented and badly crippled restaurants, theaters, museums and mass sporting and entertainments venues that the city’s 65 million annual tourists will not continue to return and that its 120,000 hotel rooms will not even come close to break-even occupancy rates.
But here’s the thing. Why in the world are the twin Gauleiters aiming to virtually snuff out the economic life-blood of a city whose finances are already creaking under a giant load of pensions, sky-high municipal salaries and a massive welfare state burden for health care, housing, education and cash aid for a large low-income and poor population?
The answer, of course, is Covid Prohibitionism. After all, the number of new cases, hospitalizations and deaths WITH-Covid have virtually disappeared from NYC and New York state.
In fact, the contrast between outcomes during the last 30 days and those during the peak Covid outbreak in April is so dramatic as to suggest that the Covid-Prohibitionists running the state and city are, figuratively speaking, determined to apprehend every last bootlegger and shutdown every single moonshine still operating in the state.
During the interval between August 9 and September 9, the only metric which was higher was the number of Covid tests administered. That was up 3.5X from 23,180 per day in April to 82,220 per day during the most recent 30-day period.
So no stone was left unturned, but for all the effort not much actually turned up. To wit, during April there were 7,620 new cases per day, representing 33% of those tested. By contrast, during the last 30 days there have been only 676 new cases per day – a reduction of 91% – which represented just 0.8% of those tested.
To put it more dramatically, during the last month New York reported 2,466,520 new tests, but less than 1% of them were positive for the Covid; and we also know from the New York Times exposé last week that the overwhelming share of even this diminutive “positive” fraction represented PCR cycle runs above 30, which means they were carrying viral loads so small as to cause neither sickness nor contagion, or even hurt a flea for that matter.
That much is evident from the comparative hospitalization and mortality data. Back in April there were an average of 2,000 new hospitalizations per day, representing 26% of the new cases, while during the last thirty days there has been no net increase in hospitalizations at all, and the daily average census of Covid patients is down by more than 90%.
Even more importantly, the daily mortality rate has plunged by 98.9%. That’s right, there were 560 deaths per day in April, but only 6 per day during the last 30-day period.
For all practical purposes, therefore, New York is a Covid free zone, yet the newly empowered Virus Patrol in the state is determined to kill not only the restaurant industry of New York City, but its very economic viability as a center for tourism and entertainment.
These unassailable facts of life highlight the Fake Science which underlies the entire Covid-Hysteria and Lockdown mania that has enveloped not only the state of New York, but much of the nation.
The fact is NYC’s restaurants, tourism and entertainment venues should never have been shut-down in the first place because the overwhelming share of their patrons were never lethal spreaders of the virus or its victims. Indeed, NYC was the very epicenter of serious illness and deaths WITH the Covid, but that unfortunate turn preponderantly occurred among the institutionalized elderly and those already suffering from one or more life-threatening conditions.
For instance, among the 25,377 WITH-Covid deaths in New York state to date, 14% or 3,590 occurred among persons 90 years or older–a population that is inherently burdened with a high incidence of life-threatening medical conditions.
According to state data, in fact, there were 6,082 cases of the top ten comorbidities or 1.7 cases for each WITH-Covid death. These included 1,724 cases of hypertension, meaning that nearly half of the casualties suffered from high blood pressure, as well as 1,133, 702 and 653 cases of dementia, diabetes and high cholesterol, respectively, plus another 2,890 cases of maladies like renal diseases, coronary artery disease, COPD, cancer, stroke, etc.
Stated crudely, these Covid victims were already on the Grim Reaper’s countdown clock. Would it have been too much trouble for the Gauleiter Twins to have suggested that during their remaining days they stay away from restaurants, Broadway, the Guggenheim Museum and rock concerts at Madison Square Garden?
Likewise, another 26% or 6,539 of the New York deaths were among the 80-89 year old cohort. But again there were 12,700 cases of the top ten comorbidities among them or 1.94 per victim, including 3,645 cases of hypertension, 2,050 cases of diabetes, 1,377 cases of dementia and 697 cases of renal disease, among others.
Another 6,576 deaths (26% of the total) are attributed to the population 70-79 and they too were rife with the top ten comorbidities. In this cohort, these conditions totaled more than 13,000 or an average of 2.0 per victim including nearly 4,000 cases of hypertension and another 4,000 cases of diabetes and dementia.
In all, 16,700 or 66% of the New York state WITH-Covid deaths were among a very small put highly vulnerable population of the aged and infirm. The 70 and over age cohort in New York totals 2.32 million persons or just 11.9% of the state’s population, and the sub-population among that group in long-term care facilities and/or afflicted with life-threatening comorbidities is an even smaller subset.
By contrast, the New York population 50 years and under totals 12.44 million or 64% of the state’s population, but it accounted for only 1,317 or 5.1% of the Covid deaths.
And, again, even among this younger population, those who succumbed to the Covid were afflicted with comorbidities at very high rates. For example, among the 2.53 million New Yorkers in the 40-49 years cohort there were 870 WITH-Covid deaths but also 800 comorbidities among the small fraction of this age group (0.03%) which succumbed.
It boils down to this. Notwithstanding New York’s high death count overall (25,377), the mortality rate for the 12.4 million souls 50 years or under was just 10.5 per 100,000, which in the scheme of annual mortality rates for this population (@300 per 100,000) is a rounding error. It’s a risk of death factor that no rational society should try to prevent with blunderbuss lockdowns and one that a free society should not even contemplate.
By contrast, the 11.9% of the population 70 years and older experienced a WITH-Covid mortality rate of 720 per 100,000 or 69X higher.
As we said, would it have been too much to leave the social congregation venues open, as did Sweden, while mobilizing education and outreach campaigns to the elderly urging them to stay away from restaurants, bars, gyms, shows and concerts?
The question answers itself, of course. No lockdown Sweden is also now largely Covid-free as demonstrated in the chart below. It ended up experiencing a WITH-Covid mortality rate of 64 per 100,000, and more than half of those occurred in extended care homes, not among the working age and school age population (there was only 1 WITH-Covid death among its 2.2 million 20-years and under population).
By contrast, the full monty lockdowns of the Gauleiter Twins resulted in a 130 per 100,000 mortality rate – even as their a misbegotten regime of economic marshal law wreaked destruction on workers, businesses and the tax base alike, and will continue to do so in its modified forms for months yet to come.
Needless to say, New York is not an aberrational island of insanity, but is simply the advance guard for the Virus Patrol that has its boot heels hard upon the population of much of Blue State America, and will continue to do so for months to come as winter influenza returns and the silver bullet of mass vaccination comes a cropper.
So, yes, under those conditions paying 51X for current earnings is not only delusional; it’s tantamount to suicidal.
Reprinted with permission from David Stockman’s Contra Corner.