Posts Tagged ‘valuations’

WILL THE “CULT OF THE EQUITY” INVESTOR DIE?

WILL THE “CULT OF THE EQUITY” INVESTOR DIE?

Courtesy of The Pragmatic Capitalist 

Portrait of a Kodiak Bear

RBS recently published a dramatic and very bearish research note that described equity investors as “the world’s worst cult”.  While I thought the note was a bit over the top it did raise some interesting and thought provoking topics.  More specifically, they said:

“The big turnover in the US economy will lead to dramatic turns down in valuations we suspect – and may finally destroy the world’s worst cult: the cult of the equity, which has no basis in fact, or history, but yet seems universally accepted.”

The credit crisis is a reflection of our excesses and this is best reflected in the markets.   We have become a society that values those who get rich quick over those who create sustainable and productive businesses.  This is nowhere more apparent than it is in the financial sector which has become the epicenter of the crisis.  Our bloated financial sector steals our best minds and puts them to work doing little of real value while rewarding them excessively.  The excess growth of this industry has coincided with Main Street’s obsession with Wall Street.  While the buy side reaps the rewards of 2 & 20 or 2% funds fees for what is effectively an index fund (sorry mutual fund managers) the sell side reels the small investor in with the myth of becoming the next Warren Buffett.  The result?   What RBS would call the worst cult in history – an economy that has become transfixed with making money by effectively doing nothing.

We have spent more than we have and lived well beyond our means.  We buy every new Apple product, houses because we believe it is a right and not a privilege, and think of debt as a way to keep up with the way of life that God bestowed upon us.  It is not sustainable and this is becoming clear to us all as the economy appears to be in a perpetual stall.  The worst part in all of this is that we have tried with all our might to prop up a sector that has failed us all.  While Main Street struggles Wall Street is back to their old tricks.

banks WILL THE CULT OF THE EQUITY INVESTOR DIE?

As a nation I sometimes wonder if a depression wouldn’t set us straight.  I have often cited the “greatest generation” in this regard.…
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The Enterprising Investor’s Guide 7-6-2010

The Enterprising Investor’s Guide 7-6-2010

Courtesy of Ockham Research 

The price-to-peak earnings multiple dipped to just 11.5x–its lowest point since last October.  Equity markets sold off strongly in the face of renewed concerns about foundering US economic growth and the anemic performance of the labor market.  Government statistics revealed that non-farm payrolls actually declined in June for the first time this year, which is quite uncommon for economies in the early stages of a recovery.  After all is said and done, equities gave back 12% in the second quarter, reversing the trend of four straight quarters of market gains.

The stock market appears to be at an inflection point—one which likely will set the tone for the second half of the year.  If current analysts’ earnings estimates turnout to be anywhere close to accurate, then stock valuations appear to be increasingly attractive.  Valuations are particularly enticing for the largest US stocks, many of which are trading at only about 10x one-year forward earnings estimates (XOM, IBM and T for example).  However, many of these estimates have been based on previous assumptions of US growth that could be a bit aggressive.  Should we see companies fail to meet the raised earnings bar or analysts’ estimates trending lower, then we would expect another down-leg for equities.

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The percentage of NYSE stocks trading above their 30-week moving average dropped below 35% following last week’s more than 5% decline in the S&P 500.  A burgeoning number of pundits are now predicting a “double-dip” recession in some form or another. Meredith Whitney claims that a double-dip in housing is already underway and the persistent weakness in private sector job growth has turned many bulls to bears. Also, global concerns regarding the ongoing sovereign debt crisis in Europe and a suspected bubble forming in Chinese real estate have global stock investors on edge.  With all the fear, uncertainty and doubt looming around the financial markets, it seems to us that investors will need reminders that things are in fact getting better with each passing day.  Third quarter earnings season begins next week, but we believe that stocks will be in a “show me” state of mind, and we don’t mean Missouri!…
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Housing Headwinds and Baby Boom Demographics

Housing Headwinds and Baby Boom Demographics

Courtesy of Charles Hugh Smith, Of Two Minds 

Bubble valuations and Baby Boom demographics both suggest housing prices have a long way to fall. 

