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"In the end, advisers “shouldn't be surprised if values rise above the old historic norms again in this recovery cycle, but perhaps should still curtail risk-taking before the upper end of the new valuation range is breached,” Mr. Paulsen wrote.
That is the kind of careful, understated call of a potential paradigm shift in the market that is hard to ignore."
I know this is English, but I struggle to find meaningful investment guidelines. The adjective "understated" does baffle me a bit. The last 5 years of the 25 they cite have been markedly affected by the Fed's intervention and are subject to multiple interpretations.
Seems to me that this is one of those papers you hope no one remembers, unless the market happens to boom, which will require something out of the ordinary, whereupon you wave it about, get some talking head time, write a book, and, in the best of worlds, get a professorship at a university people have heard of.
In my thinking now that stocks have become stretched in their valuation by using the old standard metrics the advisors are now saying that stocks should be valued under new light. Again, they are trying to repackage the same goods under a new and different valuation metric. I still prefer the old and true way by applying the Rule of Twenty. Take the trailing twelve months worth of earnings and current index valuation and add the inflation factor to it and if it is more than twenty stocks are overvalued. With a Trailing Twelve Month P/E Ratio of 18.7 for the S&P 500 Index, as of the November 29th close at 1806, and adding the governments stated inflation factor of 1.6% then this computes to 20.3% indicating stocks are a little overvalued. This method allows stocks to trade at a higher valuation when inflation is low as it is said to be today by our government. However, the inflation number produced by the government in my thinking does not include energy and food and with this one should use the headline inflation number plus now include the increase cost of healthcare. If this were done, then stocks would score much higher in their overvaluation. Also, they might be expecting inflation to be on the rise now that asset values are inflated.
Anyway, this is Old_Skeet’s thinking. Probably, not to their liking as they are looking for a means to better justify today’s stocks valuations as being fairly valued and to allow for some inflation creap. It still boils down as to how much an investor, trader or speculator is willing to pay for a dollars worth of earnings.
Reply to @Old_Skeet: Core Inflation numbers exclude energy and food as they are volatile components. However, headline does. If 1.6% you reported is referring to headline it includes food and energy.
However, skeptic in me question the wisdom of adding inflation to P/E ratio. At least in inverse is earnings yield of market and if you actually subtracted the inflation from earnings yield to come up real earnings yield and benchmarked that it would have made much more sense.
I look at P/E ratios inversely, as a measure of investor consensus and risk appetite rather than as a measure of any objective company valuation.
Stocks started as a piece of ownership of the company to share in its profits. Prices went up when people expected to get higher dividends in the future. Variables such as inflation made sense in that calculations. We have kept that vocabulary but have completely changed the investment thesis.
People buy stocks now not because it is a profit sharing mechanism but because they expect to sell it in the future at a higher price than they bought. As long as there are people willing to do that, reason really doesn't matter. Companies that don't pay dividends ever made this more explicit.
What that means is that the price people are willing to pay in the future is a measure of how willing they are to stick their neck out at that time to hope people will pay an even higher price later on. But we need some kind of confidence that will be the case so we kept the old vocabulary along pretending it makes a difference because now it is entirely based on a social consensus of whether this game can be sustained. The growth of mutual funds and indexed instruments made this reliance on future expectation of buyers more explicit as the precise valuation of individual stocks in a basket became much less important.
In this new game, the supply of money coming into the game had more effect on the prices than some meaningless valuation. More money that wants to buy in, higher the price bid up because there are always some people willing to take on more risk than others. Higher the price, higher the valuation with a very tenuous connection back to the company to maintain the illusion that this is not a ponzi scheme. Otherwise, the whole game would collapse since one could not be confident of future buyers if that was the consensus.
But we know that it is still a matter of consensus and therefore worry when future buyers may dry out, hence all of this talk and discussion on valuation which never haa a conclusion because there is no objective reason as to why some valuation is ok but some isn't. But the very discussion keeps people in the game which continues.
When people lose confidence due to some event or a confluence of negative events happen people run, expectation of future buyers collapses and so prices and valuations come down. We repeat the game again. It is an entirely manufactured game of social engineering, not some objective mathematical process despite the pretensions. It has become the only game to be able to retire, so it will continue.
This is why I just see the average valuation as a measure of how much money is available and the investor appetite for risk based on this game continuing with future buyers than some connection to the underlying companies. Higher the amount of money flowing in and higher confidence in future money coming in, higher the multiples and ratios can go. No natural barriers.
The "Bigger Fool" theory, I believe; I really miss Louis Rukheyser. That's why, as my dotage approaches (or, if one believes my children, has long arrived) I am very reluctant to buy stocks without good dividends - and never too much of any particular one - there are still a lot of BACs around. It is the only game in town because there are few pension funds around, since companies found how difficult it can be to produce large positive returns consistently, and transferred the responsibility to their far less qualified employees.
