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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Zero Hedge

US Fertility Rate Hit Record Low In 2018

Courtesy of ZeroHedge View original post here.

The US fertility rate dropped for the fourth straight year in 2018, and has fallen approximately 15% since 2007, according to the National Center for Health Statistics - which reports that there were 59.1 births for every 1,000 women of childbearing age.

In total, 3,791,712 births were recorded across the country last year - extending a steep decline that began during the 2008 Recession, according to the New York Times. ...



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Phil's Favorites

Chart Shows the Fed Ramping Up Not QE - Funding Almost All Treasury Issuance

 

Chart Shows the Fed Ramping Up Not QE – Funding Almost All Treasury Issuance

Courtesy of Lee Adler, Wall Street Examiner 

The Fed is ramping up “Not QE” .

The Fed bought $2.2 billion in notes today in its POMO, “not QE,” operations. Actually $2.15 billion because they sold back a whole $50 million. Must have been a little glitch in the force.

This brings the Fed’s total outright purchases of Treasuries to $170 billion since it started Not QE, on September 17.

It also did $107 billion in gross new repo loans to Primary Dealers to buy Tre...



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Lee's Free Thinking

Chart Shows the Fed Ramping Up Not QE - Funding Almost All Treasury Issuance

 

Chart Shows the Fed Ramping Up Not QE – Funding Almost All Treasury Issuance

Courtesy of Lee Adler, Wall Street Examiner 

The Fed is ramping up “Not QE” .

The Fed bought $2.2 billion in notes today in its POMO, “not QE,” operations. Actually $2.15 billion because they sold back a whole $50 million. Must have been a little glitch in the force.

This brings the Fed’s total outright purchases of Treasuries to $170 billion since it started Not QE, on September 17.

It also did $107 billion in gross new repo loans to Primary Dealers to buy Tre...



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Kimble Charting Solutions

Health Care & Merck Working A Bullish Breakouts!

Courtesy of Chris Kimble

Health Care (XLV) ETF has lagged the S&P for the past few years. Is the lagging trend about to end? It sure could and we should find out very soon!

This chart looks at the Health Care/S&P Ratio (XLV/SPY), which reflects that it has created a series of lower highs and lower lows inside of falling channel (1). Over the past 6-months the ratio has created a series of higher lows, reflecting out performance of XLV to the broad markets.

The ratio is testing a support/resistance line at (2). If the ratio breaks out at (2), it would suggest that health care stocks wi...



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Insider Scoop

CMA CGM Bolsters Its LNG Fuel Supply With Total Deal

Courtesy of Benzinga

CMA CGM said it signed a deal with France's largest energy firm to supply liquefied natural gas (LNG) to power container ships.

The fourth-largest global carrier by capacity, CMA CGM said the deal with Total's marine fuels division will cover LNG supply at the Marseille-Fos fueling hub in the Mediterranean. Terms were not disclosed.

Total will supply approximately 270,000 metric tons of LNG per year over the next 10 years. CMA CGM said it will be the volume needed for its 15,000 twenty-foot equivalen...



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Digital Currencies

Chinese Crypto Exchange IDAX Locks Cold Wallet As CEO "Goes Missing"

Courtesy of ZeroHedge

By William Suberg via CoinTelegraph.com

Chinese cryptocurrency exchange IDAX has suspended deposits and withdrawals after its CEO allegedly disappeared.

In a blog post on Nov. 29, IDAX, which earlier this week warned it was seeing a run on withdrawals, said the whereabouts of Lei Guorong were currently unkno...



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Chart School

RTT browsing latest..

Courtesy of Read the Ticker

Please review a collection of WWW browsing results. The information here is delayed by a few months, members get the most recent content.

Date Found: Tuesday, 09 July 2019, 01:48:48 AM


 

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Comment:
FED has no ammo in the next crisis!


Date Found: Friday, 12 July 2019, 02:38:12 AM
 

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Comment:
YIP Corporate debt blows up when econ...



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Members' Corner

Sacha Baron Cohen Uses ADL Speech to Tear Apart Mark Zuckerberg and Facebook

 

Sacha Baron Cohen Uses ADL Speech to Tear Apart Mark Zuckerberg and Facebook

By Matt Wilstein

Excerpt:

Sacha Baron Cohen accepted the International Leadership Award at the Anti-Defamation League’s Never is Now summit on anti-Semitism and hate Thursday. And the comedian and actor used his keynote speech to single out the one Jewish-American who he believes is doing the most to facilitate “hate and violence” in America: Facebook founder and CEO Mark Zuckerberg.

He began with a joke at the Trump administration’s expense. “Thank you, ADL, for this recognition and your work in fighting racism, hate and bigotry,” Baron Cohen said, according to his prepared...



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The Technical Traders

VIX Warns Of Imminent Market Correction

Courtesy of Technical Traders

The VIX is warning that a market peak may be setting up in the global markets and that investors should be cautious of the extremely low price in the VIX. These extremely low prices in the VIX are typically followed by some type of increased volatility in the markets.

The US Federal Reserve continues to push an easy money policy and has recently begun acquiring more dept allowing a deeper move towards a Quantitative Easing stance. This move, along with investor confidence in the US markets, has prompted early warning signs that the market has reached near extreme levels/peaks. 

Vix Value Drops Before Monthly Expiration

When the VIX falls to levels below 12~13, this typically v...



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Biotech

Why telling people with diabetes to use Walmart insulin can be dangerous advice

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

 

Why telling people with diabetes to use Walmart insulin can be dangerous advice

A vial of insulin. Prices for the drug, crucial for those with diabetes, have soared in recent years. Oleksandr Nagaiets/Shutterstock.com

Courtesy of Jeffrey Bennett, Vanderbilt University

About 7.4 million people ...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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