Equity Valuation: It's All Downhill From Here

Tyler Durden's picture

While in 'normal' times the commonly held view is that P/E ratios tend to fall as real interest rates rise, as we recently pointed out here, the relationship is highly non-linear and nowhere is this regime-dependence more evident than in the following chart from Morgan Stanley. Empirically, the current interest-rate regime (the 2-3% 10Y) is as good as it gets and whether rates rise or fall from here, equity valuations are likely to drop. The market rarely trades at the average multiple, though the current market trades at near average levels currently (not cheap as many would like us to believe). Of course, as Morgan Stanley notes, there are a number of other drivers but on a long-term basis and top-down, equity valuations have a hard hill to climb to prove its different this time.

Whether growth slows or inflation picks up, a fall or rise in real interest rates from here infers a drop in equity market multiples...

And while many would like us to believe equities are cheap, they simply are not - they are at their average multiple over time. Most notably if one were to remove the excess euphoria from the late 90s dot-com exuberance then the current market would appear notably rich...

But of course there are a number of other factors to be considered - though many of these suggest more caution as opposed to less...

Source: Morgan Stanley

Will it be different this time and multiples will rise against empirical insight or will the equity market muddle-through along with the extend-and-pretend macro overlay that is being played out on a global central bank board. We suspect the potential for shocks, flight-to-safety, and Japanification of global interest rates (for currency issuers not users) will push valuations down and defending equity investment on the back of multiple expansion seems disingenuous at best.

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maxmad's picture

Collapse!  here it comes!

derek_vineyard's picture

collapse hits when you start questioning your own sanity in believing its overdue

TheSilverJournal's picture

Sell equities to buy what? Bonds? Cash?...yeah right.

Gully Foyle's picture

Hey now little piggies ready for some fun news?


Women are at greater risk from global warming than men, claims MEP in 'bonkers' EU row


Terrorist Plots, Hatched by the F.B.I.

When an Oregon college student, Mohamed Osman Mohamud, thought of using a car bomb to attack a festive Christmas-tree lighting ceremony in Portland, the F.B.I. provided a van loaded with six 55-gallon drums of “inert material,” harmless blasting caps, a detonator cord and a gallon of diesel fuel to make the van smell flammable. An undercover F.B.I. agent even did the driving, with Mr. Mohamud in the passenger seat. To trigger the bomb the student punched a number into a cellphone and got no boom, only a bust.

This is legal, but is it legitimate? Without the F.B.I., would the culprits commit violence on their own? Is cultivating potential terrorists the best use of the manpower designed to find the real ones? Judging by their official answers, the F.B.I. and the Justice Department are sure of themselves — too sure, perhaps.


Wind Farms Warming Texas Turbines mix air at night and could affect local climate and farming.

Researchers used satellite data from 2003 to 2011 to examine surface temperatures across as wide swath of west Texas, which has built four of the world's largest wind farms. The data showed a direct correlation between night-time temperatures increases of 0.72 degrees C (1.3 degrees F) and the placement of the farms.

"Given the present installed capacity and the projected growth in installation of wind farms across the world, I feel that wind farms, if spatially large enough, might have noticeable impacts on local to regional meteorology," Liming Zhou, associate professor at the State University of New York, Albany and author of the paper published April 29 in Nature Climate Change said in an e-mail to Discovery News.


rlouis's picture

Green energy contributing to global warming? Too funny!

nugjuice's picture

This post pisses me off. A lot. Whether they handed the guy a van full of explosives or not, if he at least for a SECOND believed that blowing up innocent people was the right thing to do, I don't want him walking around free in my country. I don't give a shit if someone came up to me and offered me, free of charge, an entire van full of explosives and a secret identity to go and hide with after. I just. plain. wouldn't. do. it. period. Let him rot in fucking jail.

Edit: I guess my point is this: 99.9% of the American population wouldn't be capable of a mass murder of innocent people even if you handed them the weapon and promised them immunity from prosecution. I don't care what it takes to find the 0.1%, better the FBI get to them before the extremists.

tickhound's picture

The "Pre-Cognition" and "Pre-Emptive Strike" Departments of Justice appreciate your support.

fonzannoon's picture

If there are no real investors left, and no volume etc. etc. then why do fundamentals matter?

