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Stock Market Overvalued?
Old 04-09-2011, 03:17 PM   #1
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Stock Market Overvalued?

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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.
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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Old 04-09-2011, 03:33 PM   #2
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There were a couple of posts here about that P/E observation recently.
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Old 04-09-2011, 04:31 PM   #3
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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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Old 04-09-2011, 04:35 PM   #4
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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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Old 04-09-2011, 04:52 PM   #5
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Originally Posted by clifp View Post
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.
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.

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Old 04-09-2011, 04:56 PM   #6
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as bond interest rates are asymmetrically bounded.

Ha
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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Old 04-09-2011, 05:30 PM   #7
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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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Old 04-09-2011, 05:42 PM   #8
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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.
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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Old 04-09-2011, 06:04 PM   #9
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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.
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 04-09-2011, 06:12 PM   #10
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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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Old 04-09-2011, 06:18 PM   #11
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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.
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Old 04-09-2011, 06:27 PM   #12
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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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Old 04-09-2011, 06:59 PM   #13
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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.


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Old 04-09-2011, 07:08 PM   #14
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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.
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Old 04-09-2011, 07:38 PM   #15
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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.
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...

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Old 04-09-2011, 07:42 PM   #16
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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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Old 04-09-2011, 07:42 PM   #17
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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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Old 04-09-2011, 07:55 PM   #18
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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.
Intersting observation Brewer. In that case, pigs really will fly.

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Old 04-09-2011, 09:14 PM   #19
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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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Old 04-09-2011, 09:56 PM   #20
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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.
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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