Combine home prices that are still at bubble heights with the demographics of aging baby Boomers dumping McMansions and you get massively rising supply overwhelming declining demand.

A recent story in the S.F. Chronicle Real Estate section neatly illustrates the trajectory of tens of millions of Baby Boomer home buyers and owners: Home Appreciation: Concord home steady, secure during ‘roller coaster’

The couple bought their first home in a modest suburb in the late 1970s for an undisclosed price, then bought a home in another suburb in 1980 for $96,000. In 1987 they sold that residence for $110,000 and bought another one for $135,000. They then sold that house for $400,000 in 2002 and bought their current home for a price "in the $600,000s" (realtor-speak for about $650,000). After peaking in value at the bubble top in 2005-06 at around $1,000,000, the home is now on the market for $637,000 ($600,000 + 6% commission).

To peek under the hood of the larger trends, I’ve laid out each buy/sell along with its inflation adjusted value in current dollars. As always, I use the BLS inflation calculator; though it reflects the flaws of the CPI calculation methodology, it is consistent.

1980 purchase: $96,000
in 2010 dollars: $252,000

1987 sale: $110,000
in 2010 dollars: $210,000

1987 purchase: $135,000
in 2010 dollars: $257,000

2002 sale: $400,000
in 2010 dollars: $482,000

2002 purchase: $650,000
in 2010 dollars: $783,000

2010 sale: (projected) $637,000

These inflation-adjusted "real" numbers are insightfully different from the nominal prices.

To place the 1980 valuations in proper context, we need to recall that the U.S. was suffering from sky-high inflation in the late 70s and extremely high rates of new household formation as the 78 millon Baby Boomers went out and bought houses. Those two factors created a housing boom, both in valuations and homes built.

It took $1.36 in 1980 to buy what $1 had bought a mere three years before in 1977. As people fled the stock market for tangible assets and Boomers started families, real estate soared (as did gold). While I don’t have the numbers for that house bought for $96,000 in 1980, anecdotally I can assure you that homes…
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Analyzing Corporate Margins As S&P500 Free Cash Flows Hits Record

Pragcap examined the same phenomenon this morning from a different perspective, that of earnings season surprises. – Ilene 

Analyzing Corporate Margins As S&P500 Free Cash Flows Hits Record 

Courtesy of Tyler Durden at Zero Hedge 

In the recent multiple expansion run up, one of the largely ignored factors has been the dramatic rise in corporate margins, be they Gross Profit, EBITDA, Net Income or unlevered Free Cash Flow. Of course, all this has been a function of massive cuts in corporate overhead as most companies have laid off the bulk of their workers, resulting in a seemingly stronger bottom line. In the meantime, assorted stimulus programs by the government have prevented revenues from crashing, thus boosting EPS, on both a historical and a projected basis.

We demonstrate the dramatic surge in margins by scouring through the S&P 500 companies over the past 3 years, and question just how sustainable this margin pick up is. As more and more analysts predict that future margin expansion is sure to drive the market higher, we can’t help but wonder 1) with stimulus benefits expiring and excess liquidity approaching an inflection point (especially in China) who will keep the top line strong, 2) as companies are forced, as a result, to hire more workers in order to drive sales, how will operating margins maintain their stellar performance, and 3) how will a decline in margins be justified from a multiple expansion standpoint. Lastly, we parse through the thoughts of William Hester of Hussman funds, who has some very critical observations on this very relevant topic.

As the chart below demonstrates, virtually every margin metric is now trading at or above its 3 year average.

