First it was Citi, then Deutsche Bank, now Goldman joins the chorus of all those warning that the market is now furiously overbought. What’s worse, at this point the only buyers are the occasional mom and pop habitual gamblers who listen to the endless cheerleading on financial TV, and the companies themselves who are buying back their own stock thanks to desperate bond investors who don’t even care to read the “use of proceeds” section in the bond prospectus, and are happy to fund management’s retirement plans if it means at least one more year of managing other people’s money.
And of course central banks, whose liquidity injections in 2015 – seven years after the great financial crisis and years into the so-called recovery – are about to set a record in central planning intervention:
So just how overvalued is everything? This is what Goldman’s chief strategist David Kostin has to say:
Stocks with attractive valuation are rare in the current environment of stretched share prices. The aggregate S&P 500 trades at 17.3x forward EPS and 10.2x EV/EBITDA. The only time during the past 40 years that the index traded at a higher multiple was during the 1997-2000 Tech Bubble.The median stock sports a P/E and EV/EBITDA of 18.0x and 11.0x, respectively. These valuations rank in the 99th percentile of both P/E and EV/EBITDA multiples since 1976.
As a reminder, even during the peak of the last bubble crisis, LBOs at 10x, 9x or even 8x were considered very aggressive. Fast forward to today when half of the market has an EV/EBITDA of more than 11x!
Indicatively, the long-term EV/EBITDA average is just over 8x, so the entire market is about 2-3 turns of EBITDA overvalued. And there are those who say stocks are “cheap.”
And since the smart money is, well, smart and knows that buying anything at 10x or 11x EBITDA usually ends up wiping out the equity tranche when generously levered courtesy of today’s insane, broken, manipulated and centrally-planned market, it is not touching the market with a 10-foot pole. From Goldman:
The proverbial “smart money” is selling, not buying. Completed private equity sales through M&A and via follow-on offerings have both surged to record levels measured by both number of deals and by transaction value. A total of 350 follow-on sales by private equity firms were completed in 2013 and 2014, a 70% jump from the 210 transactions completed in 2011 and 2012.
For now, however, the music is playing. Why? Thanks to management teams, whose equity-linked incentives and compensation go up the higher their stocks goes, which is why companies are forecast to buyback a record $450 billion in stocks, and probably much more, in 2015.
The bottom line is simple: there is no longer any question if the market is in a bubble: it is, and in fact it is the biggest bubble in history. The only question is who starts the selling avalanche, and when?
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