Posts filed under “Valuation”
Lately, there has been a spate of research, analysis and commentary telling us that earnings are at a cyclical high and must revert. Stock valuations, therefore, are elevated and earnings will soon begin to fall, bringing stocks down with them.
This is neither a credible analysis nor a method of valuing equities. Rather, it is an interesting narrative containing two predictions, and generally fails to acknowledge multiple unknowns and variables. (Let’s hold the question of whether anything as complex as the markets can be predicted with a single variable for another time).
Allow me a few more words to explain. Many of the traditional valuation methods rely on two or more variables. For example, price-to-earnings ratio uses both stock prices and earnings to determine if a company or market is cheap or expensive. This raises the obvious problem — obvious to anyone who is not innumerate — of forecasting one unknown by using a second unknown.
Why is that? . . .
Josh has an excellent post up, titled Don’t Hate the Asset, Hate the Price, that makes several important points. I want to reiterate and expand on them here. Some of these are lynchpins of an investing philosophy I have been espousing for many years. Its a broad discussion on price and value, and I think…Read More
click for larger graphic Source: BCA Research There seems to be an increasing concern that stocks have become wildly overvalued, especially in light of rising interest rates. However, somewhat overvalued U.S. equity prices can continue to rise if price/earning multiples keep expanding. Continues here
A few weeks ago, Yale Professor Robert Shiller won the Nobel prize for his work on irrationality and inefficiency of markets. Since then, we have been treated to a plethora of stories on some of his other work — especially so-called CAPE, Shiller’s measure of long term valuation. The general consensus seems to be that…Read More
click for ginormous charts Source: JP Morgan JP Morgan observes: “Shiller P/E shows the market to be overvalued, but not as extreme if you use the NIPA data.” I’ve never used the NIPA data, so I have no real opinion on it. The two charts look directionally similar, but different in terms of magnitude….Read More
Shiller’s cyclically adjusted price-earnings ratio click for ginormous chart Source: Bloomberg Robert J. Shiller, a co-winner of this year’s Nobel Prize in Economic Sciences says US stocks are expensive. They are the most expensive relative to earnings they have been in more than five years — since the lows follwoing the great collapse…Read More
Whipsaw David R. Kotok Cumberland Advisors, October 13, 2013 A whipsaw is a “long, narrowing, tapering ripsaw, usually set in a frame and worked by one or two persons.” Webster’s Unabridged Dictionary, second edition. What a play on words. “Long,” as in, we are now passing two weeks of shutdown. Different scenarios take…Read More
Shiller P/E Bottoms Coincide with Major Lows, Downtrend Breaks Precede Rallies Click for ginormous chart Source: Merrill Lynch Nice chart from Stephen Suttmeier & Co looking at how the Shiller P/E ratio compares to regular P/E at major lows, downtrend breaks, and before rallies: The good news is that secular trading ranges lead to…Read More