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Are Stocks Cheap or Expensive?

Posted By Barry Ritholtz On December 9, 2005 @ 9:05 am In Markets | Comments Disabled

I’ve been thinking about both the Cult of the Bear [1] comment and the accusations of pouting pessimism [2]. The name calling — amusing tho it was — misses the bigger picture:

1) Capital Preservation is every bit as important (if not more) as generating gains. Calling someone a Bear misses the point of risk management;

2) There are greater potential gains at (this moment) away from US equities. The Japan ETF (EWJ) (rec’d well over a year ago at $6-7); Korea (EWY) is attractive — and I’m warming to Malaysia (EWM) (but it needs some technical improvement first).

In December 2002, we suggested Gold and U.S. equities due to the Fed’s rabid reflation campaign. The present stance is merely the logical extension of that call. (We reiterated GLD this past Spring). And our December 2003 call — repeated many times since — suggested investors buy Energy, Oil and Oil firms. 

Why are these money making investments considered pessimistic? I cannot figure that out. 


But since our Wednesday eve [3] discussion, I’ve been puzzling over this. So I asked chart wizard Michael Panzner [4] (of Rabo Securities) to help with some Global number crunching. Mike is a technician, a quant, and more, as his work below reveals.

Taking various world markets, we looked at both absolute and relative values of P/E and Dividend Yield. There were two measures used: prices relative to their 10 year median, and absolute values. Again, the point isn’t to be "pessimistic," but rather, its to be creative and smart when looking at other potential investment opportunities globally.

The results may surprise you:

click for larger graph

Relative_pe_global [5]

click for larger graph

Relative_pe_10_year_median_global [6]

The Nikkei 225 looks relatively cheap (historically), but isn’t in absolute terms.
The Nasdaq is cheaper than its been in the past, but is still expensive in absolute terms.
And the Brazilian Bovespa is cheap anyway you look at it — both historically and absolutely.
I was surprised to learn the German Dax, is also relatively inexpensive by both measures . . .


Would someone explain to me how this is pessimism? I just don’t get that . . .

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/12/are-stocks-cheap-or-expensive/

URLs in this post:

[1] Cult of the Bear: http://bigpicture.typepad.com/comments/2005/12/follow_up_to_ku.html

[2] pouting pessimism: http://bigpicture.typepad.com/comments/2005/12/how_strong_is_t.html

[3] Wednesday eve: http://bigpicture.typepad.com/comments/2005/12/media_appearanc.html

[4] Michael Panzner: http://www.amazon.com/exec/obidos/ASIN/032124785X/ref=ase_thebigpictu09-20/102-4529470-0078540

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/relative_pe_global.jpg

[6] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/relative_pe_10_year_median_global.jpg

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