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Don't Show Janet Yellen These 3 Charts
"Valuations are on the high side," warned Janet Yellen last week... "but not outside historical norms." It appears the range of her norms needs to be adjusted... As The Treasury's Office of Financial Research warns, stocks appear more costly than P/E ratios and other basic indicators would suggest.
As David Stockman exclaimed yesterday, forward P/Es are useless in judging valuation as Wall Street plays the EPS game. As OFR explains, other fundamental valuation metrics tell a different story than the forward PE. This brief focuses on a few — the CAPE ratio, the Q-ratio, and the Buffett Indicator — that are approaching two-standard deviation (two-sigma) thresholds.
Why is two-sigma relevant? Valuations approached or surpassed two-sigma in each major stock market bubble of the past century. And the bursting of asset bubbles has at times had important implications for financial stability. The two-sigma threshold is useful for identifying these extreme valuation outliers. Assuming a normal distribution in a time series, two-sigma events should occur once every 40-plus years; in equity markets, they occur more frequently due to fat-tail distributions.
click image for large legible version
CAPE Ratio. If one-year earnings assumptions based on peak profit margins are potentially misleading, then it seems logical to consider valuation metrics based on normalized (long-run average) profit margins. In 1934, Graham and Dodd argued average earnings should cover a period of at least 5 years, and preferably 7 to 10 years, on the basis that current earnings rarely reflect a company’s sustainable earnings capacity. They noted that longer periods are “useful for ironing out the frequent ups and downs of the business cycle” and provide a better measure of a company’s earnings power than a single year. Shiller enhanced this concept with CAPE, which is the ratio of the S&P 500 index to trailing 10-year average earnings (earnings are based on generally accepted accounting principles, or GAAP, and are inflation-adjusted). Although CAPE’s 10-year timeframe is somewhat arbitrary, it captures earnings over one or two business cycles rather than over a single year, better reflecting sustainable earnings.
The historical CAPE average based on a 133-year data series is approximately 17 times, and its two-standard-deviation upper band is 30 times. The highest market peaks (1929, 1999, and 2007) either surpassed or approached this two-sigma level (1999 exceeded four sigma). Each of these peaks was followed by a sharp decline in stock prices and adverse consequences for the real economy. At the end of 2014, the CAPE ratio (27 times) was in the 94th percentile of historical observations and was approaching its two-sigma threshold.
Q-Ratio. The Q-ratio, defined here as the market value of nonfinancial corporate equities outstanding divided by net worth, suggests a similar message of equity valuations approaching critical levels. Instead of using a traditional accounting-based (historical cost) measure of net worth, the Q-ratio incorporates market value and replacement cost estimates. The Q-ratio also includes a much broader universe of nonfinancial companies (private and public) than CAPE.
Buffett Indicator. The ratio of corporate market value to gross national product (GNP) is at its highest level since 2000 and approaching the two-sigma threshold. This indicator is informally referred to as the Buffett Indicator, because it is reportedly Berkshire Hathaway Chairman Warren Buffett’s preferred measure to assess overall market valuation. Historically, this indicator’s message is consistent with CAPE, particularly in identifying periods of extreme valuation before the Great Recession and the 1990s technology stock bubble.
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Of course, what really explains why Janet can't/won't see this ugly reality...
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As OFR concludes,
These readings illustrate the potential for “quicksilver markets,” in which prices shift rapidly and unpredictably, the Washington-based analyst wrote. All three gauges are “nearing extreme highs.”
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It's Lake Woebegone. Where all the charts show above average.
And everybody rides the short bus......
To ob1conobe.
http://www.foxnews.com/politics/2015/03/25/bergdahl-to-be-charged-with-d...
5 taliban free
OK, got it
https://www.google.com/search?q=troll+doll+pics&biw=1536&bih=709&tbm=isc...
Until Yellen arrived, I thought nobody could ever make me puke more than Bernanke or Greenspan...
It fucking NEVER ENDS people...
That's a common psychological phenomenon. PhD psychologists refer to it as "The Grass is Greener Syndrome".
I'm really looking forward to seeing how I could ever despise the next President more than Obama.
Hillary will make it easy.I
Pool any politician and you will find the sewer.
until it does.
Greenspan was the master of foggy, impenetrable speech, Bernanke lied loud and often and cut anyone who disagreed him off at the knees. With Yellen we have words with no meaning and no promise.
Lolll great analysis!!! Fuck Yellen and the Bernanke it rode in on that rode in on Greenspan.
She speaks in tongues and gobbledegook.
she looks like out of hobbit movie.
Wow, this topic seems to be getting a lot of coverage. even in the MSM financial sites. What's up?
They want the market to correct without raising rates.
Well, good luck with all that, government liabilities are what they are...
my hypothesis is that stabilitee will be maintained, a 1% drop is hardly significant...
If the MSM is talking about it, then they plan to let dive. That'd be their justification for the next round of QE.
I can't imagine Janet to be as rebellious as Greenspan today.
I missed the 'worse than Lehman moment' phrase.
core capital goods orders
down not one, not two, not three, not four, not five
but six months in a row
stuff that in your pipe, janet
The world according to Janet:www.amazon.co.uk/The-World-According-Janet-Personalised/dp/B00...
I wonder what the hidden personality of her name is...Fugly?
Yeah, yeah, whatever. In other news Bergdahl, you know the guy, the one who El Presidente said served with distinction and traded 5 Taliban for, is getting charged with desertion.
So in other words, after the collapse in 2008, we actually just returned to the mean and no stimulus should have been needed. We should have learned to deal with living without the juice.
the collapse in 2008 hasn't ended. Up to this point, it has been financially engineered into a decay and masked from the donkeys with fake data and compliant cheerleading media.
The result is that wall street today has very little to do with the real world, and the remaining choices are still financially engineered decay or now an even bigger global collapse.
The debt was too large to ever be repaid in 2008. In 2015 it's several orders of magnitude too large to ever be repaid.
The ziogangbangksters will probably opt for war to obfuscate their role in it all to preserve their status as our saviors.
just remember, this time is different. and there's a fat, delusional bitch thats willing to turn on her printers when stocks have the audacity to drop more than 10%.....which they havent dont since Oct, 2011.
all we need to do is to BTFD....right?
Naa, double down it's going higher
Oh by the way short the VIX everone else is doing it.
Wake the philly Fed, abolish the VIX, audit the Philly Fed, it's now or never, OKAY, never.
Thanks TVIX for making us rich..........
Oh lord, won't you buy me, a Mercedes Benz, my friends all drive Porches, I must make amends, spent all of my life just bendin over again, so oh lord, won't you buy me, a Mercedes Benz.
simple higher highs and higher lows says this has a way to run before panic sets in. lol. please don't panic for another week.
What does she care....Board seat Coke, Goldman whatever.... $200k to come have a coffee and speak to an empty room
Well you're here, so it aint all that empty.
SNAP DEPRESSION is upon us. The die is cast. Enough people now know the score. Demand will collapse; already collapsing. Race for the exits.
The CBs will be powerless.
fat-tail distribution?
Janet B Yellin'....
<----- I cannot see anyway. LOL.
"approaching two-standard deviation (two-sigma) thresholds"
approaching? Wait What confirmed they are EXCEEDING 2SDs a week ago. catch up buddy, you're dragging ass.
03/18/2015 - 15:37 5903333 Wait What 2 standard deviations aboveLooks like there's still room to grow.
YELLEN: "I WOULD RATHER GIVE AWAY MY TWO KIDNEYS THAN RAISE RATES"
FED president moves office to surgery room to calm markets.
Source: www.financialpaparazzi.com