Are stocks overvalued? CAPE vs 10 yr div yield

[haha]

Are Stocks Overvalued?: CAPE vs. Dividends – Mebane Faber Research – Stock Market and Investing Blog

Piece by Mebane Fisher that shows how CAPE or Shiller PE10 correlates very closely with price divided by 10 year average of dividends.

So maybe somebody doesn't like CAPE, but it agrees with almost every valid value measurement.

Ha

 

[Brooks Saddle]

Yes stocks are over valued... perhaps. Just maybe. Then again maybe they have more bull left in them. I could get edgy just thinking about it which is why I have an asset allocation I'm content with and I don't have to think about it.

To each their own.

 

[haha]

Yes stocks are over valued... perhaps. Just maybe. Then again maybe they have more bull left in them. I could get edgy just thinking about it which is why I have an asset allocation I'm content with and I don't have to think about it.

To each their own.

I am really not very interested in your reflex opinions.

I posted this only for people who like data, interestingly presented, by an intelligent man. I tend to appreciate this when others post information or novel ideas, so I try to reciprocate.

Others can certainly ignore it.

Ha

 

[NW-Bound]

"Please God, just one more stock bubble" - Bumper Sticker.

This came out in 2003. Then the buyers of this sticker got another chance in 2008. This time, I did manage to be a bit more proactive, but in hindsight could have done better.

Oh, will I be able to overcome greed and fear the next time?

 

[brewer12345]

I have a hard time with determining whether indicies are overvalued. Too ethereal. Individual stocks are easier. I struggle to find attractive value propositions to commit new cash to, which tells me that things are not stoopidly cheap. OTOH, there are a number of names I am willing to hold in size at present valuations. That tells me that valuations have not shot the moon just yet. When I start agonizing about paying cap gains taxes despite wanting to sell appreciated stocks, that is when I know it is time to back away. Not there yet, IMO.

 

[NW-Bound]

...Not there yet, IMO.

+1. From one market timer to another.

By the way, Buffett is reportedly having trouble finding companies to buy. However, the recent disclosure shows he bought several billions worth of XOM, and XOM is near record high.

 

[haha]

I have a hard time with determining whether indicies are overvalued. Too ethereal. Individual stocks are easier. I struggle to find attractive value propositions to commit new cash to, which tells me that things are not stoopidly cheap. OTOH, there are a number of names I am willing to hold in size at present valuations. That tells me that valuations have not shot the moon just yet. When I start agonizing about paying cap gains taxes despite wanting to sell appreciated stocks, that is when I know it is time to back away. Not there yet, IMO.

Yes, I bought one today. Still, that is not relevant to the question of whether the indices are high, relative to history, and relative to the returns experienced over the following 10 years historically. Nothing is better for this purpose.

It's rare that all stocks are too high at once. Coming into the 1999 high, I bought some really cheap tobacco stocks, which I then held for may years

Ha

 

[gcgang]

I posted this only for people who like data, interestingly presented, by an intelligent man.

Ha

Intelligent, and soooo good looking!

 

[NW-Bound]

With Yellen's continuation of QE for the near future, the market will keep on rising for some time yet. My stock AA is at 67% and I will let it rise for a while.

Watch the emerging markets. They were hammered earlier in the year (Apr-May) when there was talk of the Fed tapering off QE. These have been slowly recovering.

 

[NW-Bound]

And if we think the economy is lousy, we should also remember that they do not call the stock market a leading indicator for nothing.

 

[haha]

My takeaway from this discussion is, don't just talk Ha, do something. So I bought a nice slug of way OTM SPY puts this morning. Won't lose much if little happens, and won't make anything unless the bullish consensus breaks hard. But I would feel really stupid if I had started this thread and not taken some action to cover the tail risk. Which unlike some traders here, I see as considerable now.

Insurance for a retail investor is costly, but selling in taxable accounts is too, and you pay the tax cost whether something happens or not.

Mainly I really want to avoid $300-$400-$500K drawdowns. I am not convinced that there is any rule that these will always bounce back.

Ha

 

[NW-Bound]

While a 10% correction may happen anytime, I see no cataclysmic risks like in 2003 with the dotcom meltdown and in 2008 with the financial shenanigan.

Well, you pays your money and you takes your chances. If you have shared your equities AA, I have not seen it. Mine is 67% currently.

 

[haha]

While a 10% correction may happen anytime, I see no cataclysmic risks like in 2003 with the dotcom meltdown and in 2008 with the financial shenanigan.

A pretty bold statement! I make no judgment, I just buy insurance because my assessment is that there is a non-trivial risk in today's market. BTW, I support your judgments, and your absolute right as an American, to act on those judgments. I am in no way threatened by your different opinion. After all, the huge majority of investors also hold your opinion.

Sometimes people start threads just to provoke discussions, from whatever motivation. I mainly start threads to try to clarify my ideas, and to see how they are approached by other members.

I recently have published my AA, but it gets complicated when you start hedging, so I will likely no longer do this. No one cares anyway, except as a lever to try to criticize a position.

Ha

 

[NW-Bound]

My posts were not to challenge you, as I respect all individual opinions particularly the ones different from mine. When everyone thinks the same, we are at the highest risk. I was genuinely curious about your AA, because I think my 67% stock is reasonably safe AA in the current atmosphere.

