Joust with sanity

  • There are 125 companies in the NASDAQ biotech index which are valued at $280 billion, but posted aggregate losses of nearly $10 billion in the most recent LTM reporting period.
  • The Russell 2000 closed at a new all-time high on Friday (20th March). At its index value of 1266 it is now up 260% from is post-crisis low.
  • It represents a valuation multiple of just about 90X LTM (latest 12 months) earnings reported by the 2000 companies which comprise the index.
  • One year ago, the LTM GAAP earnings for the Russell 2000 was exactly $14.10 per share for CY 2013. So the $14.18 per share reported for 2014 means that the Russell 2000 EPS has gained eight pennies or 0.6% during the past year.
  • The Russell 2000 stock index is trading at 90X based on an earnings growth rate of less than 1%. [Link]

I just wanted to check if these figures were true and I did find this one. It is true that, based on reported PE, the Russell 2000 index is, indeed, trading at nearly 90 times PE multiple. Of course, the WSJ link above will change at least on a weekly basis if not on a daily basis.

The Federal Reserve Bank of Atlanta does ‘nowcast‘ing of GDP. It is updated with each piece of macro economic data that is released. Orders for durable goods in the US for the month of January were released last night. Goldman Sachs called it a touch ‘softer’. Well, it printed -1.4% vs. consensus forecast of 0.2%. Data for the previous month was revised down as well. It was not ‘soft’. It was bad. FRB Atlanta’s ‘nowcast‘ for GDP growth in Q1 is not much different from zero.

US stock indices normally rally on bad news because the only things they focus on (or, at least for the most part) are interest rates and liquidity. For a change, they reacted to bad economic data negatively. We should not hold that against investors. They should be permitted their rare joust with sanity.

Now, watch for the change in tone and content of the discussion on US rate hikes. There may not be any normalisation because what we have now may well be the normal, for the US. They mocked at Japan’s lost decade or two. They are sliding down that path. Interest rate normalisation will slowly turn into talk of another round of Quantitative Easing. These are early days for that. But, watch this space.

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