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Are Stocks Cheap?
Each and every day, we are bombarded by a never-ending series of asset-gatherers whose sole aim in life is to convince investors to put more money to work. Whether it is because 'we are climbing a wall of worry', whether 'long-term' equity investors always do well, whether the 'cash on the sidelines' is coming out (note - remember there is a seller for every buyer and a buyer for every seller); the most frequently proposed reason for buying stocks is 'because they are cheap'. No matter where they are trading - high or low - they are cheap. Well, in an attempt to suggest otherwise - or at least provide fact rather than accepted wisdom, the following two charts from Morgan Stanley's Adam Parker provide the reality that, in fact, stocks are not cheap - and given where rates are, they are in fact expensive. Empirical fact not fiction.
S&P 1500 - Price to Forward Earnings at its long-term median - and highs post-crisis.
and give how low real rates are, P/Es shoould be considerably lower...
and just what is the market expecting? Huge margin expansion...
As he notes, it seems corporate health is anti-correlated to economic health.
Charts: Morgan Stanley
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Are Stocks Cheap?
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Not as cheap as they're gonna be when the dollar does to zero...
Only if Ben is allowed to "race to the bottom" ahead of everyone else. Sorry francis, WWIII is more likely to happen first.
They're still inherently worthless... All you're doing is buying SOMEBODY ELSES claim on a phat bonus compensation & eventual golden parachute...
At the risk of repeating myself, George Carlin explains who "owns" the media, and what happens as a consequence.
.
http://www.youtube.com/watch?v=4jQT7_rVxAE
The "owners" don't want you to be educated. They tell you about the "American Dream," because you have be asleep to believe it!
Sorry, but citing Carlin as an "expert" in media ownership sounds suspiously like citing Sissy Spacek as an expert in mining or Obama as an expert on golf. Notice how many posts quote comedians, entertainers, You tube, a blog or a TV show as evidence instead of a book or study or news article?
Must be our "lying eyes" then tango. FYI- Sissy did not sing about mining, she sang about raisining a family on miner's wages. You gonna try and contend she knew nothing about that dumbass?
"instead of a book or study or news article?"
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So I take it we should only get our information from 'reputable' media sources like Reuters & AP [owned by Rothschild]...
yep and never ask questions when shit happens on this planet with dates containing 3, 6, 9, 11, 13, 21.
Lets see what's on the shelf next week 3/11, 3/13, 3/21
Uhmmmm... Loretta...
http://www.youtube.com/watch?v=9THvjcohqVg
@tango ~ "They're all gonna laugh at you"
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http://www.youtube.com/watch?v=PUfeEZhYs2g
Some of the best horror cinema ever.
I wan't dissing Sissy.
"Are stocks cheap?"
Is the Pope.....uhh....uhh....nevermind.
Does the pope shit in the woods?... Oh wait ~ the IS NO POPE...
There is a fine line between zero and infinity.
"and give (sic) how low real rates are, P/Es shoould (sic) be considerably lower..."
I think you have it wrong. Or else I (and Graham and Dodd) are mistaken. Low interest rates should result in high PE for stocks.
http://www.rbcpa.com/GrahamandDoddPEMatrix.html
Gramham, like all paper-pushers, ignores the energy input required for real growth. At least for companies that actually produce or deliver a real product or service. I have no doubt that the paper-pushing and financial "products" will increase exponentially forever at this point. whether or not this is a good thing will depend on what happens as more and more try to cash in those paper promises.
Growth is not possible without an increase in available energy, period. Hedge accordingly.
If you're wrong, and we can ephemeralize our economy, things will start looking up soon. Any day now. Just about now. Just waiting.
I don't think you're wrong, but I still love Bucky.
From my own experience; Architects are people that know a little about a lot and continue to learn less and less about more and more until they know nothing about everything. Engineers know a lot about a little and continue to learn more and more about less and less until they everything about nothing. Contractors know everything about anything, so cut the middleman right out fromt he start and go talk to a contractor when you need to get something done.
Beppe Grillo was written off completely by everyone before Italian election. He may well have just started a revolution. What was that about comedians?
Chicken or egg ?
The changing/losing reserve currency has always led to war,except in the case
of the pound where war(s) led to it.
either way, it's a guarranty that one will happen, and neither will be good for those in the dollar ponzi.
Covered daytrade short with small loss. No fear in the market, melting up.
I agree with your comment. The Stock market is ahead of the curve. Prices do not reflect what is actually happening. On the contrary, the prices reflect what the market thinks will happen in the coming months. Most analysts would be good to go on the media saying that the market is expensive. It would be a signal to point rise on Wall Street.
The market only "thinks" (ahead) at 5 microsecond intervals since 80% of the trades are high frequency.
