Posts filed under “Valuation”

A Few Words About Valuation

CAPE
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 CAPE — the cyclically adjusted price-to-earnings ratio – is elevated, stocks are overvalued, and a crash is imminent.

This is a misreading of both valuation measures, as well as causes of crashes.

CAPE looks at the prior 10 years of trailing earnings. It smooths out any given quarters’ ups and downs, and theoretically includes a full business cycle. The way Shiller intended it to be used was to create a valuation metric that would suggest whether stocks are likely to outperform their average returns over the next 10 years.

Shiller’s CAPE does this well. As Mebane Faber of Cambria Investment Management observed, when CAPE measures are under 10, forward 10-year returns are outstanding. Over the long run, returns fall the higher CAPE rises. However, over the short run, it is anyone’s guess. The range of returns when CAPE is elevated is fairly broad. Indeed, CAPE has been over 20 for the past few years, and U.S equity returns have been strong.
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Source: Mebane Faber

 

The problem we run into is that valuation is not a timing tool. A momentum trader will tell you from personal experience that overpriced stocks can and do get more expensive. Value investors will tell you from their personal experience that cheap stocks can get a whole lot cheaper.

Mean reversion does not occur immediately after an asset moves away from its long-term trend. Any bond trader can tell you that from their personal experience of the past 30 years.

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Originally published here

Category: Investing, Trading, Valuation

Apple’s Rebound Q in One Giant Chart

click for larger graphic Source: TechCrunch

Category: Digital Media, Earnings, Valuation

Lagged P/E Ratios: Shiller Cape vs NIPA

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

Category: Data Analysis, Earnings, Valuation

Shiller: U.S. Stocks Are ‘Highly Priced’

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

Category: Technical Analysis, Valuation

Whipsaw

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

Category: Investing, Think Tank, Valuation

Shiller P/E Bottoms

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

Category: Technical Analysis, Valuation

Beyond BRICs

Click to enlarge   Shorter Dave Wilson: Emerging markets have stunk the joint up. The longer version looks at some of the new ETFs that seek to shore up performance of emerging-market stocks by dropping the BRIC part of EM: -The four-country BRIC indicator has slipped 15 percent, with Brazilian stocks leading the decline. -Beyond…Read More

Category: Investing, Markets, Valuation

A Closer Look at Jeremy Grantham’s Expected Returns

Chart Attack,” FusionIQ’s Barry Ritholtz and Bloomberg’s Adam Johnson look at Jeremy Grantham’s 7-year expected returns. They speak on Bloomberg Television’s “Street Smart.”


Source: Bloomberg Aug. 21 2013

Category: Media, Valuation, Video

How Future Growth Impacts Current Equity Valuations

More fun with price-to-earnings ratios: Earlier this month, we looked at the question of whether Stocks were Cheap or Expensive. That was a follow up to our glance at how much Earnings and Equities had rallied off the 2009 lows. The problem is the many ways we can define earnings-per-share. Do we use analysts’ forward…Read More

Category: Earnings, Valuation

Stocks: Cheap or Expensive?

Click to enlarge Source: BofA Merrill Lynch US Equity & US Quant Strategy     Merrill Lynch’s quant team looked at 15 metrics* that measure equity valuation (above). Their conclusion? Stocks are not overvalued; indeed, by most metrics, they are fairly valued. Key bullet points: • S&P 500 has been playing catch up to other…Read More

Category: Investing, Valuation