Today Jack Ciesielski and I will to try to scare some sense into you.
Who is Ciesielski, and why would he want to frighten you? It’ll take some time to answer that. First things first.
The stock market has been more or less flat most of this year. But at times – like for the past month or so – stock prices have climbed as if Wall Street didn’t have a concern in the world.
Terrorism hasn’t fazed the stock market. Nor has the fact that the Federal Reserve is threatening – yet again – to raise interest rates. Weak corporate profits and revenue declines? Nah, Wall Street doesn’t give a damn about them either.
This column will show you why the performance of companies should be of great concern – and not only because they are, on the surface, lousy but also because accounting tricks are hiding the true horror story. That’s where Ciesielski comes in, but he’ll have to wait in the wings for his turn.
Everyone who reads this column should already know what price-to-earnings ratios are. But just in case you don’t, here’s the explanation: Price-to-earnings – or P/E – are the price of a share of stock compared with a company’s earnings on a per-share basis.
That’s a mouthful. To make it simple, let’s say a company – I’ll call it John’s Co. – earned $1 a share in 2015.
Let’s say investors are buying and selling John’s Co. shares on Nasdaq at $14 each. (I picked Nasdaq because it will piss off the New York Stock Exchange that I didn’t list my company on the ‘Big Board.’) So the price of $14 a share compared with the $1-per-share earnings gives my company a P/E of 14 to 1.
This post was published at David Stockmans Contra Corner on November 25, 2015.
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