Comments
Maybe CEOs and CFOs and all their stake holders have just become more focused than ever on maximizing value of their companies.
Here is link to actual paper by Wells Capital chief investment strategist, James Paulsen:
A New Valuation Range for the Stock Market?
That is the kind of careful, understated call of a potential paradigm shift in the market that is hard to ignore."
I know this is English, but I struggle to find meaningful investment guidelines. The adjective "understated" does baffle me a bit. The last 5 years of the 25 they cite have been markedly affected by the Fed's intervention and are subject to multiple interpretations.
Seems to me that this is one of those papers you hope no one remembers, unless the market happens to boom, which will require something out of the ordinary, whereupon you wave it about, get some talking head time, write a book, and, in the best of worlds, get a professorship at a university people have heard of.
In my thinking now that stocks have become stretched in their valuation by using the old standard metrics the advisors are now saying that stocks should be valued under new light. Again, they are trying to repackage the same goods under a new and different valuation metric. I still prefer the old and true way by applying the Rule of Twenty. Take the trailing twelve months worth of earnings and current index valuation and add the inflation factor to it and if it is more than twenty stocks are overvalued. With a Trailing Twelve Month P/E Ratio of 18.7 for the S&P 500 Index, as of the November 29th close at 1806, and adding the governments stated inflation factor of 1.6% then this computes to 20.3% indicating stocks are a little overvalued. This method allows stocks to trade at a higher valuation when inflation is low as it is said to be today by our government. However, the inflation number produced by the government in my thinking does not include energy and food and with this one should use the headline inflation number plus now include the increase cost of healthcare. If this were done, then stocks would score much higher in their overvaluation. Also, they might be expecting inflation to be on the rise now that asset values are inflated.
Anyway, this is Old_Skeet’s thinking. Probably, not to their liking as they are looking for a means to better justify today’s stocks valuations as being fairly valued and to allow for some inflation creap. It still boils down as to how much an investor, trader or speculator is willing to pay for a dollars worth of earnings.
Old_Skeet
However, skeptic in me question the wisdom of adding inflation to P/E ratio. At least in inverse is earnings yield of market and if you actually subtracted the inflation from earnings yield to come up real earnings yield and benchmarked that it would have made much more sense.
Stocks started as a piece of ownership of the company to share in its profits. Prices went up when people expected to get higher dividends in the future. Variables such as inflation made sense in that calculations. We have kept that vocabulary but have completely changed the investment thesis.
People buy stocks now not because it is a profit sharing mechanism but because they expect to sell it in the future at a higher price than they bought. As long as there are people willing to do that, reason really doesn't matter. Companies that don't pay dividends ever made this more explicit.
What that means is that the price people are willing to pay in the future is a measure of how willing they are to stick their neck out at that time to hope people will pay an even higher price later on. But we need some kind of confidence that will be the case so we kept the old vocabulary along pretending it makes a difference because now it is entirely based on a social consensus of whether this game can be sustained. The growth of mutual funds and indexed instruments made this reliance on future expectation of buyers more explicit as the precise valuation of individual stocks in a basket became much less important.
In this new game, the supply of money coming into the game had more effect on the prices than some meaningless valuation. More money that wants to buy in, higher the price bid up because there are always some people willing to take on more risk than others. Higher the price, higher the valuation with a very tenuous connection back to the company to maintain the illusion that this is not a ponzi scheme. Otherwise, the whole game would collapse since one could not be confident of future buyers if that was the consensus.
But we know that it is still a matter of consensus and therefore worry when future buyers may dry out, hence all of this talk and discussion on valuation which never haa a conclusion because there is no objective reason as to why some valuation is ok but some isn't. But the very discussion keeps people in the game which continues.
When people lose confidence due to some event or a confluence of negative events happen people run, expectation of future buyers collapses and so prices and valuations come down. We repeat the game again. It is an entirely manufactured game of social engineering, not some objective mathematical process despite the pretensions. It has become the only game to be able to retire, so it will continue.
This is why I just see the average valuation as a measure of how much money is available and the investor appetite for risk based on this game continuing with future buyers than some connection to the underlying companies. Higher the amount of money flowing in and higher confidence in future money coming in, higher the multiples and ratios can go. No natural barriers.
The tail and the dog have switched places.
That's why, as my dotage approaches (or, if one believes my children, has long arrived) I am very reluctant to buy stocks without good dividends - and never too much of any particular one - there are still a lot of BACs around.
It is the only game in town because there are few pension funds around, since companies found how difficult it can be to produce large positive returns consistently, and transferred the responsibility to their far less qualified employees.