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

#### LNG Shipper Flex LNG

Transformity's Tobin Smith is highlighting LNG Shipper Flex LNG (FLNG) today for his subscribers and us. The company goes ex-dividend tomorrow, so he's also suggesting reading this article and, if you're interested, buying shares today under \$25.

LNG Shipper Flex LNG

Investment Idea: Buy \$FLNG under \$25 with \$30-\$34 target (buy today, shares go ex-dividend tomorrow)

We have been waiting patiently for Flex LNG (too patiently, actually) to increase their nearly 3% dividend to what made sense given the huge demand for LNG imports into Europe and Asia (especially China) and our cash flow estimates.  Well...in the last few days, FLNG raised their dividend by 80%. If we act quickly, we can lock about a \$3/...

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### Zero Hedge

#### Risk Assets Don't Have A Central Bank Superhero This Time

Courtesy of ZeroHedge View original post here.

By Michael Read, Bloomberg Markets Live commentator and reporter

Why hasn’t risk bounced?

Why hasn’t there been a large troupe of dip buyers at the ready after Friday’s rout?

There are three main factors behind the underwhelming price action so far this week:

1. The emergence of previous variants has come as central bankers were roughly midway through an easing program: there was a backdrop of asset purchases and dovish forward guidance to placate an angsty market. This time not so much, and while policy makers may twe...

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### Biotech/COVID-19

#### Omicron: why the WHO designated it a variant of concern

Omicron: why the WHO designated it a variant of concern

Courtesy of Ed Feil, University of Bath

The World Health Organization (WHO) has announced that the B.1.1.529 lineage of Sars-CoV-2, thought to have emerged in southern Africa, is to be designated as a variant of concern (VoC) named omicron. This decision has already precipitated a broad shift in priorities in pandemic management on a global scale.

The WHO has recommended, among other things, increased surveillance, particularly virus genome sequencing; focused research to understand the dangers posed by this...

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### Politics

#### The first Thanksgiving is a key chapter in America's origin story - but what happened in Virginia four months later mattered much more

The first Thanksgiving is a key chapter in America’s origin story – but what happened in Virginia four months later mattered much more

In the 19th century, there was a campaign to link the Thanksgiving holiday to the Pilgrims. Bettman/Getty Images

This year marks the 400th anniversary of the first Thanksgiving in New England. Remembered and retold as an allegory for perseverance and cooper...

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### Chart School

#### Gold and Silver still working higher

Using Gann Angles from zero we can time the next run up, and it is near.

The last two days gold and silver are down on the back of central bankers talking the US Dollar higher in a attempt to off set inflation. A rising dollar is a form of tightening. Also the talk of a faster 'taper' has sent interest rates higher. But Luke Gromen knows this cant not last.

@LukeGromen Externally-financed twin deficit nations with insufficient external financing (ie the US, not Japan) cannot abide rising real rates for long.

RTT Comments: What this means a higher US Dollar makes it harder for those outside the US to buy the vast quantity of US Treasuries.

U...

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### Digital Currencies

#### Stablecoins: these cryptocurrencies threaten the financial system, but no one is getting to grips with them

Stablecoins: these cryptocurrencies threaten the financial system, but no one is getting to grips with them

Safe as houses? iQoncept

Courtesy of Jean-Philippe Serbera, Sheffield Hallam University

Cryptocurrencies have had an exceptional year, reaching a combined value of more than US\$3 trillion (£2.2 trillion) for the first time in November. The market seems to have benefited from the public having tim...

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### Promotions

#### Phil's Interview on Options Trading with TD Bank

TD Bank's host Bryan Rogers interviewed Phil on June 10 as part of TD's Options Education Month. If you missed the program, be sure to watch the video below. It should be required viewing for anyone trading or thinking about trading using options.

Watch here:

Screenshots of TD's slides illustrating Phil's examples:

&n...

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### Kimble Charting Solutions

#### Crude Oil Cleared For Blast Off On This Dual Breakout?

Courtesy of Chris Kimble

Is Crude Oil about to blast off and hit much higher prices? It might be worth being aware of what could be taking place this month in this important commodity!

Crude Oil has created lower highs over the past 13-years, since peaking back in 2008, along line (1).

It created a “Double Top at (2), then it proceeded to decline more than 60% in four months.

The countertrend rally in Crude Oil has it attempting to break above its 13-year falling resistance as well as its double top at (3).

A successful breakout at (3) would suggest Crude Oil is about to mo...

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### ValueWalk

#### Managing Investments As A Charity Or Nonprofit

By Anna Peel. Originally published at ValueWalk.

Maintaining financial viability is a constant challenge for charities and nonprofit organizations.

Q4 2020 hedge fund letters, conferences and more

The past year has underscored that challenge. The pandemic has not just affected investment returns – it’s also had serious implications for charitable activities and the ability to fundraise. For some organizations, it’s even raised doubts about whether they can continue to operate.

Finding ways to generate long-term, sustainable returns for ...

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### Mapping The Market

#### Suez Canal: Critical Waterway Comes to a Halt

Suez Canal: Critical Waterway Comes to a Halt

Courtesy of Marcus Lu, Visual Capitalist

The Suez Canal: A Critical Waterway Comes to a Halt

On March 23, 2021, a massive ship named Ever Given became lodged in the Suez Canal, completely blocking traffic in both directions. According to the Suez Canal Authority, the 1,312 foot long (400 m) container ship ran aground during a sandstorm that caused low visibility, impacting the ship’s navigation. The vessel is owned by Taiwanese shipping firm, Evergreen Marine.

With over 2...

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#### Adaptive Fibonacci Price Modeling System Suggests Market Peak May Be Near

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...

### 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

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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### 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.
...

http://www.insidercow.com/ more from Insider

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...