Warning: Declaration of action_plugin_safefnrecode::register(Doku_Event_Handler &$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/safefnrecode/action.php on line 14

Warning: Declaration of action_plugin_blog::register(&$contr) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/blog/action.php on line 0

Warning: Declaration of action_plugin_blockquote::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/blockquote/action.php on line 0

Warning: Declaration of action_plugin_include::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/include/action.php on line 0

Warning: Declaration of action_plugin_popularity::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/popularity/action.php on line 0

Warning: Declaration of action_plugin_redirect::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/redirect/action.php on line 0

Warning: Declaration of action_plugin_captcha::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/captcha/action.php on line 0

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Objective valuation of the stock market [ClearOnMoney]
Top

Site

About
Contact

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Sitemap

Profile

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Trace:
Objective valuation of the stock market

Reference

Main
Updates
Schedule

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Commentary

Objective valuation of the stock market

22 Mar 2010 by Jim Fickett.

William Hester at Hussman Funds shows in a post today that current US equity prices assume record-setting profit margins in the future.

For the theory behind evaluating the current price of equities, two top sources are Robert Shiller, of Irrational Exuberance fame, whose cyclically-adjusted price/earnings ratio (CAPE) is widely applied, and Andrew Smithers, who writes on CAPE and Tobin's Q – the ratio of price to book value for the market as a whole – on his website and in his recent book Wall Street Revalued.

For current commentary on market valuation, the two best sources I've found are William Hester of Hussman Funds, who has innovative and pragmatic analysis monthly, and Jeremy Grantham of GMO, who provides not only good insights into valuation, but suggestions on what to do about it, in his quarterly letters.

Here are a few key passages from Hester's latest analysis, which suggests that current valuations depend on unrealistic projections for profit margins. For the graph mentioned, click through to the original article.

An Update on Valuation and Forward Earnings Assumptions.

[on margins]

Corporate earnings typically grow more quickly than the economy when coming out of a recession, especially when profits take the kind of hit that they have experienced the last couple of years. But the ratio of expected earnings growth over the next few years versus expected economic growth still sits far outside of the average ratio of the two …

While earnings growth expectations are steep, sales growth expectations are more modest. … The difference between the growth rates of the top and bottom lines is implies a forecast for sharply rising operating profit margins. … Last October, analysts were about half way to pricing in profit margins that matched the record levels of 2007. Now, they are just about there.

The current [forward P/E] multiple is about 14.8. As John Hussman has noted, the long-term average P/E ratio based on forward operating earnings is about 12. Taking the 14.8 multiple at face value implicitly assumes that the near-record profit margins assumed by analysts are now the long-term norm. …

[on the yield curve]

The graph below highlights the strength of the yield curve in helping to forecast economic recessions since 1960, and also demonstrates how the curve's track record was spottier in earlier data. …

The period surrounding the 1937 recession is interesting to note. The economy was showing clear signs of recovery by most measures during the early part of 1937 – it had recovered about 80 percent of the output lost from 1929 through 1933. (An exception was the decline in the unemployment rate which occurred at a stubbornly slow rate.) But the economy would turn down in the spring of 1937 – without warning from the slope of the yield curve - and the stock market fell by 50 percent. If today investors place their confidence in an inverted curve as a perfect forecaster of recession, then they must also place their full confidence in the idea that this is a standard post-war recovery and the current period shares none of the structural weaknesses that existed during the 1930's. …

[putting it all together]

Although robust and sustainable stock returns have often followed periods where the yield curve was steep, these periods typically coincided with valuations far below current levels.

On a lighter note, we learn in John Hussmans weekly commentary about an early incident that may have taught him something about risk management.

When I was a kid, I used to make up different Rube Goldberg machines and put them together for fun. … This, to my mom, was much preferred to my attempt to ride down the stairs in my top dresser drawer with my best friend Jimmy. In hindsight, that was a Bad Idea, since the drawer burst into pieces and we found ourselves tumbling to the floor.