Posts Tagged ‘p/e ratios’

P/E Expansion & Contraction

Interesting article on P/E Expansion & Contraction by Barry Ritholtz.  Notice in the chart below that P/E ratios now are about aveage – not at the depths seen in previous bear markets. Unless the historical norms are truly moving higher, this suggests there’s further downside in P/E ratios. – Ilene 

P/E Expansion & Contraction

By Barry Ritholtz at The Big Picture 

Yesterday, Peter Boockvar referenced two WSJ articles on P/E:  The Decline of the P/E Ratio and Is It Time to Scrap the Fusty Old P/E Ratio?

I believe these articles are asking the wrong question. Rather than wondering if the value of P/E ratio is fading, the better question is, “What does a falling P/E ratio mean?” The chart below will help answer that question.

We can define Bull and Bear markets over the past 100 years in terms of P/E expansion and contraction. I always show the chart below when I give speeches (from Crestmont Research, my annotations in blue) to emphasize the impact of crowd psychology on valautions.

Consider the message of this chart. It strongly suggests (at least to me) the following:

Bull markets are periods of P/E expansion. During Bulls, investors are willing to pay increasingly more for each dollar of earnings;

Bear markets are periods of P/E contraction. Investors demand more earnings for each dollar of share price they are willing to pay.

via www.ritholtz.com - click here to read more. 

Source: Crestmont Research


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Myths about stock market myths that just won’t die

Baruch actually likes stocks, embraces the HFTing-bots and thinks that now is a good time to go long. Share his George Constanza moment… except this is serious. Baruch makes a compelling argument that stocks are the best investment around, the "asset class of the future."  He takes on bond apologists, Brett Arends, Felix Salmon and the myths. – Ilene 

Myths about stockmarket myths that just won’t die

Courtesy of Ultimi Barbarorum

[Watch George Costanza Does The Opposite]

Baruch hasn’t stopped blogging. He’s just been busy at work. To be fair, there also hasn’t been that much he has wanted to write about.

That changes here! A recent and growing animus in the econoblogoverse to, of all things, equity markets, has woken him up. Baruch finds this fairly incredible. Equities, he is fairly convinced, are the asset class of the future. This anti-equities movement, led by jealous journalists and winking, cackling bond apologists with axes to grind, needs to be nipped in the bud, as it is dead wrong. The WSJ’s otherwise reasonable Brett Arends is Baruch’s immediate target among the evil-thinkers, for his (last week’s top read on Abnormal Returns) The Top 10 Stock Market Myths that Just Won’t Die. And that Felix Salmon is also guilty as sin in this, for many offences against shares committed over the past few years.

Myth 1: stocks don’t generally go up

Wronngggg! Try shorting for a living and see how long you last. I’ve tried it. It is *really* fricking hard. Actually this year my shorts have made me more money than my longs, but I am an investing genius, and you are probably not. To those bond apologists who claim that this “stocks for the long haul” stuff is bullshit, I urge you to actually count the number of 10 year periods since 1950 where stocks have not made you a net percentage gain. I can only see 1963-64 and 1999-2001 as periods with evident losses (check out the S&P log chart from 1950). So around 90% of the time in the past 50 years, stocks have made you money on a 10-year investment horizon.

It’s not like you lost lots of money when they did go down, either. At worst, if you had been unfortunate (or dumb) enough to invest in January 2000, by 2010 you had lost about 20%. You would have faced the same, a 20% loss,  in 1964…
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What do present large profit margins mean for stocks?

What do present large profit margins mean for stocks?

Courtesy of Edward Harrison at Credit Writedowns 

profit-margins

US corporate profit margins reached a half-century peak with the housing bubble. As in most recessions, margins fell. But, this time they fell precipitously, only to snap back to near that 50-year peak. The chart above from David Rosenberg’s latest daily research shows the details. What kind of takeaways can we derive from these facts?

  • Clearly, US economic policy is geared toward the business sector. As I have indicated in previous posts, simple accounting demonstrates the economy’s financial sectors must balance to zero.  Therefore, a massive government deficit is balanced by an equivalent surplus in the trade and private sectors. But, depending upon public policy, that surplus can fall to businesses, households or exporters.
  • You should see the surge in corporate profitability as a priori proof that the US economic policy of zero rates, bailouts and stimulus is geared toward business through the maintenance of excess consumption. If we had an industrial policy more geared to promoting household deleveraging, the household sector would be doing the saving instead of the business sector.
  • Because the financial sector accounts for a huge percentage of US profitability, corporate margins are highly sensitive to interest rates. The margin whiplash you see from about 1996 onward demonstrates this. 
  • High P/E ratios are indicative of the later stages of a bull market, not the early stages.  Given that P/E margins are above their long-term average and based on high profit margins which also mean revert, you have two technical factors which will be negative for shares in the next downturn. Those who see 666 on the S&P 500 in March 2009 as a secular bear market low will be disappointed with returns over the coming years.
  • Given that the savings has been done by large businesses, household balance sheets will still be stressed when the next downturn hits. I anticipate, therefore, that the next recession will show a larger than garden-variety recession consumption pullback regardless of the other stresses in the economy.

