The Market is Now Fairly Valued

[Patrick]

Quote:

Originally Posted by twaddle Remember Bernanke's 100% MO portfolio? Maybe a 50/50 mix of MO/BUD would be a good play in this environment....

Buy Ultrashort S&P 500 (SDS) now, then when the market turns, buy Ultra (long) S&P 500 (SSO).

[Dawg52]

Quote:

Originally Posted by twaddle Remember Bernanke's 100% MO portfolio? Maybe a 50/50 mix of MO/BUD would be a good play in this environment....

I own MO and drink Bud. Pretty close to your suggestion.

[megacorp-firee]

Quote:

Originally Posted by Dawg52 I have done the same but it sure is a pisser to be in this environment so soon after retiring. Some can easily look the other way and assume the markets will roll right on to another bull market, but I fear years of flat returns as we saw in the late 60's through the 70's. Oh well, I've done all I can do. I have several years of cash to live off of along with dividend checks filling up the mail box. Hopefully the plan will work. Just gonna have to make a few extra trips to the liquor store.

Fully understand Dawg and agree ... we've done what we can to get us to this point. No sense in agonizing over something you can't control. We do have control over the buckets and how much we spend.
It is bad timing in my case also. I've been ER'ed for 9 months now. It would have been a lot better if I had a few years of up markets to start off an ER. This environment will really test my plan.
In any case, I've loaded up with a couple of bottles of cognac and scotch (in my budget ) myself.

[chinaco]

Once it is fairly valued, the next stop is under-valued. Then months of fear and loathing. And finally the path back to upward movement.

The S&P 500 barely made it back to the tech bubble high.

[W2R]

OK, confronted by this blue light special of all blue light specials, my will has crumbled. I just couldn't stand doing nothing until later in the week, when conditions might change, so this morning I moved a couple of five figure amounts from cash into Vanguard Total Stock Market Index (VTSMX) and Vanguard FTSE All-World Ex-US Stock Index (VFWIX).

Clearly, that means that the market is still over-valued, and about to drop precipitously and stay there indefinitely.

[al_bundy]

i still don't understand how the stock market can be fairly valued? what is the fair value of the sp500?

in the last 50 years it has seen PE's of 7 through 40

[Patrick]

Quote:

Originally Posted by Want2retire OK, confronted by this blue light special of all blue light specials, my will has crumbled. I just couldn't stand doing nothing until later in the week, when conditions might change, so this morning I moved a couple of five figure amounts from cash into Vanguard Total Stock Market Index (VTSMX) and Vanguard FTSE All-World Ex-US Stock Index (VFWIX). Clearly, that means that the market is still over-valued, and about to drop precipitously and stay there indefinitely.

You look like a genius right now with all of the indexes up.

[Art G]

Quote:

Originally Posted by Patrick You look like a genius right now with all of the indexes up.

Not really. She will get the close of business's mutual fund prices as her buy in. She would have been a genius if she had done it yesterday.

[W2R]

Quote:

Originally Posted by Art G Not really. She will get the close of business's mutual fund prices as her buy in. She would have been a genius if she had done it yesterday.

Exactly! See my lament in another thread about that. I bought the equities before dawn this morning, but the sale won't go through until tonight at the earliest. I guess 40 years from now I won't care. No, I will but only because it is aggravating.

On the other hand, the market is still in the 11,000's, and it could still take a dive even lower.

[Milton]

Quote:

Originally Posted by twaddle Time to shine the bat signal! Tobin's Q now indicates that the market is fairly valued. I think. The fed just released 2007Q4's flow of funds report, so I decided to calculate Tobin's Q according to this site: The Q-Ratio: Valuing the Stock Market Q recently reverted to its long-term mean. Thought you might want to know.

OMG, you're right! My Ouija board confirms that now is the time to buy!

[Art G]

Quote:

Originally Posted by Want2retire Exactly! See my lament in another thread about that. I bought the equities before dawn this morning, but the sale won't go through until tonight at the earliest. I guess 40 years from now I won't care. No, I will but only because it is aggravating. On the other hand, the market is still in the 11,000's, and it could still take a dive even lower.

Not to worry, I think the market gives back a bit this afternoon.

[twaddle]

Quote:

Originally Posted by al_bundy i still don't understand how the stock market can be fairly valued? what is the fair value of the sp500? in the last 50 years it has seen PE's of 7 through 40

The basic idea is that P/E isn't very meaningful. Earnings fluctuate depending upon a lot of things, like where we are in the business cycle, so P/E can be deceptive.

