The price/sales ratio is often used as a valuation metric in the place of earnings because of the common belief that revenues are harder to manipulate than earnings. In my book, Whats Behind the Numbers? (McGraw-Hill, 2012), I debunk that theory and outline many ways that management teams can aggressively manage the top-line. Nevertheless, the price/sales ratio is useful because there are fewer inputs, such as reserves, tax issues, share buybacks, and recurring charges, than earnings that can be used to manage the reported results.

While many market observers debate whether quantitative easing (QE) worked the general consensus appears to be that the lower unemployment rate is a positive result of the Federal Reserves policies. Recently the unemployment rate hit 5.9%, the lowest since 2008. However, in our view, that is highly misleading with respect to the effectiveness of QE. The chart below shows the labor force participation rate as well as the percentage of people employed relative to the population.

As a short selling portfolio manager, we constantly monitor market relationships for positive or negative divergences in the broad equity market indexes. One of the most important relationships is that between price and volume. In a bullish scenario, one would want to see volume expand as price rises.