And may I point out that without that tech fueled monster rise in P/E from 1995 to 2001 (first chart) the 13.7X median P/E would be (much) lower.
<Just sayin'.>
Good catch. I would have missed that.
Thanks Cog
That's why I don't like YOY sometimes either. What was going on last year and why should it matter? It's all relative. To take out the relativity you have to pick good indicators of value, but then why should value matter? If you want to make money then hysteria or sentiment should be a large driving force or possibly the only driving force if you follow Armstrong.
Same ugly, stupid untraday SPY chart; heralding the inevitable pop higher as sure as a monkey picks its own ass (which this market most certainly does). I thnk we resolve to the upside and finish well over 155.
cspan...graham, mccain, standing up for obomba, blasting rand paul......
This is what you should probably use as your baseline to gauge if everything else is a pipe dream...
http://fiatflaws.blogspot.com/
Everything is upside-down and inside-out. Gold, commodities, energy and tangible assets are apparently in abundance and not in demand (???).
On the other hand, anything that is paper and/or electronic blip is scarce and priceless. Those who save are ignorant, but those who go in debt carelessly are wise. War is peace, hate is love... We are late three decades, but we are finally there Mr. Orwell.
Was Google cheap at 600 a share? How about now at over 800? This is such a stupid question because it makes it seems there is such a thing as "empirical evaluations" of individual equities. Simply put "there isn't." are stocks cheap with INTEREST RATES this low is a good question...but not "are equities a buy here?" I HAVE argued strongly that the reasoning behind 2008 was to avoid a Japan/USA 1929 scenario. I would argue it has worked in stopping the fall...creating growth is a whole nother matter...I would argue for normalization...eh, with some States about to report massive multi billion dollar surpluses (all Republican save California of course) quite honestly i don't think it matters. "Modern Portfolio Theory 1...Lehman Brothers Zero." move along, move along...
They can't let the market drop too much. It's a continuous buying effort by the Keynesian Fed.
You need to adjust S&P earnings for the overstatement due to lack of enforcement of accounting standards....there is no need to provide for losses (banks in particular).
This would reduce earnings, and increase PE ratio.
Essentially government is absorbing potential loss, reducing S&P provision expense.
OK, so if current P/E's are at the median (13.7), how is that expensive? Seems to me, they look "fairly" priced - certainly not expensive. Besides, this data point is only meaningful in the context of the current interest rate environment.
The 2nd chart tells us nothing.
The 3rd chart, even less. Maybe GDP goes up going forward.
If I have to spend 20 minutes reconciling charts with stated implications, then its not a very good demonstration. Emphasis ought to be on clarity where a chart such as GDP growth since 08 against The SnP, or something like that actually means something. And, since when does the real economy ever matter anyhow, particularly with a market that is totally rigged and is public knowledge that it is totally rigged?
I thought that low yields induce higher P/E ratios. Because you want to put your money into something like stocks, which drives up P/E ratios. Apparently it's not a linear correlation... Interesting.
That what I always believed as well and still do. Low interest rates should correspond with higher pe's just to keep the earnings yield/ risk free rate spread in line. Not really sure what the actual numerical average spread is but say it is 3%. With the risk free rate at 2%, that would mean earnings yields should be at 5%, whioch equals a 20 pe. With the risk free rate at 5%, then the earnings yield should be at 8% which would equate to a pe ratio of 12.5.
So market is undervalued unless we see:
An increase in risk free rate
Earnings that come in short of estimates (what I'm banking on)
None of this means anything given the actions of the Fed as true relationships no longer matter.
It appears that empiricism depends on the facts you wish to highlight.
Correct on both counts. Based on current bond interest rates, stocks are UNDERVALUED, meaning there is room for further capital gains. Now this is where the Fed comes in with their money printing. As inflation picks up, i.e. the price of goods increase, the earnings have a tendency also to increase, driving down the P/E ratio meaning a greater upside potential in price of the stock. We can increase earnings by: 1) selling more stuff, 2) selling the same stuff at a higher price or 3) slashing expenses.
I submit the first graph could be interpreted as the effect of money printing since increasing gross sales (via #2) would lower the ratio if the stock price stayed the same. One could also argue #3 since ObamaCare is causing companies to shift from full timer workers to part timers by abandoning the paradigm of employee compensation to include health insurance. Or it could be a factor of both.
The upshot is liberals are very cruel to the poor and middle class by pursuing Keynesian policies and burdensome legislation. Being the sociopaths they are, they don't consider or feel the harm they do in the name of their agenda.