CClarity's picture

Nothing is cheap or expensive in this medicated marketplace.  All prices are manipulated and only good for a trade.  Not investments.

JustObserving's picture

That why is 84% of all trades are HFT now.  They are held for an average of 14 seconds.  Only dumb humans look for investments in a manipulated marketplace.

derek_vineyard's picture

what does the word investment mean?  i cant use that word in relation to giving money to a brokerage account and picking a name to buy

Shizzmoney's picture

Only dumb humans look for investments in a manipulated marketplace.

If you can't spot the sucker at the table....

5880's picture

There's nothing wrong with pairs trading (or as you call it HFT), they just need to keep providing bids and offers throughout the day. They are the new MM, not customers

Dr. Doom's picture

But but they said stocks were cheap. The vampire squid said there has never been a better time to buy!

DaveyJones's picture

At least I found my retirement home

some people know how to wing it through the golden years

only drawbacks are having Homeland cut your lawn and going through a scanner everytime you pee

DaveyJones's picture

yes, more likely, give or take a few heads on stakes

Bicycle Repairman's picture

Looks sweet.  I would have laughed my a$$ off, if they built it in FL.

amadeusb4's picture

Forward earnings are bullshit. Here's the real multiple: http://www.multpl.com/

junkyardjack's picture

Bullish! Hendry said we're in for the biggest bull market since 1980, look at those multiples

amadeusb4's picture

I thought he said after a period of hyper deflation first. I agree with him to a point. 2012 is a recession year. We will get a correction or even crash and then it's off to the moon with inflation. However, unlike the past 30 years, we will experience regular recessions from now on. Expect another recession come 2017 or thereabouts.

monopoly's picture

It is all so absurd. When will it end.

Caviar Emptor's picture

Cramer and Blodgett said stocks were cheap in March 2000. 


Vince Clortho's picture

Love to see a chart showing when Cramer said Stocks were too pricey.

carbonmutant's picture

 A market maintaining altitude on hot air....

wcvarones's picture

Dude, read the label on the chart.  Those are REAL rates.


Real rates are now negative.

Bartanist's picture

OK, so what is the next step for making more money available to people to power purchasing? Clearly the money is stopping in the sticky fingers of banks, bankers and their cronies and they have been buying up real assets ... and creating inflation by raising prices at the same time, so that asset prices make them unavailable to others.

Do they ultimately want to own (hold in what they call their legal possession ... although from a civil stanpoint, it is nothing of the sort) all of the assets in the world (and then charge rents)? My guess is yes. It is the next step after taxing all of the assets of the world through interest payments.

The next logical step, if they wanted to "cure" things by making money available, which is their claim, is to cut out the middleman (themselves) and make money available to average Joe at 0% or 0.25% interest and not simply to themselves. However, this is where we confirm their disingenuousness ... since they will never cut themselves out of their 3%... or their 2% and 20%.

Boilermaker's picture

Valuations, in general, don't mean jack shit in this environment.

Rainman's picture

....especially p/e, which is a holdover metric from a period of time that was not entirely fraudless.....but nothing nearly approaching what's happening today with the "earnings inputs ", especially in the financials. 

banksterhater's picture

Crestmont or Shiller S&P P/E is 21, hist ave is 14.7

vote_libertarian_party's picture

Aren't we at the far left bar chart.  10 year less the gvt inflation number is a little less than zero.


So we could see multiple expansion according to that bar chart as real rates increase.  I don't agree with that but that is what the chart suggests.


Which is why ZIRP causes bad predictions.  It is so far away from normal policy it screws everything up.

matt_chart's picture

Hey guys I made some Technical Analysis Training Videos.. ENJOY!

