Marc Faber was on CNBC yesterday. You might not know him, but as I live in Switzerland he is the Warren Buffett of Switzerland. What I like about Marc is that he is both a speculator, investor and very much a realist.

Yesterday he said the real problem was the financial industry that is in a massive bubble that needs to be deflated. Squawkbox looked at him and thought, Huh? Marc is actually quite right because there is an investing bubble like the dot.COM bubble.

 

Investing and chasing returns is like the tech bubble in 2000. The irony is that to get returns the bubble folks are recommending tech as something that will rally. I know tech because that is what I do. Tech is not a sector that I am investing in.

Take PE ratios for instance:

  • AAPL has a PE of 52
  • EBAY has a PE of 302
  • GOOG has a PE of 50.84
  • AMZN has a PE of 125

In contrast companies like Microsoft have PE ratios of about 21, which is about the same as historical PE ratios. The last value in 2005 is high when looking at past PE ratios. But let’s assume we accept 23 as a valid PE, this means that AAPL, EBAY, GOOG, and AMZN are overpriced!

Let’s look at AAPL. They had good earnings no doubt, but the numbers are out of whack.

Apple earned a record $3.5 billion for the year, up more than 75 percent from last year, when it earned $1.99 billion. Yearly sales reached over $24 billion, a 24 percent jump from fiscal 2006.

The PE of AAPL is double a historical high PE. Thus for AAPL to be worth its weight its earnings has to be double of its previous year. But AAPL only increased its earnings by 75%, which is 25% shy of 100%. Thus AAPL when compared to its share price is a disappointment and thus is overpriced.

Even if you accept the high PE of 25 the stock has outpaced its earnings. A year ago AAPL was trading at 80 USD, and now its trading at 185, which means it has increased in value by 131%, and that is wildly beyond its earning growth.

I am not picking on AAPL, just that its earnings came out last night. Companies GOOG are also overpriced. Let’s take a look at the earnings of GOOG.

Google reported revenues of $4.23 billion for the quarter ended September 30, 2007, an increase of 57% compared to the third quarter of 2006 and an increase of 9% compared to the second quarter of 2007.

At least AAPL was somewhat near 100%, whereas GOOG has a double PE but only has a 57% increase in earnings. If you look at the share price of GOOG there has been a 41% one year increase, which is a bit under 57%. GOOG would be an undervalued stock if it had a reasonable PE, which it does not.

I am not even going to start looking at companies like EBAY and Amazon because, well they have lost it with respect to PE earnings.

This behavior of plowing into another sector tells me the financial bubble has not deflated and what is happening is that as one sector bubble deflates another sector inflates, and the real problem are the financial’s!

All that goes through my mind is the comment from Marc Faber that said, “we have a financial bubble where valuations have to drop by 30%+.”