I love it. Investors aren't long sighted? Well, they don't tell the entire story. These indexes have been manipulated. The SPX is a cap weighted index, where what they take out has to be matched at the same value as what they put in. I thought about how they did this, but they do it by coming up with a divisor related to a certain number of shares. A 10 billion share company has 10 times the share weight of a 1 billion share company. But, if the 10 billion share company is taken out at $10 share and the 1 billion share company is put in at $100 a share, there is no adjustment. There are more tricks of the trade to make it seem these indexes are doing better than they are.
At the peak of the stock market, MSFT, GE, INTC and CSCO were valued close to $2.5 trillion in sum. Today, the value is closer to $1 trillion. So, there was a $1.5 trillion bag holder that is still holding after 10 years plus. This is close to 200 SPX points lost on these 4 stocks alone. AIG totally disappeared as did WCOM and Citi trades for fraction of the peak. There have been a few high cap stocks replace them. I am not even including stocks like Nortel that basically went to zero, Lucent, which was once in the top 10 market cap list. We are talking about maybe 2 dozen stocks where losses sum to maybe $4 trillion. I am not going to do the homework, but if you look you will find.
How did the SPX absorb these losses? The divisor shrunk and it shrunk by the companies doing share buybacks in lieu of dividends. An SPX point, the last time I checked, was worth about $8 billion, down from over $9 billion in 2001. The bottom at 666 in March 2009 equated to well under 600 against the 2000 rules. Thus, the 2000 market had lost over 60% of its value from the top. They did the same thing to the Dow, as I took the time to figure out what it would take to set a new closing record back in 2006 had they not split the stocks when they did. The Dow was never split adjusted until 1928 and once they started adjusting, they had to shrink the divisor, which aided in the perception the market was going higher. It is really a good system, as long as the split stocks don't keep going up rapidly. Splits in 2000 and some other doctoring added about 900 points to the Dow between 2000 and 2006. I still have the math somewhere.
In any case, Cohen was on record in 2000 or 2001 calling for a rebound in the SPX to 1700, that being fair value to her at the time. She gained a reputation for calling higher stock prices in the 1990's and when the market was in trouble, Goldman would trot her out. They could have trotted your dead grandma out there and she had been right in the healthy stage of a credit bubble, a pure and simple mania. What was lost was the SPX paid a 1.06% yield in Septermber 2000, 3 times the valuation that had ever been seen in the market prior to 1990. The peak value of the SPX then was in the range of 500 and the value I determined to match the price that would produce the long term 9% or so in the index was around 370. I used sound financial valuation. Currently, the SPX is at least double the price that would provide a long term return in normal financial times. The history of stock returns is based on a dividend yield of roughly 4.7%. If you double the price, a 4.7% yield becomes a 2.35% yield, which is still higher than what we have now. Bull markets have historically peaked out when the yield fell to 3%. The long term return on stocks as a whole are inflation plus yield plus the real rate of growth, which is somewhat short of 1% over history. Inflation is really no return at all and actually exposes the holder to a long term capital gain that is no gain at all. So, in times of normal taxation, the real growth is consumed by income taxes. The theoretical return on a bond is the real rate of return (3% has been assumed for years), plus risk plus inflation. The vast majority of the companies on the exchange are low investment grade or junk. When the stock market is priced as it is now, over history you would fare as well holding treasuries.
I don't believe either PE ratio and I don't believe the numbers are pertinent. What is pertinent is the stream of income payable out of a company before it goes broke. Stock buybacks are liquidation and more often than not, they are done to allow management a market to sell their shares into. If a company is trading for 6 times book, buying back 16.66% of their shares would wipe their entire book value out. People might note how much share repurchase the big banks did coming into the crisis. Do you think they knew what was coming or were they just stupid? Shareholders took massive dilutions of ownership in the various efforts to raise capital.
There is more. If you take a long term perspective, then one has to recognize how high, relative to the economy corporate earnings are. These earnings are outliers and they are based on not only inflation, but tricky book keeping. I use a formula of double the dividend and divide it into 1, which gives a relative 25 PE. I base this on the idea that a company reinvests half its profits and pays out the other half on average. If you use 40%, which is the low historical share, then multiply by 2.5 and divide that into 1. That still gives a PE of 20. This is the sustainable payout against earnings, so we aren't talking about a 13 PE or a 16 PE, but at least a 20 PE. Every downturn since 2000 has totally wiped out the earnings in sum in corporate USA and inflated earnings has to be deflated to take this into consideration.
Lastly, Cohen isn't a boomer. Look at her. I bet she is 75 minimum. She is either a liar or uneducated, as there has never been a market priced financailly has high as this one that over the next 20 years has produced any more than a treasury return at best. I suspect that we will see dividend cuts again and another crisis before long, most likely in the faith of the financial system of the US, as Bernanke is an idiot as well. What QE does is take the income earning assets out of the economy and set the economy up to have to issue more debt to continue to earn a return. It is the worst of all financial policies that could be carried out under any plan. It has done wonders in Japan, as most of us now know. The US is going to deflate, the banks are going to mark to market and the banking system is going to attempt to get along on fraud, most likely through denying people access to currency, where they never have to produce anything. The evil empire is now on the nearest corner in most cities in the country.