The Stock Market Is Seriously Overvalued Based On This Benchmark

As Americans place a record amount of bets into a stock market that continues to rise towards the heavens, few realize how much the Dow Jones Index is overvalued.  While some metrics suggest that the Dow Jones Index is very expensive, there is another indicator that shows just how much of a bubble the market has become.

If we compare the Dow Jones Index to the price of oil, we can see how much the market has to fall to get back to a more realistic valuation.  For example, if the Dow Jones Index were to decline to the same ratio to oil back to its low in early 2009, it would need to lose 14,500 points or 65% of its value.

To get an idea just how overvalued the Dow Jones is compared to the price of oil, look at the chart below:

The oil price (BLACK line) increased with the Dow Jones Index (BROWN area) until it peaked and declined in 2008.  Even though the oil price line overshot the Dow Jones by a wide margin in 2008, after it corrected and moved higher in 2010, both the Dow Jones and oil price moved up in tandem.

If you look at the movement in the oil price and Dow Jones Index from its low at the end of 2008 to 2013, you will see just how similar the two lines moved up and down together.  While the oil price shot up higher than the Dow Jones during the peaks (2010-2013), they paralleled each other quite strongly.

THE BIG DISCONNECT:  Dow Jones Index & The Oil Price

However, the BIG disconnect between the Dow Jones and the oil price took place when the price of oil fell from over $100 in the middle of 2014, to a low of $33 at the beginning of 2016.  Currently, the Dow Jones Index will buy 430 barrels of oil.  However, at the peak of the market in 2007, the Dow Jones Index could only purchase 175 barrels of oil:

We can see that the Dow Jones Index currently can buy nearly 200 more barrels of oil than it did at the peak before the stock market crash and Great Depression in 1929.  At the depths of the Great Depression, the Dow Jones Index could only purchase 90 barrels of oil in 1933.

Interestingly, the lowest ratio was reached in 1980, when the Dow Jones Index could only buy a mere 25 barrels of oil.  The ultra-low Dow Jones-Oil Ratio in 1980 took place during the huge inflationary period as a result of two Middle East oil price shocks.  In 1980, the price of oil reached $36.83 a barrel versus the average 902 points for the Dow Jones Index.

However, after Fed Chairman Volcker raised interest rates to double-digits, the price of oil, gold, and silver plummeted over the next two decades.  And by 1999, the Dow Jones-Oil Ratio surged to a high of 534.  The high Dow Jones-Oil Rato came as a result of a low $19.34 oil price versus the Dow Jones Index average reaching a new high of 10,339 in 1999.

Now, let’s explore what has occurred more recently.  As the price of oil increased from 1999 to 2007, the Dow Jones-Oil ratio declined to 175, even though the market reached a new high of 14,200 points.  Furthermore, during the first quarter of 2009 when the stock market collapsed to a low of 6,500, and the oil price fell to $42, the Dow Jones-Oil Ratio only declined to 155… 20 barrels less than at the peak in 2007.

Regardless, the current Dow Jones Index can purchase 430 barrels of oil, which is in serious bubble territory.  What is even more interesting is how the Dow Jones-Oil Ratio corresponds to the Shiller PE ratio.  The Shiller PE Ratio is the price-earnings ratio of the average inflation-adjusted earnings from the previous ten years of the S&P 500 Index.  As we can see in the chart below, the Shiller PE Ratio is currently at 30.68, higher than the peak in 1929 on Black Tuesday before the Great Stock Market Crash:

However, if we compare the Shiller PE Ratio chart to Dow Jones-Oil Ratio chart below, we can see some interesting similarities:

The peaks and valleys in the Shiller PE Ratio chart correspond to the highs and lows in the Dow Jones-Oil Ratio chart.  For example, the Shiller PE Ratio reached the first high of 30 in 1929, as the Dow Jones-Oil Ratio was 236, but both indicators fell to a low in the early 1980’s.  Lastly, the Shiller PE Ratio in 1999 and today correspond to the peaks in Dow Jones-Oil Ratio as well.

What does this mean?  It means that the earnings of the S&P 500 and the Dow Jones Industrials are based upon the price of oil.  That being said, the situation today in the oil industry is much different than it was in 1999.  Again, the reason for the very high 534 Dow Jones-Oil Ratio in 1999 was due to a very high Dow Jones Index and low oil price.  However, the oil industry in 1999 could make money on a weak oil price of $19, whereas today, they are losing money at a price that is more than double.