Support and Resistance


Understanding Trends


Stock Volume As Reverse Indicator


Using The MACD Indicator


Using The RSI


Ignorance is bliss's picture

I'm pretty sure baby boomers are looking at the vestiges of their 401Ks with trepidation. Any type of correction will be scary for the average baby boomer looking at retirement once he has been released to pasture. Got to love age discrimination. Watch for any correction to look like a cliff as baby boomers panic like a herd. They are already skittish.

AustriAnnie's picture

And those boomers are going to look to their children to fill the gap, but their children will have tens of thousands of student loan debt, credit card debt, low wages, higher food and energy prices, and mortgages on houses that are underwater, all while their property tax and income tax rates are rising.

AustriAnnie's picture

I'd love to hear from the person who red-arrowed me:

Which part of the above statement is false?

The fact is, the old and young generations are both fucked.  They can fight all they want over the pieces of the pie, but the reality is, the debt cannot be paid.  Both generations have an overblown sense of entitlement and the feeling that they don't deserve to lose the wealth that was never really earned by them in the first place.  It was all built on cheap credit, cheap oil, and money printing.  And the game is over.

Lednbrass's picture

But...but...they paid into the system, dammit! They deserve whats theirs!

nick howdy's picture

Internal Dialog: God..why did I ever get into a situation where I could't do illegal drugs on a daily basis..

TrillionDollarBoner's picture

It's a good question. I could do with some horse tranquillizer to last until this mofo goes down.

OldE_Ant's picture

I think it's interesting the talk of P/E.  What about Price to Dividends?   Also one has to wonder whether the E's reported in these charts are GAAP or some company fluff metric.

To me when I see real average incomes rising against inflation (I take it no-one noticed when gas prices rose from $3 to $4/gal last time store prices on needed goods - milk, cheese, meat, etc. all bumped by 5-20%) then one can signal 'all clear'.  Frankly I don't see the all clear yet.  Most wages are 'frozen' at best (if one has a job) and prices arn't coming down.   I do see the packages getting smaller, but I don't yet see the average American wasteline decreasing.  What I DO see are more and more smaller and larger company businesses going to auction, and the buildings going empty.   But hey even if we have the most terrible disaster happen it'll add to GDP so bad, good is all good.  Heck all of this is 'bullish' as Ben is lining up the next 50 trains to fill up with free money for all his banker pals to keep everything running smoothly.  He'll call it operation 'hot air' or "Twister2".

One thing I havn't heard people talk about is if western governments are out of control on 'spending' (and will never get in control) then exactly what else are they 'out of control on'?  Once a government sees it's own interests as paramount over the people then one has to wonder whats next?    Start killing off the undesirables using foreign military forces within it's own borders?   Mandate morality?   Force everyone into new security checkpoints to filter out those who are 'extremists'?  Extend and increase testing of various new population warfare agents (from BS tv, to wonderful new germs, to straight up genetic RNA manipulation via water sources, and radiological agents)?

It appears to be only a matter of time before western governments start to see their own people as 'the problem' and step up activities against them.

Looks like the world is being ripened for some 'shearing' activities and it won't be just Sammy Black, Mohammed Brown, or Thai Yellow, but good old Joe sixpack Whitey slated for some cold dead hands activities against anyone that dares stand up for 'rights, and liberty' anywhere, for any reason.

Might be time to get bullish on prisons.

SDRII's picture



Russia may create private military companies and possibly use them for missions abroad. Prime Minister and President-elect Vladimir Putin mentioned this possibility after he delivered his report on the government’s performance in 2011 to the State Duma. Many countries have such companies, but the issue needs to be carefully considered given the specific circumstances of Russia.


“I believe that such companies are a way of implementing national interests without the direct involvement of the state,” Putin replied. “Yes, I think we could consider this option.”


Outsourcing of U.S. mercenaries became especially flagrant during the wars in Iraq and Afghanistan. By the end of the 2000s, the bipartisan Commission on Wartime Contracting in Iraq and Afghanistan said in its report to Congress that the ratio of “the contractor workforce” to U.S. military forces in these countries was roughly 1-to-1.


adr's picture

When you can Double Dutch Irish Sandwich your profits into a zero tax haven loophole, write off inventory as an asset instead of a liability, and book forward earnings as profit now, how can you trust anything coming out of big corporate accounting? The majority of corporate profits might just be a figment of a CFO's imagination. That really makes P/E ratios meaningless. That and any individual using any GAAP on their personal finances would send them straight to jail.

