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

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HedgeAccordingly's picture

They are cheap enough for Bill Gross - Gundlach took his $ -

Cranios's picture

This is not a good analysis. Just because Treasuries are very, very VERY expensive does not mean that stocks are expensive. The relationship between treasury rates and stock has always been tenuous and it still is. The best predictor of whether stocks are cheap is the overall market P/E ratio, period. At tops and bottoms people will always tell you this time is different for one reason or another, but it never is different, actually.

Jason T's picture

exactly... GDP growth will be horrid for the next 10 years.  

Yen Cross's picture

Stocks weren't cheap@ 13x's let alone 15x's! Every f..king forward guidance report is for lower "top line revenue".

Precious's picture

They are not cheap and they are not getting any cheaper either.

bnbdnb's picture

It doesn't matter how cheap they are or not. The major money players and countries conspire to buy what they want to inflate.

Dr. Engali's picture

The White House claims that the Mideast demonstrations aren't protesting the United States or their policies. You just can't make this shit up it sounds just like Baghdad Bob.

LouisDega's picture

PE.. That is so Louis Rukeyser. 


juwes's picture

Can someone who actually has an idea explain to me why, if this headline is to be believed, interest rates are rising so rapidly on the 30 year treasuries?  How can one claim interest rates will be kept low while simultaneously interest rates are rapidly rising as the words exit the word processor?


What if 30 year treasuries go to 8% by January?  Did the Fed still keep interest rates low?  Are they only talking about the rate that banks use for lending to one another?  If so, who the fuck cares how much banks charge each other?  I would expect the rate of interest paid by the U.S. on treasuries to bond buyers is of massively more importance.


Any bond experts here?

LawsofPhysics's picture

bad analysis, nothing of physical value, will ever be "cheap" or inexpensive again.  Once again, we have the Federal Reserve to thank for that.  The last time was WWII and before that WWI, see where this is going?

Bansters-in-my- feces's picture

Stocks are not cheap but Silver is.

Kitco shows you can lease Silver for as low as -0.430%

Why would a big bank think of giving loans to poor people ,with deals like this out there to be had.

Where do I sign up..?

billsykes's picture

There are few deals, otherwise you would be seeing unpresidented public to private LBOs.  But you are not.

16x fake earnings is not cheap.

Those "assets" and "non operating income" & "goodwill" entries on the books are just accounting trickery, legal but most are not US tax experts and accountants trained in optimizing the books.


francis_sawyer's picture

Stocks aren't as cheap as FRN's... (or, let's say, 'WILL BE', for the nitpickers out there)...

Cult_of_Reason's picture

What is the most retarded about this market is that equity traders buy stocks when they see EUR/USD move higher, and currency traders buy EUR/USD when they see equities move higher. As a result, both currency and equities spike up parabolic without any fundamental reasons.

Complete stupidity beyond stupidity moves these markets.

Yen Cross's picture

Agree, hope this helps. It explains your comment, but doesn't answer the question(s). I think we( z/h readers),have known the answers for a long time.

falak pema's picture

How do these charts fit in with the analysis provided here-below, admittedly by a biased entity :

BofA: Stocks Will Breeze Past All-Time Highs In 2013 - Business Insider

How can the fundamentals continue looking bad and YET attain such projections for 2013 asset levitation!

This is an awesome prediction, when so many people are saying QE-3 to infinity is the end of the real economy!

Something which is now becoming an issue in itself. Fiscal cliff and QE-3 pumping must have real consequences as the P/E is not looking good.Yet this bullish prediction!

I am stymied by this! 

Is it +10% as above or -30% in 2013?  as here:

“I think over the next two years or so we will probably see 1,000 in the S&P again (a decline of more than 30%).”

In the interview, Zulauf details the price of aggressive monetary accommodation by central banks:

The cost is that the fiat currency, paper currency standard, is in the final stage of the ‘super cycle.’  Fiat currency systems always collapse at the end.  We are in that stage of the super cycle where things are accelerating.

I don’t know how many years we still have, but you can assume that central banks will, as the ECB stated just recently, will do everything necessary to prevent a collapse of the system.  That means they will even finance bankrupt governments, they will finance bankrupt banks, they will finance every bankrupt entity that is important to the system.