FINANCIAL TROUBLE BREWING:  ExxonMobil’s Financial Situation Deteriorates

I decided to look at the U.S. largest and most profitable oil company, ExxonMobil, to see how the company’s financials in 1999 compared to 2016.  The table below provides evidence that the current oil price is causing financial distress on ExxonMobil’s balance sheet:

With the price of oil at $19.34 in 1999, ExxonMobil was still able to enjoy positive $1.84 billion in U.S. upstream earnings versus a loss of $4.15 billion in 2016, based on a $43.29 oil price.  Upstream earnings represent the profits ExxonMobil made from its U.S. oil and gas fields.  So, even with an oil price of $19, less than half of what it was last year, ExxonMobil still made profitable earnings in 1999 on its U.S. oil and gas fields.

Now, if we consider other financial items, ExxonMobil’s current situation is in much worse shape today than it was in 1999.  For instance, ExxonMobil made a larger net income of $7.9 billion in 1999 on total revenues of $185 billion versus $7.8 billion on higher sales of $226 billion in 2016.  Furthermore, ExxonMobil’s long-term debt has surged over the past few years to $29 billion versus $8.4 billion in 1999:

Moreover, if we consider the staggering amount of capital expenditures ExxonMobil has invested since 1999, overall liquid oil production is actually lower:

In 1999, ExxonMobil spent $10.9 billion on capital expenses and produced 2.52 million barrels of oil per day (mbd) versus $16.1 billion in 2016 with 2.36 mbd of liquid production.  Just think about that for a minute.  ExxonMobil spent a staggering $190 billion on capital expenditures from 2009 to 2016, while production declined:

ExxonMobil Total Liquids Production 2009 = 2.39 mbd

ExxonMobil Total Liquids Production 2016 = 2.36 mbd

As the price of oil fell from over $100 a barrel in 2014 to $43 in 2016, ExxonMobil slashed its capital expenditures in half from $33 billion to $16 billion.  By severely cutting its capital expenditures, future oil production at ExxonMobil has only one way to go… and that’s down.

Now, what I have shown here is a deteriorating financial situation at the largest and most profitable oil company in the United States.  ExxonMobil is the biggest and is supposed, the best of the best.  So, can you imagine what is taking place in the marginal U.S. shale oil companies?  Yes, it’s a fricken disaster.

Of course, I continue to receive correspondence from individuals who tell me otherwise.  For some strange reason, brilliant people are unable to CONNECT THE DOTS.  The world is full of very bright, but exceedingly stupid people.  I hate to be so harsh… but there you have it.

I used to believe that if the facts were presented, then these supposedly brilliant people would alter their incorrect assumptions on the U.S. Shale Oil Industry.  While my followers, who are open-minded, have updated their opinions on the U.S. Shale Oil Ponzi Scheme, many continue to waste time regurgitating worthless information.

GOD HATH A SENSE OF HUMOR…..

In conclusion, the Dow Jones Index is currently overvalued by orders of magnitude we have never seen before.  The only thing propping up the stock market and the economy is the Fed and Central Bank money printing and asset purchases.  Moreover, there are Trillions of Dollars in currency swaps that aren’t even included that make a bad situation even worse.

For the precious metals investors who are disillusioned by a stock market that continues to rise towards the heavens while the gold and silver prices remain in the doldrums, you have my sympathies.  However, fundamentals and the truth always win out in the end.  Although, it has been quite difficult to follow an investment strategy based on ethics and integrity… it seems that many people today believe it is okay to sell one’s soul or integrity to make a buck.

SO BE IT….

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25 Comments on "The Stock Market Is Seriously Overvalued Based On This Benchmark"

  1. Great post,I dream of reality

  2. Citi CEO warns of oil shortages coming as soon as 2018 -Bloomberg

    https://www.bloomberg.com/news/articles/2017-09-25/citi-says-get-ready-for-an-oil-squeeze-than-an-opec-supply-surge

    German Government (leaked) Peak Oil study concludes: oil is used directly or indirectly in the production of 90% of all manufactured products, so a shortage of oil would collapse the world economy & world governments

    https://www.permaculture.org.au/files/Peak%20Oil_Study%20EN.pdf

  3. The Oil Age may come to an end for a shortage of oil. ~ Saudi saying

  4. I’m not sure I see much correlation between oil and Dow Jones. Should there be any? I could argue the issue either way. It is clear to me that exxon and the rest of the industry has big problems that are here and now. I think it is obvious that the age of oil will be over in 15 years. We need to transition to the electric age soon. Not much time left.

