Posts Tagged ‘Q ratio’

# The Q Ratio Indicates a Significantly Overvalued Market

### The Q Ratio Indicates a Significantly Overvalued Market

Courtesy of Doug Short

Note from dshort: The charts below have been updated based on the September 17th Federal Reserve Flow of Funds release for Q2. I’ve also used the Vanguard Total Market ETF for extrapolating the Q Ratio up to the present.

The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It’s a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies. The data for making the calculation comes from the Federal Reserve Z.1 Flow of Funds Accounts of the United States, which is released quarterly for data that is already over two months old.

The first chart shows Q Ratio from 1900 through the first quarter of 2010. I’ve also extrapolated the ratio since June based on the price of VTI, the Vanguard Total Market ETF, to give a more up-to-date estimate.

Interpreting the Ratio

The data since 1945 is a simple calculation using data from the Federal Reserve Z.1 Statistical Release, section B.102., Balance Sheet and Reconciliation Tables for Nonfinancial Corporate Business. Specifically it is the ratio of Line 35 (Market Value) divided by Line 32 (Replacement Cost). It might seem logical that fair value would be a 1:1 ratio. But that has not historically been the case. The explanation, according to Smithers & Co. (more about them later) is that "the replacement cost of company assets is overstated. This is because the long-term real return on corporate equity, according to the published data, is only 4.8%, while the long-term real return to investors is around 6.0%. Over the long-term and in equilibrium, the two must be the same."

The average (arithmetic mean) Q ratio is about 0.70. In the chart below I’ve adjusted the Q Ratio to an arithmetic mean of 1 (i.e., divided the ratio data points by the average). This gives a more intuitive sense to the numbers. For example, the all-time Q Ratio high at the peak of the Tech Bubble was 1.82 — which suggests that the market price was 158% above the historic average of replacement cost. The all-time lows in 1921, 1932 and 1982 were around…

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### Phil's Favorites

#### Facebook cuts back on news to give you more time with advertisers

Facebook cuts back on news to give you more time with advertisers

Courtesy of Tom Felle, City, University of London

Dear friends, it’s not us, it’s you. You are the problem. You’ve stopped sharing every intimate detail of your lives and we can’t monetise you as well as we’d like. So we’re changing our relationship to convince you to share more, so we can show you more ads.

Not an exact quote from Mark Zuckerberg, of course, but a rough translation. In a statement released on January 12, the company’s founder announced new changes to the platform’s news feed that would prioritise posts from friends and family over content posted by news organisat...

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### Zero Hedge

#### SEC Cracks Down On "Overnight Blockchain" Companies

SEC Cracks Down On "Overnight Blockchain" Companies

Courtesy of Zero Hedge

One month after the addition of "blockchain" to a company's name - or business model - became a joke  in financial circles, not to mention a shortcut to soaring market cap for countless micro-cap companies, the SEC is finally getting involved.

As Reuters reports, the SEC is scrutinizing public...

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### Chart School

#### Nasdaq Hits 15% Historic Price Action Highs as S&P Enters 10% Extreme Zone

Courtesy of Declan.

The Nasdaq joined the S&P at historic highs as it hit the 15% zone of historic price extremes (relative to its 200-day MA). The S&P went a step higher as it touched the 10% zone of historic highs; i.e. it trades at levels above 90% of historic price action dating back to 1950 - a sign there isn't much left to this rally. If it makes it to 2,874 it will be in the 5% zone, a zone last seen in February 2011.

The Nasdaq continued to accelerate past its most recent upside channel on higher volume accumulatio...

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### ValueWalk

By VW Staff. Originally published at ValueWalk.

Miller Value Partners’ Bill Miller holds the record for being the only mutual fund manager to beat the market for 15 years in a row. One way he did it is by investing in new technologies that the Wall Street establishment thought were crazy at the time – Amazon, Google, and Facebook among them. His latest “crazy” idea: Bitcoin.

