Down goes the Dow

coach d and agip,

You both hold on to the premise that Federal Reserve policy has been good for the economy. Perhaps I would agree for the first year of the financial crisis in 2008-2009. However, Operation Twist and the various QE programs has distorted price discovery and driven asset prices to dangerous levels. This is the real debate and you are feee to be on the other side of my opinion. The unraveling of the market at home and abroad has its basis in this point. You cannot drive the cost of money to zero and not have financial asset distortion.

Igy

Most asset prices are not at "dangerous levels".

Face the fax,

"Most asset prices are not at "dangerous levels"."

That is just not true.

Perhaps you can find this interview with Robert Shiller this morning (9/3) on the CNBC website later in the day. The key points:

-CAPE 10 currently at 25, historical average 17

-at 17 the Dow level is 11,000 and S&P 1300

-market can become more overvalued as in 2000

-dangerous time

-buying on the dip may not be the best advice

If you don't know or discount Robert Shiller's work, all I can say is you are ignorant of historical valuation models going back to Graham and Dodd in 1934.

Igy

Ghost of Igloi wrote:

Face the fax,

"Most asset prices are not at "dangerous levels"."

That is just not true.

Perhaps you can find this interview with Robert Shiller this morning (9/3) on the CNBC website later in the day. The key points:

-CAPE 10 currently at 25, historical average 17

-at 17 the Dow level is 11,000 and S&P 1300

-market can become more overvalued as in 2000

-dangerous time

-buying on the dip may not be the best advice

If you don't know or discount Robert Shiller's work, all I can say is you are ignorant of historical valuation models going back to Graham and Dodd in 1934.

Igy

as we all know, the Shiller average is flawed and has had absolutely zero predictive ability for at least 25 years. It has shown the US to be at dangerously high valuations since, oh, 1991, yet the market has returned 10.21% per year during that time. At least through 12/31/15.

So hang on the Shiller thing all you want, Igy, but the thing don't work.

and anyway, the only way we are historically overvalued by shiller is if you look at 100 year returns. I for one reject the view that companies of 2015 are no more profitable and just as risky as those of 1915. Call me crazy.

By 25 year averages, we are pretty much in line with the average shiller reading. Which would suggest that stocks are not priced at dangerous levels.

Ghost of Igloi wrote:

coach d and agip,

You both hold on to the premise that Federal Reserve policy has been good for the economy. Perhaps I would agree for the first year of the financial crisis in 2008-2009. However, Operation Twist and the various QE programs has distorted price discovery and driven asset prices to dangerous levels. This is the real debate and you are feee to be on the other side of my opinion. The unraveling of the market at home and abroad has its basis in this point. You cannot drive the cost of money to zero and not have financial asset distortion.

Igy

I think this is right in theory - that the fed has distorted prices. But not a huge amount. The fed has little to do with long term rates - yet the market has chosen to price them very low. So where is the distortion? It's probably there, but far less than you are claiming.

And with stocks at valuation levels barely above average...I just don't see a large distortion. Some, sure. Just not huge.

agip,

You like to go to your 25 year average fine, but the 15 year picture is different.

In terms of predictability you and the rest of Wall Street use forward PE based on Wall Street analyst forward earnings estimate. That is so off the top you are flat out foolish to use is.

June 2014 LTM net income (Last Twelve Months) for the S&P 500 was $103.12. June 2015 LTM net income (Last Twelve Months) for the S&P 500 was $97.32. The recent peak LTM was the September 2014 quarter at $106. So, for the most recent quarter the LTM has fallen 8% from the peak.

What this means is the market is currently trading at 20 times earnings. Many Wall Street analyst are using a $130 forward earnings estimate.

You are blind if you think American companies will not be affected by all the recent global economic events.

You my friend are being fooled by inaccurate analysis and the usual Wall Street propaganda.

Igy

meh. I don't really look at forward PE either. I like price to sales, which strips out accounting shenanigans. And like with most measurements, it shows a slightly expensive market. Certainly not dangerous.

Actually I like to look at lots of measurements and see if there is a trend. And there is a trend - it shows a slightly overvalued market.

As for your measurement of profits - there are so man different measurements of profit that I can't get my head around them all. So I'm not an expert there. Could you cite your numbers with a link? I suspect your numbers are massively skewed by energy companies. Which is hardly representative of the entire economy.

And hey, here's a more positive number: in 2Q corporate profits in the US were up 7.3% over last year 2Q. That's not the SP500 - that's a broader number not connected to a stock index. Pretty big number, right?

agip,

Respect your right to a view but I believe you will regret it.

Good luck.

Igy

WTF? I post an opinion and this Igy fellow labels me as "ignorant"? What happened to the respectful discourse?

And anyone who cares to disagree with my opinion is welcome to, but take a look at valuations when the energy sector is removed.

agip,

In regards to valuation models and their predictive ability Google Treasury Department Office of Financial Research Departments staff report “Quicksilver Markets.” I believe you have both seen this but I refer you to page three specifically because it pertains to this discussion. If you care to look at other valuation models John Hussman prefers Market Cap/GVA and discusses the nuances in the following commentary:

http://www.hussmanfunds.com/wmc/wmc150518.htm

.

