Stocks Are Not Cheap

Tyler Durden's picture

Valuations; stocks are cheap; money-on-the-sidelines; everyone's bearish; trend is your friend. We've all heard them and we've all played them but the following charts from Morgan Stanley will at least provide some nuance of sense for those stunned into silence by a market seeing its nominal price surging amid Bernanke blowing bubbles. The headline is - with real rates this low (and staying low for a few more years yet) current P/E multiples are extremely high and even on a long-run empirical basis, hope remains excessive at 22xShiller P/E versus an average 16x. Remember, a long-term investment is a short-term trade gone bad. But it seems for now that you buy because you'll always be able to sell it back higher to the next smarter dumber greater fool.

 

Real rates are super low in the US...

 

and when real-rates are this low, P/E ratios tend to be considerably lower than every talking-head believes...

 

and this near 13x forward P/E is based on what seems like incredible levels of consensus EPS for 2013...

 

but equities still aren't cheap - as the valuations of the last 25 years were exceptional (and likely unsustainable)...

 

and while relative-value is a slow moving guide, even Graham-Dodd equity yield vs Treasuries is AT its long-run average - not cheap at all...

 

but of course, the key is earnings and whether these returns are sustainable - is the last ten years the new normal or an exceptional period from which we revert to long-run normals...

 

and as a reminder of what is priced in with regard QE's efforts, our long-run QE-Unwind basket has torn lower to its 'buying region' - i.e. the relative performance of the risk-on to risk-off sectors has moved towards mutli-year extremes once again. It may be too early to pull the trigger but we would be warming up our RV-bazooka.

 

Charts: Bloomberg and Morgan Stanley