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04-09-2011, 02:17 PM
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#1
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Posts: 5,072
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Stock Market Overvalued?
Quote:
wo heavyweights of financial analysis believe they hold the answer. Robert Shiller, the Yale University economist who correctly predicted the bursting of the stock market bubble in 2000 and the housing crash that started in 2006, has data that show stocks are pricey by historical measures.
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Is The Market Overvalued? - WSJ.com
The late 1920's and the late 1990's tech bubble sure look like a similar pattern!
S&P 500 PE Ratio Chart
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04-09-2011, 02:33 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2003
Posts: 5,105
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There were a couple of posts here about that P/E observation recently.
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Sometimes death is not as tragic as not knowing how to live. This man knew how to live--and how to make others glad they were living. - Jack Benny at Nat King Cole's funeral
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04-09-2011, 03:31 PM
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#3
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2006
Posts: 7,733
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I have little doubt that on an historically basis stocks are overvalued. However the real question is what about on a relative basis? Are they overvalued compared to bonds, real estate, oil etc? I honestly don't know.
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04-09-2011, 03:35 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Sep 2005
Posts: 5,381
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The scariest thing about the WSJ article is the deja vu I got reading how Mr. Bianco is adjusting traditional valuation metrics to fit his bullish thesis. Very dotcomesque.
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Retired early, traveling perpetually.
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04-09-2011, 03:52 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2003
Location: Hooverville
Posts: 22,983
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Quote:
Originally Posted by clifp
I have little doubt that on an historically basis stocks are overvalued. However the real question is what about on a relative basis? Are they overvalued compared to bonds, real estate, oil etc? I honestly don't know.
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I would guess that comparing a commodity like oil to stocks is meaningless, except that historically high oil prices are bad news for economic activity and for stocks. There is little doubt that in many bombed out areas residential RE is cheaper than the S&P, if some sort of PE facsimile were made using net rents/prices. But one is hands on, the other passive, different buyers and sellers in the two markets, and various other things I think make them not easily compared, except perhaps by a venturesome hands on person who might do that.
While comparing to bonds seemingly makes sense, the trouble is that that can be a risky game. Even fairly long bonds have a finite duration, while at times of low yields stocks have a verrry long effective duration. John Hussman presents data that convince me, anyway, that stock bond ratios and indicators derived from them have no predictive value.
Actually, low interest rates rather than being an argument for higher PEs might be taken to be an argument to get the heck out, as bond interest rates are asymmetrically bounded.
Ha
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"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
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04-09-2011, 03:56 PM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Posts: 5,381
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Quote:
Originally Posted by haha
as bond interest rates are asymmetrically bounded.
Ha
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Fancy way of saying "more downside than upside" . . . I agree. I'm shortening duration wherever I can. That means trimming stocks, too. Just sold another slug this week.
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Retired early, traveling perpetually.
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04-09-2011, 04:30 PM
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#7
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Thinks s/he gets paid by the post
Join Date: Dec 2004
Location: Minneapolis
Posts: 4,455
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It's not a bubble according to Mr. Bianco if "operating expenses" are used to calculate P/E.
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May we live in peace and harmony and be free from all human sufferings.
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04-09-2011, 04:42 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Sep 2009
Location: Hong Kong
Posts: 1,688
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Quote:
Originally Posted by clifp
I have little doubt that on an historically basis stocks are overvalued. However the real question is what about on a relative basis? Are they overvalued compared to bonds, real estate, oil etc? I honestly don't know.
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I agree that US stocks look a bit overvalued.
The same is not true of stocks in all market - a number of emerging markets are selling at multiples which are well below their long term averages (Hong Kong and China among others).
I'm always a bit suspicious about using relative values as a justification for an asset being cheap or expensive if used in isolation - too often its used as a basis for claiming that something that is, in absolute terms, expensive represents good value. (I apreciate that this goes further than the comment in your post.)
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Budgeting is a skill practised by people who are bad at politics.
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04-09-2011, 05:04 PM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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Quote:
Originally Posted by clifp
I have little doubt that on an historically basis stocks are overvalued. However the real question is what about on a relative basis? Are they overvalued compared to bonds, real estate, oil etc? I honestly don't know.
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If we look at the dollar as just an intermediate to compare the relative values of different assets, we already do not have a clear answer.
Now, if we do not want any of the above, as some have indicated their skepticism, and just hold our capital in dollars, then heck, what is the value of the dollar with respect to equities? A corporation represents hard assets, intellectual properties, an income stream. And the dollar? A piece of paper, backed by faith in the US government of course!
And what is the relative value of the dollar with respect to the Euro, British pound and other major currencies?
Perhaps I just answered my own question as to why the market keeps bidding up gold.
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"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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04-09-2011, 05:12 PM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2006
Location: west coast, hi there!
Posts: 8,808
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We are not at valuation extremes. There is a big grey area and we are in it -- most of the time we should expect to be in it. Schemes to finely tune AA's based on valuation alone have a poor track record.
Just thought you'd like to know that .
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04-09-2011, 05:18 PM
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#11
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Yeah, looking back, the times it was clear that we were outside the gray area band were during the tech bubble of 2000, and the housing bubble of 2007, and of course the crash of 2009.
How did I fail to get all out, and then all in at these historical moments? Of course, being a CMT, I did a bit of selling and a bit of buying, but not all the way.
