Chart of the Day

[Running_Man]

 

[street]

Up, up and away!

 

[aja8888]

Exactly what I am watching!

 

[NW-Bound]

Very interesting chart of the S&P Price/Sales Ratio (bottom chart).

In 1965, the P/S ratio was around 0.95, and it is now 2.6. Does that mean the stocks are now almost 3 times more expensive?

No, we should look at the P/E ratio. However, I could not find a chart of the Median P/E, only the usual composite P/E (the average). It was 18.75 in 1965, and 21.9 now. So, the stock market is not as outrageously expensive as the P/S chart implies.

But this means companies have been able to squeeze more profits out of sales than they used to.

 

[copyright1997reloaded]

Since the P/S trend has been going up for many years, what makes you think it will change NOW?

 

[NW-Bound]

Since the P/S trend has been going up for many years, what makes you think it will change NOW?

I am not sure to whom your question was directed, but in case it was meant for me, I will answer.

No, I did not make any comment about what the P/S will do. I only noted that higher profit margins (earnings to sales) do not mean that stocks are necessarily more expensive.

Companies have been able to get higher margins out of their sales than they did 50 years ago. How or why? An economist can write a book about that.

 

[copyright1997reloaded]

I am not sure to whom your question was directed, but in case it was meant for me, I will answer.

No, I did not make any comment about what the P/S will do. I only noted that higher profit margins (earnings to sales) do not mean that stocks are necessarily more expensive.

Companies have been able to get higher margins out of their sales than they did 50 years ago. How or why? An economist can write a book about that.

Meant for RunningMan. The chart is I guess supposed to show us that the market is much more expensive now than before. But I asked the somewhat cynical question as to why a trend would reverse.

 

[Running_Man]

Earnings as a matter of practice fluctuate greatly, sales have a staying power for the most part especially if you are speaking of the 500 largest companies. If the world really valued the S&P500 by earnings the fluctuation would be quite great:

Earnings for the S&P 500:
Jun 30, 2018 122.70
Dec 31, 2017 112.52
Dec 31, 2016 98.86
Dec 31, 2015 92.35
Dec 31, 2014 109.99
Dec 31, 2013 108.54
Dec 31, 2012 95.11
Dec 31, 2011 97.26
Dec 31, 2010 89.09
Dec 31, 2009 59.58
Dec 31, 2008 17.87

Now Sales By Year:
Jun 30, 2018 1,292.84
Dec 31, 2017 1,231.57
Dec 31, 2016 1,150.68
Dec 31, 2015 1,127.13
Dec 31, 2014 1,163.32
Dec 31, 2013 1,116.81
Dec 31, 2012 1,092.37
Dec 31, 2011 1,052.83
Dec 31, 2010 962.71
Dec 31, 2009 908.40
Dec 31, 2008 1,042.46

So since 2008 you have had 2.2% annual sales growth for the S&P 500. That is a very limiting force on earnings. The forward optimism on earning on the S&P 500 to give it the current PE in the face of increasing interest rates, labor costs and transportation costs is one of the signs of a top in the market place.

https://www.cnbc.com/2018/10/31/wages-and-salaries-jump-by-3point1percent-highest-level-in-a-decade.html

 

[Lsbcal]

Is there anything actionable about that P/S chart? Or is it just a curiosity?

 

[copyright1997reloaded]

Earnings as a matter of practice fluctuate greatly, sales have a staying power for the most part especially if you are speaking of the 500 largest companies. If the world really valued the S&P500 by earnings the fluctuation would be quite great:

Earnings for the S&P 500:
Jun 30, 2018 122.70
Dec 31, 2017 112.52
Dec 31, 2016 98.86
Dec 31, 2015 92.35
Dec 31, 2014 109.99
Dec 31, 2013 108.54
Dec 31, 2012 95.11
Dec 31, 2011 97.26
Dec 31, 2010 89.09
Dec 31, 2009 59.58
Dec 31, 2008 17.87

Now Sales By Year:
Jun 30, 2018 1,292.84
Dec 31, 2017 1,231.57
Dec 31, 2016 1,150.68
Dec 31, 2015 1,127.13
Dec 31, 2014 1,163.32
Dec 31, 2013 1,116.81
Dec 31, 2012 1,092.37
Dec 31, 2011 1,052.83
Dec 31, 2010 962.71
Dec 31, 2009 908.40
Dec 31, 2008 1,042.46

So since 2008 you have had 2.2% annual sales growth for the S&P 500. That is a very limiting force on earnings. The forward optimism on earning on the S&P 500 to give it the current PE in the face of increasing interest rates, labor costs and transportation costs is one of the signs of a top in the market place.

https://www.cnbc.com/2018/10/31/wages-and-salaries-jump-by-3point1percent-highest-level-in-a-decade.html

Yes. We are late cylce, where typically wages increase at a higher rate than sales (or more importantly productivity). The questions remains - how late cycle.

As of today, the SP 500 forward PE estimate is 16.41, source: P/Es & Yields on Major Indexes - Markets Data Center - WSJ.com. It was even lower two days ago, at the recent low. 16.41 isn't that rich.

Now, if we are at the true end of the cycle, it could be that the E in the estimate is too high, and will come down as reality sets in and earnings expectations are lowered. Then stock prices will fall even w/o a contracting PE ratio. If we aren't at the end of the expansion, that won't happen, and perhaps even some upside surprises will occur given that many companies recently reporting earnings have given pretty conservative go-forward statements.

That's what makes late cycle investing so "interesting".