]]> Get The Timeless Reading eBook in PDF

Listen to the audio only version here:

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### Digital Currencies

#### Cryptos Are Crashing Again...

Cryptos Are Crashing Again...

Courtesy of Zero Hedge

From South Korean bank blocks to Bulgarian ponzi scheme shutdowns and a Bali bitcoin crackdown, you can take your pick as to what is driving the sudden plunge in cryptocurrencies this morning. Ethereum is back below \$1000, Bitcoin is back to a \$10k handle, and Ripple is down 30% from the weekend's highs.

Weakness began around 6amET but really accelerated at around 8am ET...

With Bitcoin and Ethereum breaking key support levels..

The catalyst for the move is uncertain at best with numerous headlines over the weekend:

OneCoin offices ...

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### Insider Scoop

#### 34 Biggest Movers From Friday

Courtesy of Benzinga.

Gainers
• Forward Industries, Inc. (NASDAQ: FORD) shares surged 137.9 percent to close at \$2.95 on Friday after the company reported the acquisition of Intelligent Product Solutions.
• NuCana PLC (ADR) (NASDAQ: NCNA) shares climbed 41.55 percent to close at \$20.51 as the company announced plans to initiate a Phase 3 study of Acelarin in front-line advanced biliary tract cancer.
• New Age Beverages Corporation (NASDAQ: NBEV) shares jumped 22.5 percent to close at \$3.92 on Friday.
• ...

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### Biotech

#### How Alzheimer's disease spreads throughout the brain - new study

Reminder: Pharmboy and Ilene are available to chat with Members, comments are found below each post.

How Alzheimer's disease spreads throughout the brain – new study

Courtesy of Thomas E CopeUniversity of Cambridge

Harmful tau protein spreads through networks. Author provided

Alzheimer’s disease is a devastating brain illness that affects an estimated 47m people worldwide. It is the most common cause of dementia in the Western world. Despite this, there are currently no treatments that are effective in curing Alzheimer’s disease or preventing its relentless progressio...

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### Mapping The Market

#### Trump Admin Bans CDC From Using Words Like 'Science-Based,' 'Diversity'

By Jean-Luc

These are the policies of a theocracy, not a modern democracy:

The Trump administration has prohibited the Centers for Disease Control and Prevention (CDC) from using words like “science-based,” “diversity,” and “transgender” in their official documents for next year’s budget, according to the Washington Post.

Senior CDC budget leader Alison Kelly met with the agency’s policy analysts on Thursday to announce ...

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### Members' Corner

#### An Interview with David Brin

Our guest David Brin is an astrophysicist, technology consultant, and best-selling author who speaks, writes, and advises on a range of topics including national defense, creativity, and space exploration. He is also a well-known and influential futurist (one of four “World's Best Futurists,” according to The Urban Developer), and it is his ideas on the future, specifically the future of civilization, that I hope to learn about here.

Ilene: David, you base many of your predictions of the future on a theory of historica...

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#### Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options.

### Promotions

#### NewsWare: Watch Today's Webinar!

We have a great guest at today's webinar!

Bill Olsen from NewsWare will be giving us a fun and lively demonstration of the advantages that real-time news provides. NewsWare is a market intelligence tool for news. In today's data driven markets, it is truly beneficial to have a tool that delivers access to the professional sources where you can obtain the facts in real time.

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### Kimble Charting Solutions

#### Brazil; Waterfall in prices starting? Impact U.S.?

Courtesy of Chris Kimble.

Below looks at the Brazil ETF (EWZ) over the last decade. The rally over the past year has it facing a critical level, from a Power of the Pattern perspective.

CLICK ON CHART TO ENLARGE

EWZ is facing dual resistance at (1), while in a 9-year down trend of lower highs and lower lows. The counter trend rally over the past 17-months has it testing key falling resistance. Did the counter trend reflation rally just end at dual resistance???

If EWZ b...

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#### Mid-Day Update

Reminder: Harlan is available to chat with Members, comments are found below each post.

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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...