    • DisappearingCulture | September 28, 2017 at 4:00 pm | Reply

      “I’m not sure I see much correlation between oil and Dow Jones.”

      Less so currently, because the DOW isn’t a market. It’s an intervention.

      • The Dow/oil ratio jumps around tremendously due to many factors and currently the shale oil revolution has crushed the price of oil by about 50% so the ratio has little to do with an over or under valued stockmarket but due to shale oil.

    • Eddy,

      There is a correlation between the DOW JONES and OIL. Oil is the foundational basis of our economy. When the valuation of the stock market moves too far above the oil price, it is highly inflated. I would go as far to say, the Stock Markets have been inflated since 1990, but are seriously in a WHOPPER OF A BUBBLE currently.

      steve

  5. Oil Shortages > Global Economic Collapse > This World Will Burn!

  6. I can’t wait to visit a new Saudi Entertainment Hub! Hopefully they sell their classic ‘ten inch beheader blades’ at the gift shops!

  7. Steve,
    Your charts and information about bubbles and fundamentals is always informative and helpful for those of us waiting for the day when the manipulation ends. We are starting to reach peak “everything” from oil to gold. But there are still stockpiles of these items that will last for years so the immediate effect of shortages will not be felt for some time.

    The stock market is being artificially pushed to all new highs because this is where all the pension plans are invested. They can not be allowed to go under or chaos will break out. Even with the market achieving new highs and inflated returns, these pension plans are still under water. Can you imagine what would happen if the market was allowed to have a normal 10 to 20 % correction! So we will continue to see a systematic rise in the market, with no major correction, until such time that the manipulation is unable to produce the desired result.

    In 2009 a new economic model was constructed. Instead of the economy driving the stock market, it is now the stock market driving the economy. (The preverbal cart before the horse). This economic model has thrown away basic capitalism where supply and demand have no meaning or impact. Steve, everything you write makes perfect sense but just not “at this time”. You are right that fundamentals will finally win out because they always do…but when?

    The key to the demise of the manipulated market will be tied to the retirement and pension plans. Once the market can’t provide the crazy returns needed to keep them afloat, they will sink. Everything will be done by the elites to keep this ponzi scheme alive for as long as possible. Steve, you show us the holes in the dam…and they keep plugging the holes…but sooner or later they will run out of fingers and toes.

    • I am one of Steve’s ardent followers Crayfish BUT I tend to think a bit like you. I liked your comment. Much of the comment made today is very short term. We have to get away from this short term thinking because there is obviously a much bigger picture. That shows up in Steve’s charts.

      I came across the following interview yesterday with “Lynette Zang”, 40m by “X22 Report” which I thought was an interesting long term view. I had never heard of her before BUT found her very easy to listen to. Lynette reckons the problems started back in 1997. I do technical charts for myself, the Dow Jones being a favourite and I am finding it difficult to disagree with her.

      https://www.youtube.com/watch?v=X79mEtZEo_8

      Just a quick observation – It took the “Dow Jones” 16 years to increase 100%, 1997 – 2013. In round numbers 7800 – 15600. Compare that to previous years and it is one big slow down!

    • Crayfish,

      Couldn’t agree with you more. No, the market can’t be allowed to decline 10-20%. Well, it could, but then the economic system starts to unravel. However, the ENERGY INDUSTRY is now in serious trouble. This isn’t something that can be bailed out. Once the Fed & Central Banks start HYPERINFLATION, then we have a short period of time before the system really unravels. At that point, we will see some serious GOLD & SILVER PRICES.

