Also, this has nothing to do with discounting the cash flows, it's mostly stock buybacks that's driving all the action:

http://www.bloomberg.com/news/articles/2016-04-19/early-warn...

No, they are off because they are making way less money (down 55% from a year ago!). In general volatility can be good for investment banks because it means higher trading volume. Revenue has been way down thanks to fewer deals (remember when tech companies had IPOs?) and reduced fixed income trading volume (GS revenue from fixed income trading is down 48% from a year ago).

Then you could calculate revenue per trade (or something more useful along those lines) to use as a signal in these cases.

http://www.goldmansachs.com/media-relations/press-releases/c...

The numbers are pretty brutal, especially in institutional client services.

http://blog.emoneyadvisor.com/industry-news/trending/complet...

GS has $11BB in oil sector exposure. MS is $4.8BB. BofA and Citi are around $20BB. JPM is around $15BB. These are fractions of total loans outstanding (MS is 5%, all the rest are much smaller). Each of these banks has more in reserves than oil loan exposure. Does that sound scary to you?

Again, relatively sophisticated investors understand these things. This is basic research. Where is your evidence?

The limits on the banks' exposures are dependent on counter party risk. GS's exposure is far more, but they insured most of it with other banks, and please allow me the simplifying assumption they insured all of it with BAC. Which means that (hypothetical scenario) if BAC goes bankrupt, suddenly GS exposure to oil goes up to, say $100BB. Suddenly the reserves are woefully insufficient. Then there's the sudden risk that GS goes belly-up, which would increase everyone else's exposure. One of them goes and ...

Additionally, oil fuels the economy. Oil is what builds the roads, what makes everything on the roads moving, what keeps planes in the air and boats going forward. Oil provides significant parts of our electricity supply, and so on and so forth. So you can look at the oil sector problem in 2 ways. Either you look at the supply side, which is producing somewhere around 2% more oil than the market is willing to buy (at any price). This is short-sighted. "If we'd all just put 2% more gas in our tanks, there wouldn't be a problem", which is not realistic.

The other oil to look at is demand-side oil. The market is simply not buying 2% of the oil, except to store it. Why not ? One explanation would be that there is a global recession and the oil price move is simply the result of that. The fact that the price crash happened with oil production/supply constant (even slightly declining) would seem to support this. For instance the baltic dry index plunged before oil started having problems, same with container shipping, and this explains quite a bit of the excess capacity in oil, and therefore, I say caused the price drop in oil. Oil crashed because manufacturing (the source of the demand for shipping) crashed a few months before the oil crash (and hasn't recovered).

In other words : you've identified the wrong problem. Oil is a symptom of the underlying situation, not a cause. You say banks are capable of withstanding one aspect of a greater problem ? Well, I'm not saying that's bad, but it's not reassuring at all (and may not be true due to financial engineering).

I do agree with you overall about indexing, however "Just wait until the recession is over" is market timing and I dont believe I (or others) can do this dependably well.

One can argue the way to judge stocks value is not by P/E but by E/P relative to interest rates; that is whether their excess return relative to risk-free assets is justified by their risk.

Interest rates remain 5% below their long-term historical average, which can justify E/P going up significantly. Currently stocks offer a 3.5% return over some classes of t-bonds, well in line with historical norms.

The current danger is that both will move down at the same time, and then where should one invest?

https://www.quandl.com/data/MULTPL/SP500_PE_RATIO_MONTH-S-P-...

check how high it was in the 2000 and 2008, we're aren't even close

My fear is that the central banks are pumping so much liquidity into the market that they are driving up equities and pushing people out of safer assets into things like high yield bonds and momentum stocks. If we do have a recession, the pain could be worse than usual (for stocks) for the mere fact that the debt market could have liquidity problems when tons of funds begin to pull their money out at once from HY.

Not to mention all of the corporate buybacks that companies are doing by leveraging, because cash is too expensive to bring back overseas.

You can still invest in solid companies, but companies like Tesla, Netflix, anything with a super high P/E is going to be taken out back and shot (that doesn't mean the companies will go out of business, only that their stocks are much like Amazon in the 2000s.)

The 2008 bubble was eminently predictable. The problem was that no one knew the exact trigger, and no one had a politically acceptable means to deflate the bubble until the domino effect started, and then hedge funds and then major banks started collapsing.

Until the knife started falling, no one had a financial incentive to stop. After all, subprime mortgages have crazy interest rates, and if you're BoA or JP Morgan Chase, the government will probably step in to stop your collapse...

Not that I disagree with you, but I believe a contrarian viewpoint would be something along the lines of "We are currently in the midst of an economic revolution as increasingly large swathes of activity are digitized and lingering mechanical/human processes are computerized. Companies likely to be successful in this new economy are unlikely to be the same ones which were successful in the old."

(To which the obvious rebuttal is probably "People are always saying things are about to be different, and they're usually wrong.")

Not even close to a record high. It's slightly high, but is it surprising that people are will to put a premium on earnings with negative interest rates?