Long-story short: high margins mean-revert as do P/E ratios. That means share prices will be doubly under pressure in the next recession. Moreover, with households also likely to pull back given still high debt levels, there is a lot of downside for shares going into that downturn which I believe could begin as early as 2011.


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IS THE MARKET OVERESTIMATING FUTURE ECONOMIC STRENGTH?

Here’s a Comstock report via Pragcap that supports the views of Richard Davis at Consumer Metrics Institute, which Richard shared with us yesterday in "The 2010 Contraction Being Tracked by the Consumer Metrics Institute Traces Unique Pattern." – Ilene 

IS THE MARKET OVERESTIMATING FUTURE ECONOMIC STRENGTH?

Courtesy of The Pragmatic Capitalist 

Side profile of a mid adult man standing and flexing his muscles

By Comstock Partners:

In our view the market is seriously overestimating the strength of the economy as the usual drivers of a sustainable recovery, namely consumer spending and housing, are in no condition to provide the catalyst that leads to steady growth.  The statistical growth we have witnessed to date is merely a bounce back from the brink of a potential financial disaster that was averted by massive stimulus.  However, the lingering after-effects of the credit crisis are creating strong headwinds against a typical post-war type of recovery.

The rise in consumer spending in recent months is nowhere near as strong as the media and the Street would have you believe.  The extremely sharp decline in consumer spending during the recession was caused by both negative fundamental factors and outright fear of a collapse.  Now the fear is gone, but the negative fundamentals remain.  Unemployment remains high, jobs are hard to get and credit is tight.  Moreover the consumer has barely begun to pay down the enormous debt accumulated over the last decade, and the deleveraging has a long way to go.  Savings rates are still low by historical standards and will take time to return to normal.

The housing industry is still in serious trouble and appears to have turned down again after the bump created by the home buyer tax credit.  Existing home sales were down 0.6% in February, the third consecutive drop.  Sales are back to the depressed level that existed before the start of the tax credit.  In addition new listings were up 10% to the highest level since September while inventories rose to an 8.6 months supply.

The problems were also reflected in new…
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Classic Market Bubble

Classic Market Bubble

Courtesy of John Lounsbury

The price to book ratio (P/B) is not a good valuation metric for individual stocks, because the price discounts future earnings and growth. A P/B ratio less than 1 for stock X with low earnings and no earnings growth does mean that stock X is undervalued. If stock Y, with P/B=2 has healthy and growing earnings, it may actually be undervalued and a much better buy than A.

However, P/B does have value when assessing the relative valuation of indexes over time. To that extent, I found the following chart from David Rosenberg, Chief Economist at Gluskin Sheff, which I have modified as indicated.

Rosenberg suggests that the normal range for P/B ratios is between 1.5 and 2.4. The lower number is what is expected coming out of an economic trough and 2.4 is approximately the long-term average. By his analysis we have not had a P/B ratio consistent with economic reality since 1996. We came close on March 9 but quickly left that place.

Note: My reference lines are slightly above 1.5, 2.0 and 2.5 and are minimally above Rosenberg’s reference numbers.

Rosenberg also discusses other valuation measurements at length, including price to earnings ratios (P/E). Read his entire post here.

A graph such as this reinforces the opinion that some have regarding when equities in the U.S. really topped. Looking at this graph, one would say the market topped in 2000. The same conclusion is drawn when the market indices are priced in inflation adjusted dollars or gold. (See here.)

The inference from the Rosenberg graph is that one of the following conditions must pertain:

  1. We are well into recovery and should entering a maturing growth phase of the business cycle within a couple of years; or
  2. We are still declining from the 2000 market high and the current rally will have to give back substantial portions of the gains before long-term market growth can be maintained; or
  3. We are still declining from the 2000 market high and have not yet reached the bottom.

I give a greater than 50% probability to #2. The other two get much smaller probabilities: #1 Less than 10% and #3 less than 30%. (You can put the missing 10% into rounding errors. After all, guesses should have large rounding errors.)…
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Kimble Charting Solutions

Germany Breakout Bullish For Stocks In The States!

Courtesy of Chris Kimble.

An important message to stocks in the states will come from Germany in the next few weeks!

This chart looks at the DAX index from Germany over the past 10-years. For the majority of the past 6-years, the DAX has remained inside of rising channel (1). The 2018 decline saw the DAX hit support where a 1-year counter-trend rally started.

Over the past year, the DAX has created a new falling channel (2). It is now testing the top of this falling channel and the lows of last February at (3).

For most of last year, the DAX created a bearish divergence with the...



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Insider Scoop

Earnings Scheduled For March 18, 2019

Courtesy of Benzinga.