The S&P 500 was down 59% and the NASDAQ down 85% in the 2000-2002 downturn. The S&P 500 was down 59% in the 2007-2009 downturn. That is two drops of greater than 50% in the last fifteen years. The market is currently within a single digits of S&P 500 all-time highs. Yet, even with all the Federal Reserve market manipulation the 15 year return on the S&P 500 including dividends is a little more than 4% compounded annually.

The valuation of the S&P 500 may have been higher in in March of 2000, but the median stock value today is higher than it has ever been. That was result of the index being driven by large market cap technology stocks. I was an adviser in 2000 I remember how anything with a dividend was considered a fool’s investment. The mantra at that time was companies should be using free cash flow to grow their businesses. This time is different! And look at our companies today, loading up their balance sheet with debt to buy their stock back. It’s disgusting in my opinion and stock holders will pay a price for such imprudent behavior. All the while the CEOs line their pockets with stock options purchased with corporate debt and don’t forget inflating their earnings to the delight of Wall Street. And to complete the point, look at investors today gulping up anything with a dividend be it stocks, REITS or MLPs. Why because the Federal Reserve has driven investors out of a safe money alternative. This time is different! If you cannot see the risk here may God have mercy on your advisor soul. Sorry.

More facts, Wall Street's base case twelve month target for S&P 500 is approximately 2200. That is based on $132.53 in annual earnings per share and a multiple of 16.6 times. Funnily enough, at the end of the most recent reported quarter of June 2015 Last Twelve Month (LTM) net income per share was $97.32. The previous year, June 2014 quarter LTM net income per share was $103.12. The peak earnings in this cycle was LTM $106 net income per share at the end of the September 2014 quarter. So from the peak of September 2014 the LTM net income is down 8%. At the cycle low June 2009 quarter LTM was $8 a share. Earnings and profit margins mean revert and they do so with a vengeance. When they do, PEs compress in rapid succession.

Based on the current level of earnings, not using Wall Street forward earnings estimates, the market is trading at exactly 20 times. So, I ask how do we get to $132.53 from $97.32 with all that has happened in the domestic and global markets? It simply will not happen. The only way this market moves higher is based on the big money’s ability to continue to borrow money a zero and churn the market higher. Don’t kid yourself it is not the Muppet with an E-Trade account. That market action, if it happens, will only increase the risk to investors, not lessen it, despite the market move up. My sense is the game is up and the downward slope is in place.

High quality bonds have been a bane of analysts over the last several years. Early this year Wall Street was telling us to buy Europe and Japan. Several months ago we heard how good falling oil prices were going to be for consumers. We have also heard recently how China is not a risk for US investors. How has this advice worked so far? Not very well.

Personally I am amazed how willing people in our profession ignore the facts. And yes, I do believe we will be down not just 30% before this cycle is over.

So where does an investor go. Lower stock market exposure appropriate to risk preference and time horizon. Increase holdings of high quality short term bonds and cash.

That’s my story and I am sticking to it.

Igy

Face the fax,

I apologize if you took my response to be that you are stupid. What I inferred is you might be uninformed about stock valuation models. See my piece above to agip for more discussion and some references.

It would on the other hand be foolish to remove an important sector like energy to form an opinion on market valuation. Can you likewise remove a single stock like Apple to form an opposite opinion? No.

Igy

It would not be foolish at all. Remember, you said MOST asset prices are at dangerous levels. I agree that energy is overvalued, but most of everything else is not.

I accept your apology.

Face the fax,

From the Treasury Department Report "Quicksilver Markets."

"the CAPE ratio, the Q-ratio, and the Buffett Indicator...are approaching two-standard deviation (two -sigma) thresholds...Valuations approached or surpassed two-sigma in each major stock market bubble of the past century"

Yes you are ignorant and foolish as well.

Sorry if you are insulted. Go back to your studying of investments since you failed the first exam.

Igy

Elite Hobby Jogger wrote:

Ghost of Igloi wrote:

Robert Shiller appeared on CNBC and remarked on the over valuation in the domestic market and how he feels the general direction will be down. He did add that this process could take years.

Jeremy Siegel doesn't think it's over valued much.

http://m.kiplinger.com/article/investing/T052-C019-S002-bursting-the-talk-of-a-stock-market-bubble.html

Bump.

Good one, Igy. Anyone who has an opinion different from yours/Stockman's must be "ignorant and foolish". Keep this in mind folks: there is only one correct way to invest and that's Igy's/Stockman's way. Everyone else is ignorant and foolish.

Jeremy Siegel uses the Fed Model or Dividend Discount Model which is historical unreliable for forecasting. Siegel's book "Stocks For The Long Run" expresses his predominately Bullish view.

Igy

POTO,

Fax like you offers smarty responses and like you deserves a smart response back.

Igy

POTO,

You always slam me for links to Stockman's site, and I have repeatedly said to you that most of the articles are not from Stockman. For example, I will include a link to an article from the Wall Street Journal posted on the Stockman site. If you go to the Wall Street Journal you cannot read the full article. Contrary to your attacks on me I have provided more content and rational support to my arguments. You on the other hand provide unsupported attacks and spurious underhanded comments. Why at times do I get so frustrated with you POTO?

http://davidstockmanscontracorner.com/mind-the-residuals-why-the-new-car-bubbles-days-are-numbered/

Igy