Comments on: A Cyclical Look at P/E Ratios

By: roncfp

roncfp — Tue, 17 Feb 2009 17:12:11 +0000

The value of the chart lies principally in the first sentence above the chart. “Our P/E Predictor Study has demonstrated that during the past 138 years stock market P/E ratios have increasingly, over time, explained ABOUT 50% OF US STOCK MARKET RETURNS OVER THE SUBSEQUENT DECADE OR TWO.”

Wonderful, so they do no better than a simple flip of a coin. WTH? The chart is useless!

By: Clem Stone

Clem Stone — Tue, 17 Feb 2009 05:04:05 +0000

It’s a nice chart but how will it help anyone make money? I bet anyone who went long term short at the chart peak in July ’99 has sweat more than a few bullets since then. Like absolutely no bullets remaining would be my guess. If he made it beyond March ’00, he was surely pulverized by the time new highs rolled around in 2007, fully 8 years after he put on the trade.

If instead the chart is meant to help with short term trading, i’m having a hard time seeing how.

By: How the Common Man Sees It

How the Common Man Sees It — Tue, 17 Feb 2009 04:33:54 +0000

That should read A/R on the asset side

By: How the Common Man Sees It

How the Common Man Sees It — Tue, 17 Feb 2009 04:04:02 +0000

@Todd Says: February 16th, 2009 at 12:53 pm

From what I’ve been looking at it looks like the fastest growing asset on companies balance sheets are deferred taxes.

And watch the A/R on the liability side. A company is only as strong as the customers it has and their ability to pay

By: Mr.Sparkle

Mr.Sparkle — Tue, 17 Feb 2009 02:54:13 +0000

@DiggidyDan - I did a post breaking out the SPX by PE level and binning them by standard deviations and 1 year percent returns. (See here, if you're interested). This was back in December when PE was just a bit over 18 based on inflated Q4 estimates. Now, it's far worse at 29 or so. We'll see if this quarter really represents the kitchen sink for write-offs. There is still a decent gap between operating and reported EPS estimates in the next 4 quarters from S&P.

By: Simon

Simon — Tue, 17 Feb 2009 02:50:12 +0000

@ Andy Tabbo,

Nice summary. I think we are headed for a series of compressed economic cycles as the economy butts its head on dwindling oil supplies every time growth emerges. The commentators will all focus on the wrong reasons for things finding evidence for which ever part of the cycle we are in to continue on much further with the most enthusiasm or dispear at each extreme of each cycle.

Time your trades well and of course you will be fine.

By: usphoenix

usphoenix — Tue, 17 Feb 2009 02:02:04 +0000

@DoctorRx: Your blog brings up an interesting thought. Future earnings can easily depend on survival. I recall a recent Cramer scenario where he was touting stocks simply because they had lots of cash.

Lots of cash – good. Maybe. Depends on the accounting rules and how real the cash is. Lots of assets tied up in less utilized production capacity – bad.

By: DoctoRx

DoctoRx — Mon, 16 Feb 2009 22:43:16 +0000

Barry

What does the “Update” refer to re slacker analysis? What am I missing?

Also note typo first sentence (ratio, not ration)

It looks to me as though earnings are vanishing along with Big Money banks and that stocks will be valued against tangible book value. Looked at through that prism, when earnings do recover, it makes a lot of sense that given how low tangible book is even for the non-financial companies in the Dow 30 or S&P 500, a single-digit P/E will be appropriate.

As an example, look how Japanese stocks went from a 50+ P/E in 1989 to near tangible book now, and have a higher dividend yield than 10 yr Japanese Gov bonds. And earnings are moving down there as well. After a 20 year secular bear, though, their stock market finally has tangible support. Our market does not.

By: DiggidyDan

DiggidyDan — Mon, 16 Feb 2009 22:42:17 +0000

The average P/E increase over time is in my opinion simply because of lack of data from the finite set of time the S&P has existed. This average line theoretically should end up flat as more data points are added to infinity. It has just been skewed to have an upward slope in the short term by the recent boom in stock investing via 401K plans, mutual funds, and proliferation of stock investing throughout the world as a whole via the internet and growing access to brokerage accounts. As the suckers (including me) lose all their principal in the GD 2.0 event, there will most likely result a distaste for investing in stocks and a reversion to more “safe” alternatives. The interesting thing will be to find out what this long run average of PE will end up being. Perhaps this could be a buy signal for when it is finally safe to get back in at the bottom, when the average PE line goes back to being flat!

I also second Mr. Sparkles suggestion to play with the data from Shiller’s Yale website data. I played with the data in statistical analyses recently after a post here about Cyclically Adjusted PE. The CAPE average he has is about 15, but is again based upon limited data. Shiller uses 10 yrs inflation adjusted data he and his colleagues have collected for this, perhaps looking at the data with a 20 year average is called for looking at periods on the chart.

By: royrogers

royrogers — Mon, 16 Feb 2009 22:13:22 +0000

this is the first chart Barry has ever posted that has a mathematical
statistical significance and the PE ratio does have some ways to go lower.
Congrats Barry, finally, an objective data that we can all use.