It is so great that we can thank Apple for most of it. Steve Jobs wasn't a visionary product developer. He was one of the greatest criminal masterminds of all time. Al Capone's got nothing on Steve Jobs.

SDRII's picture



Almost two decades after advising the U.S. to sell floating-rate notes to lower debt expenses, Campbell Harvey says starting to issue the securities now would be a costly mistake for American taxpayers.

"In an environment with historically low interest rates, the Treasury should avoid floating-rate debt as it introduces risk," Harvey, a finance professor at Duke University's Fuqua School of Business in Durham, North Carolina, said in a telephone interview April 17. "If interest rates go up, it puts the government at risk because they will need to come up with a lot of extra revenue to pay the interest bill."

Jim in MN's picture

Let's not forget other kinds of risk.  Like...


Japan government to seize control of TEPCO





theTribster's picture

The shit is thick now, everything moving opposite the direction it should move! This has now been the case for over a week, especially with respect to Europe and the Euro-Usd relationship. The Yen is gaining strength while the BoJ commits to 10Trillion more in easing. Bad news is good news, good news is good news. News is totally irrelevent because every market is being either directly or indirectly manipulated - on a scale like I've never seen before.

The lies piled on lies piled on fake numbers piled on more lies and more fake numbers, how can anybody really know what the actual situation really is? or when things will change? Truth is, nobody can.

I know, this is the way it always is which I would agree except that this time it is everything at once and at manipulation levels that are far beyond anything done in the past (at least that I remember). We wait for summer to come because most of us believe that will be the beginning of the end. The Italians and Spanish talking about how they won't need any help and things are just fine - cut off their heads! The Germans installing austerity everywhere - cut off their heads, the ECB/IMF and others constantly lie about reality - cut off their heads, every leader in western civilization is lying through their teeth everyday as wars continue and innocent people die for banskters - cut off their heads!

I expect that the French revolution and Bastile Day will be relegated to historical insignificance when compared to what is going to happen in Europe, America and Japan during the rest of this year and into next. Oh yeah, heads will roll - literally. I can see them putting each head on one of the fence posts surrounding the Eurocratic buildings in Brussels. This is what they did to Mussolini so why not again, the current politicans have doomed Europe to more strife and ultimately more pain than probably ever before!

Did I mention? Cut off their heads!

BTW, it definitely includes American politicans at the State and Federal levels as well - and especially our president (no caps for him) and the congress (or them) with only a couple exceptions (Pauls, Kaptur). I'm hoping this comes sooner then later while we still have a chance to fix it before it is totally unfixable (may be already).

Good luck to the citizens of the world, let's take back our freedoms and install a new paradigm for all of the worlds systems including government, business, war, etc. If not, we'll all be pinhead serfs for the rest of eternity - now is the time, now is opportunity to take advantage of the hatred people feel towards these "leaders" and "intellectuals" and "reporters"...

Let me mention again, cut off their heads!

Mariez's picture

It's almost as if investors are playing musical chairs and no one will get up when the music starts playing again.

buzzsaw99's picture

This too, is bullish.


P/E mulitples are just one of the many extentions of accounting trickery and are total bullshit (damn, just like the entire equity market when you actually think about it).

All is not hopeless though, at least there is Home Depot to provide the market with a sane view of reasonable valuations and price movement(sar-overload).


JasperNewtonDaniel's picture

Forward P/E mean nothing with ZIRP, extrapolated to eternity, being the underlying basis for all models.  I'm sure the southern half of Europe thought they'd be borrowing at AAA rates for the next millenium too.

JasperNewtonDaniel's picture

Abby Joesph Cohen says we'll avoid another recession and simply continue with this depression.  Bullish, like the smell of her vagina.