After 2000, I remembered seeing this bumper sticker on the road: "Please God, just one more bubble". I wonder if the car owner was able to time the later housing bubble a bit better.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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04-09-2011, 05:27 PM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: May 2006
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I think failure to time the last two bear markets is understandable because most of us have not developed a nice algorithm that will respond to this stuff. Seat of the pants guesses -- not the smartest way to do things. My guess is that there are some algorithms out there that backtest well but are proprietary. The ones you hear about a lot like moving average based ones are kind of hokey and have 10 year periods where they don't work as well as buy-hold.
I've spent that last 2 years looking at algorithms and backtesting. I'll see how it goes if there is another nasty bear market.
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04-09-2011, 05:59 PM
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#13
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I don't need no fancy algorithms, because I don't get upset if some junk is flying and I don't own any of it.
Here is a short interview with a guy who sees it as I do, fund manager Donald Yacktman.
Kiplinger.com
One class that while not giveaway cheap, is at least priced to give an investor a solid return is very high quality, low debt, high ROA, high market share and high barrier to market entry US stocks. These stocks will pay a growing dividend, though not necessarily an unusually high one. They will be cash generative and largely self financing
This doesn't mean an S&P index fund.
Ha
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"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
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04-09-2011, 06:08 PM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I was only joking about trying to time the market better. I do not try to predict the next bubble to get in on it either. I do not believe in any fancy algorithm, because the market and the influencing political events are not predictable and will foil anything that one can devise. I believe one must be flexible and act as events unfold.
I simply wish I had a stronger conviction to get out of a bubble, and perhaps even the courage to short it, once it has been formed and showed signs of deflating. I am fond of telling the story of how the late Templeton, despite being a value investor and did not invest in tech stocks, still made himself $80M by shorting some dotcoms by being able to recognize the tech bubble being deflated.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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04-09-2011, 06:38 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by NW-Bound
I was only joking about trying to time the market better. I do not try to predict the next bubble to get in on it either. I do not believe in any fancy algorithm, because the market and the influencing political events are not predictable and will foil anything that one can devise. I believe one must be flexible and act as events unfold.
I simply wish I had a stronger conviction to get out of a bubble, and perhaps even the courage to short it, once it has been formed and showed signs of deflating. I am fond of telling the story of how the late Templeton, despite being a value investor and did not invest in tech stocks, still made himself $80M by shorting some dotcoms by being able to recognize the tech bubble being deflated.
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It is very hard to do. In 1998 and 1999 and early 2000 I was busy buying puts on techs, but I got tired of losing and didn't roll over just about when the bottom fell out. I did avoid being long the sector, and also made money by investing in tobacco and a few other sectors which were very depressed. Unlike now, a money flood was not causing everything to go up, so all the money being thrown at junky internet stuff also caused depressed demand for what at the time was derisively called "old economy stocks". Right, like smokers are going to stop smoking and eaters are going to stop eating and drinkers stop drinking because we got this here internet...
Ha
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"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
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04-09-2011, 06:42 PM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I would say that the most obviously overvalued asset class at the moment is junk bonds and leveraged loans. I have been seeing stupidly-underwritten stuff flying off the shelves and not at what I would call terribly cheap prices. If this trend continues, we may see this sort of thing get transmitted to the equity market in short order via increased M&A and leveraged buyouts.
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Ezekiel 23:20
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04-09-2011, 06:42 PM
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#17
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Recycles dryer sheets
Join Date: Nov 2010
Location: Houston/Galveston area
Posts: 163
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I'm in the process of moving my 401K to an IRA with a different mutual fund company. This is about 40% of my invested assets. I'm going to put it in one of their money market funds and DCA back to my asset allocation. Not being a sophisticated investor this market seems very weird to me, and now that I'm retired everything looks overpriced, stocks included.
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04-09-2011, 06:55 PM
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#18
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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Quote:
Originally Posted by brewer12345
I would say that the most obviously overvalued asset class at the moment is junk bonds and leveraged loans. I have been seeing stupidly-underwritten stuff flying off the shelves and not at what I would call terribly cheap prices. If this trend continues, we may see this sort of thing get transmitted to the equity market in short order via increased M&A and leveraged buyouts.
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Intersting observation Brewer. In that case, pigs really will fly.
Ha
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"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
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04-09-2011, 08:14 PM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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I'm of the opinion that I personally know very little about the stock market and shouldn't be trusted to manage someone's money (maybe even my own). They'd say, "where did it go ", and I'd say "Yikes, I dunno...".
I have investments, sure, but I lately have been building a cash cushion to help ride out the inevitable squalls that will occur once I FIRE later this year.
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04-09-2011, 08:56 PM
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#20
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Thinks s/he gets paid by the post
Join Date: Sep 2009
Location: Hong Kong
Posts: 1,688
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Quote:
Originally Posted by brewer12345
I would say that the most obviously overvalued asset class at the moment is junk bonds and leveraged loans. I have been seeing stupidly-underwritten stuff flying off the shelves and not at what I would call terribly cheap prices. If this trend continues, we may see this sort of thing get transmitted to the equity market in short order via increased M&A and leveraged buyouts.
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That's consistent with what is happening in the debt markets with a drift back towards lighter covenants.
Incidentally, the local paper carried an article this morning pointing out that developed markets as a whole are currently trading well below long term historical averages and developing markets are even lower. If the US is expensive, this suggests that there may be some decent value elsewhere.
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Budgeting is a skill practised by people who are bad at politics.
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