Companies Reporting Before The Bell
  • Lumber Liquidators Holdings, Inc. (NYSE: LL) is estimated to report quarterly earnings at $0.12 per share on revenue of $272.54 million.
  • Genesis Healthcare, Inc. (NYSE: GEN) is expected to report quarterly loss at $0.24 per share on revenue of $1.19 billion.
  • Overstock.com, Inc. ...


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Zero Hedge

"Spring Is Coming": Why Europe Looks Set To Surprise On The Upside

Courtesy of ZeroHedge. View original post here.

Is the winter of Europe's discontent coming to an end?

After a long period of economic pain which many believe culminated in Europe's descent into recession just as the ECB's QE of public bonds came to an end, in a note titled "Spring is coming" and focusing on events in Europe, Bank of America writes that its EU Composite Macro Indicator (CMI) avoided a decline for the first time in 12 months.

...



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Phil's Favorites

No Free Lunch: Valuation Determines Return

 

Source: Pixabay

No Free Lunch: Valuation Determines Return

By John Mauldin, Thoughts from the Frontline

Last week, I described the enormous challenges retirees face. One reason for that, aside from insufficient savings, is that markets haven’t delivered the returns many experts said we could plan on.

Back in the late 1990s, we were told that the long-term average return (~10%) was a reasonable long-term assumption—even if the market cooled down from the tech boom. Instead, the S&P...



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Biotech

Marijuana is a lot more than just THC - a pharmacologist looks at the untapped healing compounds

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

 

Marijuana is a lot more than just THC - a pharmacologist looks at the untapped healing compounds

Assorted cannabis bud strains. Roxana Gonzalez/Shutterstock.com

Courtesy of James David Adams, University of Southern California

Medical marijuana is legal in 33 states as of November 2018. Yet the federal government still insists marijuana has no legal u...



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ValueWalk

Crescat Capital On The "Macro Trade of The Century" Short Bet

By Jacob Wolinsky. Originally published at ValueWalk.

Via Crescat Capital

At Crescat we remain positioned to capitalize on a downturn in the economic cycle. Global equity markets peaked in January 2018 while US markets peaked in September 2018. Crescat’s hedge funds were two of the world’s top performing funds in 2018 as a result of our bearish macro views and positioning last year. We are confident that was only the beginning of a downturn in asset prices from record global leverage and central-bank-driven asset bubbles for this cycle. US asset bubbles only just began to burst at the end of last year as on can see in the chart below.

Year to date, global stocks and corporate credit have rallied back while economic indicators have continued to deteriorate. This is setting the market up for another down-leg. We haven&#x...

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Chart School

Wyckoff Price Thrust Measure

Courtesy of Read the Ticker.

Richard Wyckoff said in his last days as an educator,'follow the waves'. And an important measure of those waves is the 'thrust'. The thrust of price into new ground, considering price and volume support or lack of it. The price wave thrust is clear visual presentation of the composite man demand or supply characteristics: strong, mild, weak or confused. 

readtheticker.com favored trend tool named RTTTrendStatus sister indicator RTTTrendThrust shows off Wykcoff measure of price thrust. RTTTrendThrust can be used to assist mechanical trading systems...

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Digital Currencies

Facebook's cryptocurrency: a financial expert breaks it down

 

Facebook's cryptocurrency: a financial expert breaks it down

Grejak/Shutterstock

Courtesy of Alistair Milne, Loughborough University

Facebook is reportedly preparing to launch its own version of Bitcoin, for use in its messaging applications, WhatsApp, Messenger and Instagram. Could this “Facecoin” be the long-awaited breakthrough by a global technology giant into the lucrative market for retail financial services? Or will...



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Members' Corner

Despacito - How to Make Money the Old-Fashioned Way - SLOWLY!

Are you ready to retire?  

For most people, the purpose of investing is to build up enough wealth to allow you to retire.  In general, that's usually enough money to reliably generate a year's worth of your average income, each year into your retirement so that that, plus you Social Security, should be enough to pay your bills without having to draw down on your principle.

Unfortunately, as the last decade has shown us, we can't count on bonds to pay us more than 3% and the average return from the stock market over the past 20 years has been erratic - to say the least - with 4 negative years (2000, 2001, 2002 and 2008) and 14 positives, though mostly in the 10% range on the positives.  A string of losses like we had from 2000-02 could easily wipe out a decades worth of gains.

Still, the stock market has been better over the last 10 (7%) an...



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Mapping The Market

It's Not Capitalism, it's Crony Capitalism

A good start from :

It's Not Capitalism, it's Crony Capitalism

Excerpt:

The threat to America is this: we have abandoned our core philosophy. Our first principle of this nation as a meritocracy, a free-market economy, where competition drives economic decision-making. In its place, we have allowed a malignancy to fester, a virulent pus-filled bastardized form of economics so corrosive in nature, so dangerously pestilent, that it presents an extinction-level threat to America – both the actual nation and the “idea” of America.

This all-encompassing mutant corruption saps men’s souls, crushes opportunities, and destroys economic mobility. Its a Smash & Grab system of ill-gotten re...



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OpTrader

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. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

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Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

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About Phil:

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...

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