Posts filed under “Valuation”
Brett Arends has an interesting article over the weekend about timing the market: It’s Time to Time the Market.
After giving the usual reasons why market timing doesn’t work, he mentions an approach that is similar to my own: Using valuation and sentiment to make tactical adjustments (Incidentally, “Tactical” is the new buzzword amongst brokers and others who are not really using it properly).
Long term, Arends argues, stocks and bonds are not cheap:
“Over the past 80 years, according to data from New York University’s Stern School of Business, bond investors have earned an average of just over 2% a year, adjusted for inflation. The only way an investor would earn anything similar over the next decade would be if inflation were negative.
Stocks, too, seem pricey. Over the past 130 years, U.S. stocks on average have traded at about 17 times mean earnings for the previous 10 years—a measure known as the “Shiller Price/Earnings Ratio” after Yale economics professor Robert Shiller, who tracks the data. Today the market is about 22 times those earnings, a level associated with frothy markets such as 1929, the mid-1960s, and most of the period from 1995 to 2008.
Another measure, “Tobin’s q,” also suggests stocks might be in dangerous territory. Tobin’s q, named for the late Nobel economics laureate James Tobin, measures stock valuations against the cost of replacing companies’ assets. Right now the reading is 0.92, about 50% above the long-term historical average. Stock returns from these levels have usually been subpar.”
Under normal circumstances, I would have been aggressively pulling back equity exposure since, well last year. The wild card that has prevented me from doing that has been the Fed’s program of QE. Having made riskless assets much less attractive, the Fed’s liquidity fire hose has forced managers into equities beyond what is normally prudent.
Today, we are equal weight equities (we came into the year overweight equities).
The Fed’s impact on asset prices will eventually attenuate. Those of you who are playing along at home, make sure you have some set of parameters to alert you to evidence of when the Fed’s punchbowl has gone non-alcoholic so you can reduce your equity exposure substantially.
We continue to get closer to that point, but we are not quite there yet . . .
It’s Time to Time the Market
WSJ, October 19, 2012
Click to enlarge: Source: Bloomberg Fascinating comparison between Google and Microsoft gains since their IPOs from Dave Wilson. Earlier this month, Google managed to slip past Mister Softee in terms of market cap (MSFT is now $244.8B vs GOOG $243.56B). Microsoft Corp.’s stock-market performance during its first eight years as a public company far surpassed Google. MSFT…Read More
Fascinating set of cycle charts from Merrill looking at earnings, and how being too early when timing value stock purchases is even worse than being too late! Earnings Life Cycle Click to enlarge: Merrill explains: “Value traps are industries that fall into the portion of the earnings expectation life cycle labeled Bad Value. These…Read More
My disdain for Facebook’s valuation is (clearly) no longer an outlier perspective. When the cover of Barron’s declares FB to be worth “about $15,” it means that this has become fairly uncontroversial viewpoint. The table below is very much along the lines of what I discussed previously (here and here). Table comparing…Read More
Click to enlarge: Source: Bloomberg Is Gold cheap? Pricey? Somewhere in between? I have a hard time answering that question because I have no frame of reference. With equities, I could look at earnings and/or dividends, sales, book value, etc. to determine relative valuation. With bonds, interest rate, credit rating (and whether its callable)…Read More
There has been a steady drumbeat from the Treasury Department as to what “successful investments” the bailouts of Wall Street have been. This morning I’d like to broadly consider that by discussing a few key points that I have yet to see addressed. Namely, that these were not investments, but rather they were systemic rescues….Read More
Cyclically Adjusted P/E Click to enlarge: Meb Faber of Cambria Investment Management looks at 10 years of earnings. Based on a methodology developed by Yale University Professor Robert J. Shiller, Faber concluded from an analysis of cyclically adjusted price-earnings ratios, designed to minimize the effect of economic swings on profits. Cyclically adjusted P/E, also known as CAPE,…Read More