One notable observation is the unlevered Free Cash Flow margin, which at 12.6% is now at a recent record. We have preciously discussed how companies have extracted major cash concession by squeezing net working capital, which is likely a factor in the disproportionate rise in FCF margins relative to all other metrics. The immediate result of this cash conservation has been of course the dramatic increase in corporate cash balances, which some have speculated is merely in anticipation of much higher corporate tax rates down the line, as well as general austerity as the reality of America’s insolvency trickes down to individual corporations.

The take home here is that margins have likely little room left to grow. This is especially true…
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‘Overvalued, Check. Overbought, Check. Overbullish, Check….’

‘Overvalued, Check. Overbought, Check. Overbullish, Check….’

Courtesy of Michael Panzner at Financial Armageddon, and John Hussman

German Stock Exchange Opens After Wall Street Crash

I’ve written a fair number of posts highlighting the disconnect between Wall Street and Main Street (far more than I can remember, in fact). But even if you ignore what is happening in the real economy (you know, like Wall Street usually does), share prices are out of whack — with their own history. In "Clarity and Valuation," John P. Hussman, President of Hussman Investment Trust, discusses that very issue in this week’s edition of Hussman Funds’ Weekly Market Comment:

Last week, the dividend yield on the S&P 500 dropped below 2%, versus a historical average closer to double that level. While part of the reason for the paucity of yield in the current market can be explained by the 20% plunge in dividend payouts over the past year, as financial companies have cut or halted dividends to conserve cash, the fact is that current payouts are not at all out of line with their historical relationship to revenues, and even a full recovery of the past year’s dividend cuts would still leave the yield at a paltry 2.5%. The October 1987 crash occurred from a yield of 2.65%, which was, at the time, the lowest yield observed in history, matched only by the 1972 peak prior to the brutal 1973-74 bear market.

Those two periods had a few other things in common. In the weeks immediately preceding the market downturn, stocks were overbought, had advanced significantly over prior weeks, bond yields were creeping higher, and investment advisory bearishness had dropped below 19%. All of those features should be familiar, because we observed them at the 1987 and 1972 peaks, and we observe them now.

On the basis of normalized profit margins, the average price/earnings ratio for the S&P 500, prior to 1995, was only about 13. Higher historical “norms” reflect the addition into that average of extremely high “recession P/Es,” based on dividing the S&P 500 by extremely low, but temporarily depressed earnings. For example, the P/E for the S&P 500 currently is 86, because earnings have been devastated, but it would be foolish to take that figure at face value, and equally foolish to work it into a historical “average” P/E. The pre-1995 norm


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LET’S GET TECHNICAL – STOCKS STILL SUSCEPTIBLE TO DECLINE

LET’S GET TECHNICAL – STOCKS STILL SUSCEPTIBLE TO DECLINE

Courtesy of The Pragmatic Capitalist

The technical perspective from Decision Point:

Stocks have been in the overvalued end of the normal P/E range since the early-1990s, and this condition shows no sign of abating. Below is an excerpt from our daily earnings summary that will offer readers a better perspective. I have outlined the 2009 Q4 results because that is the first quarter not distorted by the huge loss reported in 2008 Q4. While the results of the current quarter are not final, 90% of companies have reported, and I don’t think there will be any surprises from the remaining companies sufficient to change the estimated results a substantial amount. As you can see, valuations are projected to be well above the overvalued limit of the range (P/E of 20) through the first two quarters of 2010. If the market continues to rally, the over valuation will persist into the foreseeable future.

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Since price movement over the last two decades seems to have little relationship to P/E ratios, why pay any attention to values? In fact, Decision Point’s trend-following models consider price movement and nothing else. Nevertheless, we still want to be aware of the condition of the fundamental foundation of the market, and we believe that investor ignorance in this regard will only lead to more pain. After all, investors have been ignoring valuations for nearly two decades, and the result has been a stock bubble and two major bear markets. Most have not fared well during this period.

At each price top for the last two months I have been expecting a correction to begin, yet price declines have been relatively small and each top is followed by a higher top. Frustrating! I am not trying to identify a shorting opportunity, because shorting is not recommended during a bull market. The only reason that a decent correction is important is that it will provide a lower-risk opportunity to open new long positions.