Read more:

LawsofPhysics's picture

failure of people/analysts to understand what it means to have a fiat go to zero, reported "valuations" will go exponential as the currency value gets closer and closer to zero. an exponential relationship actually, remmeber calculus and intergration? the function esentially keeps dividing the space under the curve into smaller and smaller boxes, eventually the size of the box does not change much, but the number of boxes required to represent the same area goes exponential...  prepare.

falak pema's picture

lol, prepare and wait.

Meanwhile those who play the market...I can vouch that on the non financial selection of CAC40 you made 25% between Jan 1 and July 1 2012...and still going strong...

I hope your calculus is spot on timing wise...that is the issue. 

Lost Wages's picture

I'm a little wary of Treasury yields continuing to spike and the stock market rising, but I can't imagine they can allow interest rates to go up at all... wouldn't that crash the whole ponzi scheme? This treasury debacle and stock market rally is probably temporary and things will revert back to "normal" shortly. Then again, Dow could always go to a million. Who the hell knows? But a couple months ago everyone was saying 10 year yields would be below 1.25% and it never happened. Are we just supposed to forget that now?

Squid Vicious's picture
  1. I just unwound $75 of liquid QE baskets into my tank... thanks Ben!
JSD's picture

Neither are USD's.  What to do....

sbenard's picture


ekm's picture

Bear stearns, Lehman and the unexpected latest primary dealer, MFG.
Another primary dealer collapse right before the elections would have created mayhem, in their opinion.

This was a panic move, in my opinion.
Buying and owning open-endedly crap from primary dealers, thus providing them with the necessary cash to forward to the winning CDS users, throws the ball into congress's and future president court.
If the congress/future president orders to stop the program, they will be blamed for the next collapse of primary dealer, not the Fed. (Please do not start with the ridiculous concept of independent central bank).

It seems to me, this is Fed's revenge towards congress for blaming the Fed for everything. Quite a cold dish, I'd say, quite a cold dish.


What actually matters is what are the CDS users going to do with the new cash.?

1) Buying USTs?

2) Buying stocks?

3) Buying crude oil?

4) Buying gold and silver?


I don't know. I do not think that they will buy stocks at all. Not much left to buy.

I think volume will get lower and lower and lower, depending on how much stock is removed from the market.


Bottom line:

QE = Lower volume in the stock market.

Treeplanter's picture

I'm holding my shorts,  Europe is still sliding toward the cliff.  QE is a paper tiger at this point.  Crying cause I sold my gold and siver miners in April.  Mama told me to stay out of the stock market.  And the Chinese lady said don't forget to take your profits.

Atlantis Consigliore's picture  THE FED   QE 3  say hello to my little friend, the US Dollar,  FARCEFACE, BERFLUNKY

RiskAverseAlertBlog's picture

Very useful analysis and I quite agree with the conclusion. Given the past 25+ years of stretched valuations, it seems reasonable the great, post-'08 levitation could be extended in time some months longer, even if not much more in price remains to be gained. Those weak hands who "knew" open ended QE was coming and were frontrunning it will need some time to offload in preparation for the massive margin squeeze at hand.

icanhasbailout's picture

market has already run out of greater fools - housing bubble cleaned 'em out


all that's left are greater foolgorithms... anyone want a job at a competitor's brokerage?

slightlyskeptical's picture

I look at it a different way. The market trading at a 14 pe ratio is equivelant to a 7.14% earnings yield. With a risk free rate of say 2%, then there is still much room for stocks to expand their pe ratios. I think a pe ratio of 20 (5% earnings yield)still wouldn't be all that expensive in the current interest rate enviroment.

As for comparing stocks to their pre 1985 history, accounting treatments have changed quite drastically since then, thus earnings are less a factor than operating cash flows compared to that earlier time period (that would be a great comparative study).

Alas, there is much more going on than stock valuations. Systematic risk is everywhere you look. That is why stocks aren't already at that 20 pe level. If these risks ever become muted, which seems to be happening daily, then stocks should approach that level and likely will overshoot it. Then it will be time to sell as the central banks make all those profits disappear in the form of higher interest rates.

neutrinoman's picture

Yep, by any measure: way out of line.

- Normalized earnings

- Present earnings (peaking around $102/share S&P)

- P/E ratios (bottom at or below 10 in secular bear markets)

- Q value

- Dividend yield

Take a look at the Economist article:

The final kicker is the Dow-to-gold ratio, featured here on ZH:

YouAreBliss's picture

And getting not cheaper faster.