Compare to other people, I would have no qualms about liquidating a lot of my stocks if I sense danger. A large portion of my portfolio is in before-tax savings, which I would liquidate first without tax liabilities. Perhaps that's the difference between us that makes you more leery of a market downturn.

 

[Apex1]

Undervalued or overvalued really doesn't concern me too much.......... in 30 years time, it is just a blip in the grand scheme of things. If stocks double every 10 years (or worth 8x's in 30years), what do I care if lose out on 20-30% and mis-timed the market? Buy baskets of quality companies that have the best chance of standing the test of time and a history of improving earnings. I will never sell with exception of tax loss harvesting or unless I need to draw down for living expenses. That's my strategy and I'm going to the grave with it.

 

[NW-Bound]

But I think this is a thread for people who like to overcome greed and fear, or who want to go against the masses.

 

[haha]

But I think this is a thread for people who like to overcome greed and fear, or who want to go against the masses.

I have no way to pretend that I am not part of "the masses". I say, overall, we are the masses.

Ha

 

[haha]

My posts were not to challenge you, as I respect all individual opinions particularly the ones different from mine. When everyone thinks the same, we are at the highest risk. I was genuinely curious about your AA, because I think my 67% stock is reasonably safe AA in the current atmosphere.

Compare to other people, I would have no qualms about liquidating a lot of my stocks if I sense danger. A large portion of my portfolio is in before-tax savings, which I would liquidate first without tax liabilities. Perhaps that's the difference between us that makes you more leery of a market downturn.

I didn't see this statement. yes, it make a big difference. I would also sell down severely if my stocks were in non-taxable accounts, rather than try to hedge.

Ha

 

[NW-Bound]

I have no way to pretend that I am not part of "the masses". I say, overall, we are the masses.

Ha

Well I would say the masses are buying!

I have already bought, and am waiting to sell. But same as brewer, I do not think it's time yet.

 

[clifp]

I also added to my hedges today,. Selling NY Times short (NYT) to go with Netflix NFLX which stubbornly continues to go up. I have short order for 2 additional stocks but weren't executed.

My preferred hedging strategy is writing covered call, unfortunately the premium for calls is so small now daysthat I don't think it is very effective. For instance, I wrote a 100 call on UPS for a $1 when it was trading 90 and quickly zoomed up to a $100. Oh well I am happy selling at the price.just expected it to take longer.

My portfolio is up 20% year so if it lags by a few percent I don't care too much.

 

[RetireAge50]

My portfolio (mixed asset classes) has earned about 9%year over the last 24 years. Seems about right if not low. Expect market to double in 8 or 9 years so I'm making no changes.

 

[NW-Bound]

...
My preferred hedging strategy is writing covered call, unfortunately the premium for calls is so small now daysthat I don't think it is very effective. For instance, I wrote a 100 call on UPS for a $1 when it was trading 90 and quickly zoomed up to a $100. Oh well I am happy selling at the price.just expected it to take longer...

I have written a few covered calls this year on stocks that I was skeptical that they would continue their momentum, and ended up leaving too much money on the table. I don't have any outstanding right now. My equities AA would have been quite higher than 67% if I just let them be. Oh well.

Anyway, here's an interesting except from the Web.

Of the 463 S&P 500 companies that have announced earnings so far, 75 percent have topped analysts’ income forecasts, data compiled by Bloomberg showed. Profits for the gauge increased 4.9 percent in the third quarter and will gain 5.8 percent in the final three months of the year, estimates compiled by Bloomberg show.​

 

[Fermion]

+1. From one market timer to another.

By the way, Buffett is reportedly having trouble finding companies to buy. However, the recent disclosure shows he bought several billions worth of XOM, and XOM is near record high.

There are plenty of good companies for Buffett to buy:

Apple, Corning, Cisco, Intel

They all have tons and tons of cash and huge free cash flow. The only thing he would need to do is get rid of the dividend and do a 200 for 1 reverse stock split so they trade for $100,000 a share.

 

[Running_Man]

To me there is no doubt that stocks are extremely vulnerable as the article makes clear. However, as long as the Fed continues to purchase government issued debt at the rate it is doing it will tend to support stocks in the overvalued range. Any asset class can become extremely overvalued until the point comes where the support cannot hold.

The federal government really had a deficit of 860 million not 680 million in 2013 fiscal year if you consider the amount of paybacks by Fannie Mae and others from 2008 crisis. This deficit spending by the federal goveernment along with the AFA will tend to really help companies as corporate health care costs for retirees and employees is going to drop very quickly as a cost for major American companies, which will lead to larger dividend increases.

Yellen appears to be starting her term by impicitly stating support of the stock market as the key of her model. Now the best thing to do is stick to your asset allocation model and when it is time to adjust you adjust. If you were a follower of Benjamin Graham and his book the Intelligent Investor to decide on allocating between 25 and 75 % stocks, I would believe his allocation would be somewhere between 25 and 50 percent, and moving towards the lower percentage. I continue to believe Japan 10 long term bonds will give the first signal that this goverment valuation support system is ending, haven't done so yet, until then enjoy the climb up!

Several of my dividend stocks have been incredible in gains obtained in the past year (VFC, MMP, MO) but dividend increase are gettings larger as well.

 

[Gatordoc50]

I have no idea whether we are overvalued or not. But I have reduced my equity exposure to 65/15/20 cash, Additionally, I just sold a vacation rental and closing is in 3 weeks. I'll add that to cash (CDs) pile which will effectively lower my equity percentage even more.