For two weeks the market has been rolling over into what could be another short-term top. Or it could be the beginning of the long-awaited correction. Negative divergences still abound, but, as I told a subscriber, these conditions are usually not too serious in a bull market. The market is vulnerable, but it is not a time…
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Equities Aren’t a Bargain

Equities Aren’t a Bargain

Courtesy of Michael Panzner of Financial Armageddon

Even if you don’t buy my argument that there is plenty more downside to come as far as the U.S. economy is concerned, that doesn’t necessarily mean you should acquire or own stocks.

Aside from the fact that revenues aren’t keeping pace with profits and the latter are in many cases being pumped up by quick fixes that undermine future prospects — as I noted yesterday in ""Wall Street’s Gains Equal Main Street’s Loss?" — the reality is that equities simply aren’t a bargain.

Indeed, the Pragmatic Capitalist says as much in a graph-filled post entitled "Is the Market Cheap":

I’ve compiled a few different measures of valuation for your consideration.   Regular readers know that I am not much a “value” investor.  Value, in my opinion is in the eye of the beholder.  Is Apple cheaper at a high PE than GE at a low valuation?   Perhaps yes, perhaps no.  Most valuation metrics are based on the guesses of the analyst community – something that I believe is entirely unreliable.  Nonetheless, here are a few measures to help you put things in perspective:

val1 - US Tobin's Q

val2 - us market cap-to-GDP

val3 - us p/e on trend earnings

 

 


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CHART OF THE DAY: REVISITING THE MARCH LOWS?

If history repeats, keep this chart in mind.

CHART OF THE DAY: REVISITING THE MARCH LOWS?

Courtesy of The Pragmatic Capitalist

According to Bloomberg and Jim Reid, we’re likely to see much lower valuations (and stock prices) at some point in the next few years:

June 22 (Bloomberg) — U.S. and European stocks are destined to fall below March’s lows if bear-market history is any guide, according to Jim Reid, a strategist at Deutsche Bank AG.

Share prices tend to hit bottom “at extremely cheap levels” relative to earnings during so-called secular bear markets, Reid wrote five days ago in his first equity strategy report. Secular bears consist of multiple rallies and declines, with each slump producing lower valuations than the prior one.

The CHART OF THE DAY shows the Standard & Poor’s 500 Index’s price-earnings ratio since 1900, based on data compiled by Yale University’s Robert Shiller and cited in Reid’s report.

stocks666

Shiller calculated the P/E ratio at 6.6 in September 1982, just before the 1980s bull market started. The gauge sank to less than six in the depths of the Great Depression and at the beginning of the 1920s. This year, it has stayed above 13.

“History tells us that at some point in the next decade there will be much more stressed valuations than today and a once-in-a-generation buying opportunity,” wrote Reid, who previously focused on credit-market strategy.

Even “a large rally” later this year and into 2010 may not be enough to prevent this scenario from unfolding, he added. The S&P 500 has climbed as much as 40 percent from its March 9 lows. Reid’s European benchmark, a local-currency version of the MSCI Europe Index, has risen as much as 33 percent.


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Zero Hedge

For Bonds, This Is Now The Second Worst Bear Market In 40 Years

Courtesy of ZeroHedge View original post here.

Last December, we predicted that the US was heading for a "titanic taper tantrum" in 2021, to an extent as a result of a sharp drop in bond demand as a result of reduced bond purchases by the Fed but also due to a spike in inflation which would lead to a sharp drop in demand for duration.

So fast forward to this week when the crash in US Treasurys, and especially the belly of the curve led by a plunge in 5Y prices...

...

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ValueWalk

GameStop's Dead Cat Bounce; Munger's Annual Meeting

By Jacob Wolinsky. Originally published at ValueWalk.

Whitney Tilson’s email to investors discussing GameStop’s dead cat bounce; stop the speculative and manipulative madness; and Munger’s Daily Journal annual meeting.