      Unfortunately, the world has no idea what is coming. I don’t see this playing out in decades, but a few years at most.

      steve

  8. Ugh, easy Steve. Good article again, but could use a bit less pontificating. To insinuate that mainstream investing lacks integrity, while PM’s don’t, is silly on a whole bunch of levels. My portfolio has a good portion of G/S miners – and they’ve been the least profitable by far. It’s been decades since I’ve been poor, but can tell you, when you are broke , you have no integrity, despite some poetic notions.
    In any case, the catastrophism that the PM/prepper pushers in the “alt” media advocate (for profit) is an opinion, not fact, and so far a wrong opinion. People are much more likely to click on “your world will soon end as you know it” vs “business as usual”. I’ve heard about the “impending big crash” for a long time now, and may be for decades to come. I am also certain the “thermodynamic collapse” won’t happen by 2020, at which point it’ll be “just delayed by (insert excuse)”, and the date keeps getting pushed out. The bad guys are winning, as they always are. Depressing, but true.

    • Emil,

      Please check out an article linked by another commenter today: http://www.zerohedge.com/news/2017-09-28/we-are-already-depression-if-borrowing-money-not-income

      When the Financial and Economic system heads into an EXPONENTIAL TREND, it has to double every year just to maintain itself from collapsing. THis is the type of trend we are currently in. However, each passing year the line heads up in a more straight and narrow path.

      So, yes… they will continue printing and buying assets. But, time is not on their side any longer.

      steve

    • Unless those miners are owned by you and your family, it’s a paper promise to pay nothing in particular. You could make some digits with the miners, just like bitcoin owners have done well, but I wouldn’t go long-term on them.

  9. Oil kicks butt, gold is just an ancillary, and as for FED notes, to your imagination..

  10. Hi Steve,

    There’s a mismatch between Exxon financial table which reports “millions” and the following explanation talking of “billions”.

    Details apart, looking at the oil-Dow graph I noted something interesting to me: Dow index clearly overpasses oil price in 1992, at the Clinton-era beginning: not a coincidence to me, indeed Greenspan has granted him years of relative peace on the job hot front, obviously at the expense of the next future.
    I think that as we passed from a gold-based standard to the petro-dollar, now we’re shifting from this last one to a money system quite unsubstantial and supported only by the mutual interests of the governments involved in making it work until… well it doens’t.
    In other words the militarization everywhere is signing the end of this world.
    Don’t know when it will end but we surely entered in it: this to answer to naysayers who only try to read the reality only but some manipulated economical statistics.

    Good job again.

    Regards,
    Riccardo

    • Riccardo,

      Yes… ExxonMobil reported the figures in millions, as I did on the table. However, I converted it to $billions in the article. You will notice that there is a COMMA in the table, thus those figures were in millions, but the figures in the article had a PERIOD, for billions. It would have been easier to understand if I kept the figures in one metric.

      Thanks for the heads up.

      steve

  11. Hi Steve ,

    You think the Dow or S&P are in a bubble now just have a look at the argentian Merval
    https://tradingeconomics.com/argentina/stock-market

    We are just beginning all forecasters can,t imagine Dow can easy double again with some setbacks funny/printing money can elevate any stockmarket.

    As well to compare oil and the Dow in 1999 and 2016 is not realistic as the purchasing power of 1 usd in 1999 was a lot more as 1 usd in 2016. I know it is hard to know the exact decreasing of the debauching of the usd since 1999 but just compare prices in general then and now.

    We are all argentinians now.

  12. What happens when the yuan (backed by gold) takes over as the basis for future oil purchases?

  13. Americans will drive less. Got bicycles?

  14. With financialization of the whole world, they can simply drive indices to wherever they need them to be. We live in an engineered world.

    As such, this is the final endpoint of our system, but it’s going to take decades. Everything doesn’t collapse immediately, it happens in bits and pieces. Like growing old.

    They already have the outcome they need: all the middle aged and old are invested in the system, all the young are trapped in debt and bullshit jobs. There is no escape, nowhere to run to, nowhere to create an alternative system. 50% of you reading this post are likely to be dead before the system crashes, and, if the system crashes, you may very well die for other reasons like famine or war. Same outcome.

    You guys somehow think that precious metals increasing in price, and everything else falling in price equals a desirable outcome. We get to live like kings, while everyone else loses.

    Not true! If everyone else loses, that’s mad max in some form or another. Your metals won’t do anything.

    The smart money long ago went into real estate and equities because they understood that nobody is making anymore land, but that resources will continue to be produced and the stock market propped up at all costs.

    Nobody makes money in gold or silver other than the miners and bullion banks.

    Was that enough black pill for you? Think of me like the architect, and you are neo. Remember that scene from the matrix reloaded.

  15. Thanks Steve, regards.

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