Are stocks cheap compared to what? Dollars? Do I need to elaborate?
are they cheap relative to the total amount of money in the system? it would seem so. the economy is not the stock market, the stock market is and has been for the last 30 years a function of growing the total supply of money. stocks on the whole would rarely if ever go up in a economy with stable money.
the chart needs to show the price to forward earnings after there are 3 trillion dollars plus, with multiplier of many times that floating around.
but what comes first the inflationary slaughter of millions of jobless americans or people finally realize that the paper certificates represent companies that can't sell anything because the banksta niggas destroyed the world ? Sometimes too much fuel floods the engine and the motor dies.
rip
Minsky said the market becomes unstable the more money invested, but what if recently the majority of investors had been burned badly and are less willing to take risk?
pensions, hedge funds, speculators will leave in mass to where? to what?
btw I am in no way saying that the market can't experience a set back but from what I can see that would have to happen after the current amount of new money is priced in, which I dont think it is even close to being there. the fact the market has run up in the face of unbelievable bad economic numbers is a huge sign of this fact. fundamentals mean nothing total amount of dollars means everything, for now.
FED train coming through you stupid cattle!
http://m.youtube.com/watch?v=nieK4GHov-Y
Have the readers here viewed the videos on u tube re: Iron Mountain? Suggest it become importantto view.
dont worry, these assholes will do everything in there power to continue pumping the market up to new all time highs, so that ppl can say in a few years, obama was behind the greatest stock market rally in history, of course giving him no blame as always.
fuck u bernanke, and major fuck u obama u worthless piece of shit. i wish the worst for u
I do not see that we have been here before? This is a comparison by ratio. WQalking at 3 miles per hour on the ground, a train and a rocketship are three completely differnet things. Perhaps some places in the world have visited these conditions but I do not recall this occuring in NA.
I'm responsible for ordering and stocking inventory where I work. Monday Anheuser Busch salesmen arrived to take my beer order just like they have for 15 years. On Tuesday for the first time in 15 years they failed to deliver said order. I don't know what it means except maybe people don't like to pay full price for watered down beer. Budweiser if over valued maybe.
nevermind. the newbie salesman screwed up my order. by your leave as they say
You can come back to ZH after a 6 month hiatus and the same lessons will be replayed here. Yes, the indexes will rise (Except in the Summer). Yes, gold prices will fall proportionally or stay static. Yes, there are opportunities to make a killing in equities if you have insider info on what the POMO primaries will be buying. And the list goes on, the caveat of this list being, "As long as the printers keep churning". By all accounts Ben's bout of green dysentery is not about to stop this year.
But no, the same dangerous casino culture, accounting obsfucation (OBLs), counterparty risks (Re: Sovereign debt), non-productive loans pretending to be assets (Re: Subprimes), and growing GDP/Debt ratio to mention but a few of the problems that did* bring down the markets in late 2007/2008 - well, these problems and others are still with us. (*Not "Almost" brought down - let's be clear here. Without the begging, squirming figure of Hank Paulson, we now know the biggest players in the financial system were 24 hours away from collapse). The problems are multiple and endemic. That is why so many at ZH suggest going out of the system altogether, if you haven't already done so.
Your perspective on what is and what is not "cheap", has "value", or "has utility" should be tempered with a good hard look at the risks inherent in playing the game. If those risks entail losing everything you've got and carting all your possessions in a shopping trolley for the rest of your life, then don't play. If it won't hurt to lose your chips, then play with an eye on your exit strategy. Personally, I think equities are far too much work and stress for little or no gain, and behavioural science, whether it involves people or machines, bores me.
It is easy to fall prey to solipcism - sometimes I think the markets stubbornly refuse to collapse just to spite me. :). But seriously, whatever you do professionally to earn your daily bread, give some consideration to eventually having the ability to make your bread instead of merely earning it. Much less chance of it being riddled with coliform bacteria. (That's an Ikea joke, if anyone is wondering).
Stocks are cheap if you're an insider, that is to say free.
Say Joe, what'd that 100,000x block of shares cost ya?
Nothing Fred, I work there!
After 100 years of endless fed manipulation and dollar devaluation, the $USD is worth 3% of what it was in 1913. So, essentially, the dollar is "going to zero" when you map it on a graph with time versus value. So, yeah, stocks are cheap.
Money in stocks is perhaps not as safe as money in physical gold, but both are far safer than money in money.
When real interest rates are < 0, it really screws up all the historic valuation methods. So the analists plug in (....ahem) all sorts of neo facist assumptions.
When the valuation models were created over the past 50 years or so going back to the Gordon Model, Miller and Modigliani, etc... it was never contemplated that the Fed (indeed US Gov't) would be so infested with neo facsist, racist plunderers. Or that real interest rates would be negative. Thus the old dividing by 0 or negative numbers problem.
Hey only Robert Mugabe of Zimbabwe had a disastrous economy but raging high stock market just a few years ago. But Mugabe was an african dictator, who stole white people's farms from them, imprisoned them in many cases, and pursued ultra race based redistribution polices.
So, of course that could not happen in the US.....