Q4 2020 hedge fund letters, conferences and more

GameStop's Dead Cat Bounce

1) The behavior of speculators these days boggles my mind...

Only a few weeks after losing more than 90% of their money as shares of GameStop (GME) – or "GameStink," as I've been calling it – col...



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Phil's Favorites

Wall Street Sends a Message to the Fed: We Have Run Out of Places to Stuff Your Treasuries

Courtesy of Pam Martens

By Pam Martens and Russ Martens: February 26, 2021 ~

The action in the U.S. Treasury market yesterday reminded us of the classic “I Love Lucy” episode at the chocolate factory. As the conveyor belt churns out chocolate balls faster than Lucy and Ethel can handle them, they resort to stuffing them in their mouths, their hats, and their shirts. Lucy remarks: “I think we’re fighting a losing game.” (See video clip below.)

That was the scene in the Treasury market yesterday – ...



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Politics

What is fascism?

 

What is fascism?

A Donald Trump supporter wears a gas mask and holds a bust of him after he and hundreds of others stormed the Capitol building on Jan. 6, 2021. Roberto Schmidt/AFP via Getty Images

Courtesy of John Broich, Case Western Reserve University

Since before Donald Trump took office, historians have debated whether he is a fascist.

As a teacher of World War II history...



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Biotech/COVID-19

How does the Johnson & Johnson vaccine compare to other coronavirus vaccines? 4 questions answered

 

How does the Johnson & Johnson vaccine compare to other coronavirus vaccines? 4 questions answered

The Johnson & Johnson vaccine only requires one dose. Phill Magoke/AFP via Getty Images

Courtesy of Maureen Ferran, Rochester Institute of Technology

Editor’s note: On Tuesday, Feb. 24, the U.S. Food and Drug Administration released the results of its trial of the Johnson & Johnson coronavirus vaccine. The FDA found the vaccine to be safe...



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Chart School

The Fastest Money

Courtesy of Read the Ticker

The fast money happens near the end of the long trend.

Securities which attract a popular following by both the public and professionals investors tend to repeat the same sentiment over their bull phase. The chart below is the map of said sentiment.







Video on the subject.







Charts in the video


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Digital Currencies

Bridgewater Explains When It Will Invest In Bitcoin

Courtesy of ZeroHedge

Two weeks ago, Bridgewater founder Ray Dalio called Bitcoin "one hell of an invention" adding that:

"I expect Bridgewater to soon offer an alt-cash fund and a storehold of wealth fund in order to better deal with the devaluation of money and credit that we consider to be a major risk and opportunity, and Bitcoin won’t escape our scrutiny.”

And now, after significant attention that his comments received, Senior Portfolio Strategist Jim Haskel sits dow...



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Kimble Charting Solutions

Is Rising Inflation About To Hit U.S. Economy In Big Way?

Courtesy of Chris Kimble

Inflation seems to be a thing of the past… but current trading in bond and commodity markets tell us that it could become a thing of the future!

Inflation hasn’t been an issue, or even on our radar, since the 1980s. Sure, the 2007 surge in oil prices offered some concern but the financial crisis killed any thoughts of inflation.

So what’s got us concerned about inflation in 2021?

Today we take a look at long-term charts of two potential inflation indicators: Crude Oil ...



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Mapping The Market

The Countries With The Most COVID-19 Cases

 

The Countries With The Most COVID-19 Cases

By Martin Armstrong, Statista, Jan 12, 2021

This regularly updated infographic keeps track of the countries with the most confirmed Covid-19 cases. The United States is still at the top of the list, with a total now exceeding the 22 million mark, according to Johns Hopkins University figures. The total global figure is now over 85 million, while there have been more than 1.9 million deaths.

You will find more infographics at ...



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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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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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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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Promotions

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Feb. 26, 1pm EST

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

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

This week, we also have a special presentation from Mike Anton of TradeExchange.com. It's a new service that we're excited to be a part of! 

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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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