Bubble Alert: Stocks Are Trading Based on Accounting Gimmicks And Fraud, Not Growth

Time to bust yet another hole in the “stocks are cheap” argument.

As we’ve already noted earlier this week, based on the only valuation metric that can’t be massaged, stocks are more expensive than they were in 2007 and on their way to tying the all-time high established in 1999.

Of course, few people use P/S to value stocks. Most people use Price to Earnings or Earnings Per Share (EPS), since this is meant to represent how expensive stocks are relative to the money a stockowner gains by “owning them.”

On that note, according to the “official data” the S&P500 is sporting a P/E ratio of 25. This is supposedly “cheap” since it’s below the P/E ratios established in the past.

Unfortunately, this too has been shown to be a load of nonsense. As Lance Roberts has revealed, only 13% of today’s earnings per share results stem from actual “growth.” The rest are based on accounting gimmicks like buybacks, write offs and the like.

Put another way, 87% of earnings growth since the GREAT CRISIS has been the result of accounting gimmicks.

This is a 1 in 100 year type event. The fact that stocks have rallied to new all-time-highs based on this is like someone winning a Olympic Gold medal while hopping themselves up on every steroid imaginable.

The fall-out will be just as intense.

The below chart isn't a pretty one, but it's worth keeping in mind as stocks move ever higher into nosebleed territory based on accounting trickery.

This bubble, like all bubbles, will burst. And when it does, the market will crash, just as it did in 2000 and 2008.

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Graham Summers
Chief Market Strategist
Phoenix Capital Research