P/E Expansion and Contraction

Last week, I showed a 50 year chart of the S&P500, focusing on the P/E over that time period. Today’s chart covers the same issue, only we focus on the 1982-2000 Bull market.   

Some people argue that P/E expansion wasn’t all that significant; they say it was (if anything) a function of falling interest rates. In my mind, that only partially explains why multiples expand; It certainly cannot rationalize why P/Es went from 7 to nearly 50 over the course of ~20 years.

Why might the median P/E have run from 7 to 32 during the Bull market?

My explanation is Psychology: something shifted in investor sentiment that made them willing to pay more than $7 for a $1 of
earnings — much more. That change is best explained by a sentiment shift related to perceived relative Value.
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Click for larger graph

Bullpe_1

Source: Panzner

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Most investors do not think P/E expansion as the lion’s share of the market’s 82-2000 gains; Instead, they credit a robust economy, technological advances, productivity gains, and (of course!) earnings improvement.

And all those elements did have an obvious impact — by my math, they were responsible for about 25% of the performance.

But the biggest contribution these four elements had was not to the bottom line; rather, it was to investor psyches that gradually became willing to spend more per dollar of earnings than they had been. They allowed a rationalization of higher prices: Aren’t stocks worth more if the economy is doing well? Doesn’t technology make companies more efficient with their capital? If workers are more productive, went the thinking, than earnings will be all the more better.

Notice how squishy these thoughts are; they may be rational, but they are hardly the sort of easily quantifiable data points that makes for a dispassionate, calculating investor.

more on this later this week . . .

Category: Investing, Markets, Psychology

How Bullish is the Investing Public?

Category: Psychology

The Tax-Cut Danger of “borrowing growth” (or, Laughing at Laffer)

Category: Economy, Politics, Taxes and Policy

Gold & The Wizard of Oz

Category: Commodities, Federal Reserve, Inflation

Death of Volatility

Category: Markets, Psychology, Technical Analysis, Trading

For 2006: Feedback, Please!

Category: Weblogs

Window Dressing

Category: Investing, Trading

P/E vs S&P 500 (50 Years)

As promised, today brings us to the 4th in our series of charts: P/E vs S&P500 click for larger chart courtesy of Mike Panzner, Rabo Securities > I’ll get into the significance of what this means to the markets later, but for now, note where the P/E is over the median, and its impact on…Read More

Category: Earnings, Markets, Psychology, Technical Analysis

Annual CD Sales Slide Resumes; Down 8% for ’05

We’ve broadly discussed the recording industry this year. How’d they do in terms of numbers?

Wsj_music_20051215
After a slight blip up in 2004, CD sales resumed their prior slide. Sales were off 7% (CD albums only) or 8% (CDs and singles). The decrease is comparable to the decline in Movie theater attendance, which fell about 7%.

Reported Album sales (January through the week ending
December 25) were 602.2 million in 2005; weaker than last year’s 650.8 million. Digital singles sales more than doubled to 332 million — a 148% increase.

Some blamed the Album CD sales slump on the cherry-picking of singles by a fickle public. But the broader analysis reveals that CDs are a format in decline. While 95% of music sales are still in the CD format, there are plenty of signs this is changing. In addition to the different fortunes of the two formats — CDs are slumping while digitial downloads skyrocket — the industry itself is changing. A new breed of music label is distributing their product strictly in digital format, thereby bypassing CDs entirely. See Cordless Recordings as an example of this.

This year’s biggest sellers, according to Nielsen SoundScan, were Mariah Carey’s Emancipation of Mimi at 4.866 million; In second place was 50 Cent’s The Massacre, which sold 4.834 million. "American Idol" winner Kelly Clarkson’s Breakaway finished 3rd, selling 3.4 million copies. The top sales position has not been occupied by a female solo artist since Alanis Morissette’s Jagged Little Pill in 1996. In 2005, female solo artists captured the gold and the bronze.

Although the major labels lament the internet, P2P, and file sharing, it turns out that the Net has been a boon for Indie Labels. Much of the industry’s complaints are actually about disintermediation — the web forces them out of the relationship between the artists and their fans. The indies understand this, and have been using the net to promote their unknown artists.   

While sales here, in the UK sales continue to do better than in the U.S. — despite Great Britain’s widespread adoption of broadband. Credit likely goes to the wider playlists in UK radio, and a payola-free radio industry. Britain does not have the same concentrated private ownership of Radio Stations which have become so prevalent in the U.S. since the 1996 Telecommunications Reform Act, which enabled firms like Clearchannel and Infinity to scoop up 1,000s of stations.

Its no coincidence that music sales problems can be traced to what occurred following that legislation’s enactment.

While legal Music downloads more than doubled this year, so too has the recording industry’s misconduct. After settling Price fixing charges in 2002, it appears that the recording industry brain trust is at it again: An industrywide probe into how much record companies charge for digital music was started by NYAG Eliot Spitzer; subpoenas have gone out to several labels.

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One last astonishing piece of music trivia: Mariah Carey’s CD spawned her 17th #1
single, "Don’t Forget About Us." This places her in second place on the
all time #1 hit list — behind the Beatles’ total 20 #1 hits. If Carey
manages to pass the Fab Four, I will interpret this as incontrovertible proof that life is meaningless or God is dead . . . I haven’t decided which.

Finally, you can see my Anti-"Best of 2005" here.

UPDATE January 3, 2006 6:09am

It turns out that the British are the ‘world’s biggest music buyers.’  According to figures released by the British Phonographic Industry (BPI) early 2005, the UK music industry recorded an overall 3% increase in volume sales, mostly due to its robust albums market.

The British buy the most compact discs in the world – an average of 3.2 per year, compared to 2.8 in the US and 2.1 in France.

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Sources:
Silent Night for Music Sales
Holiday Buyers Spurn Tunes As Industry Picture Worsens; ‘Cesspool of Really Bad Bands’
ETHAN SMITH
THE WALL STREET JOURNAL, December 16, 2005; Page B1
http://online.wsj.com/article/SB113469750280524159.html

UK ‘world’s biggest music buyer’
BBC, Tuesday, 22 March, 2005, 12:25 GMT
http://news.bbc.co.uk/1/hi/entertainment/music/4371673.stm

The extensive list of sources used in this posting can be found below

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Category: Music

A Different Kind of Music List: The Anti-”Best of 2005″

Category: Music