So Tobin (a respected economist) came up with a method that is completely independent of P/E. He just looks at the ratio of the total value of all securities to their replacement value.

That ratio is now at its long-term historic mean value. That seems "fair" to me, but of course the market can get well above or below its fair value. Especially if we get greedy or fearful.

[al_bundy]

i still don't get it, the value of a stock is based on future earnings. wall street is usually a year or so ahead. right now the trading is based on estimated 2008 eps. and these days so many companies are mostly goodwill that replacement value is meaningless.

pretty much every good company these days gets it's value from patents, branding or the people that work there. MS can buy Yahoo but if all the good people leave it's wasted money since there is really nothing behind yahoo buy the brand. same with google. the value is in the employees and you have to keep them happy

[twaddle]

Quote:

Originally Posted by al_bundy i still don't get it, the value of a stock is based on future earnings. wall street is usually a year or so ahead. right now the trading is based on estimated 2008 eps. and these days so many companies are mostly goodwill that replacement value is meaningless.

Again, the ratio is now at its long-term historic mean. So it doesn't really matter if the replacement value is overstated, as long as it has been calculated consistently over the last 55 years, which I believe it has been.

FWIW, Tobin says that fair value is below a ratio of 1 precisely because he thinks "net worth" is overstated.

As of the end of last quarter, the replacement value was $16 trillion and the market value was $12 trillion according to the fed.

If we're in a recession, we'll see P/E ratios get higher even as the market crashes because earnings will get lower faster. Opposite happened during the business cycle peak -- we saw relatively low P/E values because earnings were at a peak. In other words, one year's "E" doesn't tell you much.

[al_bundy]

but how do you value a company like Yahoo or Microsoft for replacement value? if the people are gone you can replace the buildings, computers and source code but bringing in new people is useless because it's going to take years for them to figure out what the people who left wrote. same with almost every other company in the SP500 where the value is from what the people create.

[twaddle]

Your argument is basically that net worth understates value because we've transitioned to a service economy, right? If that's the case, then wouldn't we expect fair value to be at an even higher ratio? So, the market is undervalued by your argument.

Obviously, the concept of "fair value" is a slipery one. Tobin's q is just one metric, but I thought it was cool that it finally turned green after showing that the market has been overvalued for the last 15 years or so.

It could be worse. This could be the year 2000 when the market was waaaaay overvalued by any metric you wanted to look at.

[haha]

Quote:

Originally Posted by twaddle Your argument is basically that net worth understates value because we've transitioned to a service economy, right?

Andrew Smithers explicitly addresses that argument. Q is for the entire set of firms, not an individual firm. And for the entire set of firms, ROE must over time come into equilibrium with the cost of capital, as advantages that do not require capital get competed away.

It is true that profit margins and ROI have been high for some time; so maybe the process of getting to equilibrium is no so sure after all.

Ha

[Art G]

Quote:

Originally Posted by twaddle Your argument is basically that net worth understates value because we've transitioned to a service economy, right? If that's the case, then wouldn't we expect fair value to be at an even higher ratio? So, the market is undervalued by your argument. Obviously, the concept of "fair value" is a slipery one. Tobin's q is just one metric, but I thought it was cool that it finally turned green after showing that the market has been overvalued for the last 15 years or so. It could be worse. This could be the year 2000 when the market was waaaaay overvalued by any metric you wanted to look at.

If I can take a shot at this, IF companies are now using questionable accounting methods vs. what has been used in the past, wouldn't it be fair then to state that current numbers are skewed?

[twaddle]

Quote:

Originally Posted by Art G If I can take a shot at this, IF companies are now using questionable accounting methods vs. what has been used in the past, wouldn't it be fair then to state that current numbers are skewed?

Sure, and I haven't looked into the fed's methodology, but fed economists tend to be more rigorous than Joe CFO.

Take it with a grain of salt -- one indicator in a sea of indicators. Other economists have attempted to normalize earnings in an effort to create a better P/E, for example.

Also, the market doesn't suddenly slam on the brakes and say "hey everybody, we're fairly valued now!" Like I said, we could easily see a 50% discount from here based on historical precedent.

The good news is that if you believe the market is currently fairly valued, long-term returns going forward should be a bit better than if you start from an extremely overvalued condition.

[Marquette]

Quote:

Originally Posted by Art G If I can take a shot at this, IF companies are now using questionable accounting methods vs. what has been used in the past, wouldn't it be fair then to state that current numbers are skewed?

A chartist that doesn't trust the charts. I think I figured out what went wrong with your call on HUM