Note that I am not saying you are wrong. Perhaps we've seen the high for this cycle. Perhaps not.

 

[Lsbcal]

Here is a chart from Shiller on P/S. It seems to show less of a rise:

link at: S&P 500 Price to Sales Ratio

Note: I thought I posted this before but must have messed up somewhere.

 

[Running_Man]

Is there anything actionable about that P/S chart? Or is it just a curiosity?

It is information about relative valuation of the stock market, while there is nothing specifically actionable about the chart, it indicates to me as does the PE-10 ratio that stock market valuations are high.

As others have stated there could be a myriad of reasons for this, among the explanations are that low interest rates have made industry consolidation cheaper as companies can hold lots of debt with little expense leading to higher earnings as you buy out the competition (for instance INBEV and Annheiser Busch controlling amazing amount of beer market.

This will tie in with the next chart I will post.

 

[Running_Man]

A nice passive index in the companies that provide growth to the entire European continent and expand around the world! This is total return including dividends!

 

[pb4uski]

^^^^ Are you having a slow day?

 

[ERD50]

A nice passive index in the companies that provide growth to the entire European continent and expand around the world! This is total return including dividends!

And your point is?

-ERD50

 

[Running_Man]

I thought it was an interesting chart, that over 30 years net all the banks in the country of Germany would have a long time negative performance. It is a comment on the state of finance in Europe I would think if banks cannot produce an investment return over 30 of the most prosperous years of history and as of right now is down over 90% from the peak.

 

[ERD50]

I thought it was an interesting chart, that over 30 years net all the banks in the country of Germany would have a long time negative performance. It is a comment on the state of finance in Europe I would think if banks cannot produce an investment return over 30 of the most prosperous years of history and as of right now is down over 90% from the peak.

OK, thanks. Your inclusion of "nice passive index", combined with some other comments you've made, made me think you were knocking passive index investing.

So it is interesting as a measure of the German Banking industry, and also illustrates why I avoid sector investing - passive, indexed, or otherwise.

-ERD50

 

[Nick12]

I don't pay too much attention to charts and the so called experts on Wall Street. Invest in Vanguard index mutual funds is my philosophy. No fund manager long term has ever come close to beating it.

 

[Lsbcal]

Here is my chart of the day. Hope Runningbum does not mind another contribution:

This is from the FED which states:

The leading index for each state predicts the six-month growth rate of
the state's coincident index. In addition to the coincident index, the
models include other variables that lead the economy: state-level
housing permits (1 to 4 units), state initial unemployment insurance
claims, delivery times from the Institute for Supply Management (ISM)
manufacturing survey, and the interest rate spread between the 10-year
Treasury bond and the 3-month Treasury bill

I think the FED has combined state graphs into one for the USA. You can see individual state graphs too. This hasn't been updated in January probably because some dumbcoffs are closing down government agencies. If this starts to slide I might reduce my stock allocation.

 

[haha]

I thought it was an interesting chart, that over 30 years net all the banks in the country of Germany would have a long time negative performance. It is a comment on the state of finance in Europe I would think if banks cannot produce an investment return over 30 of the most prosperous years of history and as of right now is down over 90% from the peak.

I definitely value this sort of chart, and usually don’t try to psychoanalyse supposed reasons for posting it. How I would try to use it is realizing that German bankers are at least as intelligent as most other bankers, there may be some opportunities here.

Ha

 

[Running_Man]

Here is my chart of the day. Hope Runningbum does not mind another contribution:

I do not know what Runningbum thinks but RunningMan likes it!

 

[Lsbcal]

I do not know what Runningbum thinks but RunningMan likes it!

Oops, sorry about that name error. Glad you like it too.

 

[Running_Man]

Lowest quality investment grade debt is not only rising as a % of total investment grade debt but investment grade debt in US to GDP has gone from GDP 10 times IGD in 2008 to 3.9 times IGD in 2018. In 1990 before the FED embarked on its long decline of interest rates the ratio was 14.5 times (BBB was about 10% of total investment grade debt.

 

[audreyh1]

Here is my chart of the day. Hope Runningbum does not mind another contribution.

Running_Man - don’t confuse them!

 

[Lsbcal]

...
Lowest quality investment grade debt is not only rising as a % of total investment grade debt but investment grade debt in US to GDP has gone from GDP 10 times IGD in 2008 to 3.9 times IGD in 2018. In 1990 before the FED embarked on its long decline of interest rates the ratio was 14.5 times (BBB was about 10% of total investment grade debt.

I'm not sure I follow your statement. Just eyeballing it the below BBB IG bonds look like they were about 30% of total and now 50% of total. Total being the BBB and below grades.

Now I would want to know more to use this information in an intelligent way. Like how much above-BBB bonds there are, and how the durations of those below IG bonds are spread out. Then I'd want to know if experts consider this a problem and why or why not. I suppose that the spreads come into this too. If the BBB spread is wide versus Treasuries then investors are being paid more for the extra risks. Here is one Fed chart of the BBB spread (red line) and it doesn't look like the spread is particularly wide at this point:

Luckily at this time I hold only a modest amount of short term IG bonds. But this sort of chart you showed Running Man would have me more concerned if I held intermediate IG bonds.

I looked at VFIDX (what I would probably hold if I weren't in TIPS) and it has about 15% in BBB and below. Looking a few web sources the term "investment grade" seems to be applied to BBB and below. But the VFIDX fund is called Vanguard Intermediate IG Bond fund even though it only a modest exposure to BBB and below. Confusing.