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

"Apple Has Become What It Once Railed Against": Fortnite Maker Epic Games Sues Over App Store Ban

Courtesy of ZeroHedge View original post here.

In a lawsuit that is taking the tech industry by surprise, especially considering the rumors, widely discounted, that Apple might buy TikTok, it appears Epic Games, the creator of "Fortnite", has just filed a lawsuit against Apple, accusing it of "unfair and anti-competitive actions....undertaken....to maintain its monopoly in two distinct, multibillion dollar markets: (i) the iOS App Distribution Market, and (ii) the iOS In-App Payment Processing Market (each as defined below)."

...



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Phil's Favorites

Trump's attempts to ban TikTok and other Chinese tech undermine global democracy

 

Trump's attempts to ban TikTok and other Chinese tech undermine global democracy

Banning TikTok in the United States poses a threat to global democracy. (Shutterstock)

Courtesy of Philip Mai, Ryerson University

The Trump administration aims to purge Chinese tech companies from the United States, and that has consequences for all of us.

U.S. President Donald Trump and his administration recently issued three new national security measures: an expansion of the State Department’s Clean Network initiative and two executive orders. The Clean Network initiative forbids the use of Chinese tech in the U.S. telecom ...



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Biotech/COVID-19

Up to 204,691 extra deaths in the US so far in this pandemic year

 

Up to 204,691 extra deaths in the US so far in this pandemic year

The pandemic leaves its mark in the number of lives ended. Ben Hasty/MediaNews Group/Reading Eagle via Getty Images

Courtesy of Ronald D. Fricker Jr., Virginia Tech

The Conversation, ...



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ValueWalk

Peter Schiff Expands Offering to Include Gold Chains in Hopes That Gen Z Will Buy Them

By Jacob Wolinsky. Originally published at ValueWalk.

With precious metals making a massive resurgence in the past month, namely gold, Peter Schiff hopes to capitalize on the ostentatious nature of Gen Z, with their endearment for overpriced clothes and name brands. Schiff Gold is reported to start offering 18k cuban links, bracelets, and other various wearable accouterments.

Q2 2020 hedge fund letters, conferences and more

“These kids need to understand that while they can personally invest in themselves by being dripp...



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Kimble Charting Solutions

History Says Gold Correction Could Lead to Big Rally!

Courtesy of Chris Kimble

Over a decade ago, Gold rallied past its 1980 highs and over $1000/oz at (1) on today’s chart.

That rise to new highs was met with a 30 percent correction at (2), followed by a blast off rally to new highs.

Is gold setting up for a repeat of its past?

Gold recently rallied past its 2011 highs and above $2000/oz. Could Gold soon turn lower for a sharp correction before another blast off toward $3000?

If so, Gold bulls should look for a pullback, before blasting higher. Stay tuned!

This article was first written fo...



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The Technical Traders

Adaptive Fibonacci Price Modeling System Suggests Market Peak May Be Near

Courtesy of Technical Traders

Our Adaptive Fibonacci Price Modeling system is suggesting a moderate price peak may be already setting up in the NASDAQ while the Dow Jones, S&P500, and Transportation Index continue to rally beyond the projected Fibonacci Price Expansion Levels.  This indicates that capital may be shifting away from the already lofty Technology sector and into Basic Materials, Financials, Energy, Consumer Staples, Utilities, as well as other sectors.

This type of a structural market shift indicates a move away from speculation and towards Blue Chip returns. It suggests traders and investors are expecting the US consumer to come back strong (or at least hold up the market at...



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Chart School

Silver Big Channel

Courtesy of Read the Ticker

Big channels are the sand pit of price action. Lets review some big trends of these past months.


GLD
- Moving higher to upper solid red line channel


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XAU
- Ready to pause, or simply explode.



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SILVER
- Ready to pause, or simply explode.


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Digital Currencies

Raoul Pal: "It May Not Be Worth Owning Any Asset Other Than Bitcoin"

Courtesy of ZeroHedge View original post here.

Authored by Turner Wright via CoinTelegraph.com,

Raoul Pal, CEO and founder of Real Vision, says Bitcoin may soon become his only asset for long-term investments.

image courtesy of CoinTelegraph ...



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Lee's Free Thinking

Texas, Florida, Arizona, Georgia - The Branch COVIDIANS Are Still Burning Down the House

 

Texas, Florida, Arizona, Georgia – The Branch COVIDIANS Are Still Burning Down the House

Courtesy of Lee Adler, WallStreetExaminer 

The numbers of new cases in some of the hardest hit COVID19 states have started to plateau, or even decline, over the past few days. A few pundits have noted it and concluded that it was a hopeful sign. 

Is it real or is something else going on? Like a restriction in the numbers of tests, or simply the inability to test enough, or are some people simply giving up on getting tested? Because as we all know from our dear leader, the less testing, the less...



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Members' Corner

Coronavirus, 'Plandemic' and the seven traits of conspiratorial thinking

 

Coronavirus, 'Plandemic' and the seven traits of conspiratorial thinking

No matter the details of the plot, conspiracy theories follow common patterns of thought. Ranta Images/iStock/Getty Images Plus

Courtesy of John Cook, George Mason University; Sander van der Linden, University of Cambridge; Stephan Lewandowsky...



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Insider Scoop

Economic Data Scheduled For Friday

Courtesy of Benzinga

  • Data on nonfarm payrolls and unemployment rate for March will be released at 8:30 a.m. ET.
  • US Services Purchasing Managers' Index for March is scheduled for release at 9:45 a.m. ET.
  • The ISM's non-manufacturing index for March will be released at 10:00 a.m. ET.
  • The Baker Hughes North American rig count report for the latest week is scheduled for release at 1:00 p.m. ET.
...

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Click HERE to join the PSW weekly webinar at 1 pm EST.

Phil will discuss positions, COVID-19, market volatility -- the selloff -- and more! 

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Mike will show off the TradeExchange's new platform which you can try for free.  

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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

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