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The “New Normal” Calls for a Lower Market Multiple Range.
I am getting tired of the endless procession of perma bulls who keep insisting that, at a 15 times multiple, the S&P 500 is cheap. The last time I heard this was in 2000, when NASDAQ multiples went from 100 to 50, on their way to 10. Before that, it was in Japan in 1990, when multiples went from, guess what, 100 to 50 on their way to 10. Some 20 years later, Japanese multiples are still at 15.
When I first entered the stock business in the seventies, typical equity earnings multiples were in the seven to eight neighborhood. If you performed exhaustive stock screens, which then involved paging through endless reams of 10-k’s, newsletters, and tip sheets printed in impossibly small type, you could occasionally find something at a two multiple, the kind Graham and Dodd wrote about. Anything over ten was considered outrageously overpriced, fit only to be sold on to retail investors. This is when the prime rate was at 6%.
The selloff we saw this week is consistent with my long term view that we are permanently downshifting from a 3.9% to a 2%-2.5% growth rate, and the lower multiples this deserves. I’m convinced that if the circuit breakers had not been installed, we would have been visited by another flash crash last week. If you look at a 30 year range of market multiples, it ranges from 10-22. Given our flaccid growth prospects going forward, I think the new range will be 10-16. It does not make today’s 15 multiple look like such a bargain.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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When do we go back to multiples of 6-7?
in inflationary climate multiple of 10~15 is probably acceptable. In deflationary climate multiple in signle digit is likely wrranted. Question is are we in inflationary climate or deflationary climate? Of course if Bernanke succeed in killing the dollar and we enter hyper-inflation, then stocks multiple will be least of the worries.
GDP growth at 2.5%? Run the numbers again with a federal budget of $2.5T. That's your long-term reality.
"and my last two years of research reports available for free"
Where? Your site has no link for to these reports.
Buy the dip, a liquidity tsunami is heading our way...
100% wrong (as per usual) Mr Kockupalotis ...you BTFD, we'll chat about the 'wisdom' of your crashing stock portfolio in 3 months
Noticed the market went green right after you posted this jibberish!
1. Please don't use that idiotic PIMCO term, the "new normal"; it makes you sound like an ass.
2. Markets don't follow P/E's, they just reflect the amount of earnings(which, in a world with stocks option dilution are fiction anyway) behind the price. Stocks had an infinite P/E in 2008 and the market went up about 100% - glad you didn't spout this efficient markets hypothesis faux wisdom back then.
3. In a world where stocks are denominated in fiat money terms, the price of the stock market is a function of the strength of money printing. Go visit somebody in Argentina, and try and sell them on the spurious notion that stocks have a "fair" value when your currency is collapsing. Said differently, any price is a good price when your paying for real assets with confetti.
4. Stocks are probably going to test the all time highs as people like you are forced to cover. Its not an opinion, it's an axiom.
if stock indexes were a product of money printing what the hell happened to Japan? ...20 years of printing and the index is still down 70%
...similarly where does earnings determine a stocks price? ...how did earnings get reflected in stock prices at any time during the 2007 decline to March 2009 bottom!
Does this mean that AAPL's next stop is not $1000, as you wrote here: http://www.madhedgefundtrader.com/december-30-2010-2.html
That;s what it means, alright. Strangely enough, I find myself agreeing with this writter; As far as I can see he happened to get ahold of the right end of the string this time.
He was also saluting Dr. Copper and touting FCX at > 60 a couple of months ago. When the market is going up, everyone's a genius.
Hedgies follow the trend -- up, or down -- and exploit it. To them, "long-term" is holding through lunch. I concur, however, that going forward, in the QE-ad infinitum world, a "15" market multiple will likely be the exception, and not the rule. It will resemble the market of the '70s, post-"Nifty Fifty" era. A veritable no man's land for the major indexes.