Use access key #2 to skip to page content.

Are stocks cheap or not? Valuation of the S&P



June 25, 2009 – Comments (55) | RELATED TICKERS: SPY

Well I've done some more digging into the valuation of the S&P today.  This is subject to much controversy, debate, and discussion.  One of the bears favorite things to do these days is to parade around a chart showing that the S&P has a sky-high p/e of 100some, using it as proof that we have to immediately have a market crash.  Bulls counter with arguments about operating earnings, mark to market mirages, how far stocks are down, how many years its been w/o appreciation in stocks, green shoots, and more.

As I blogged a week ago or so here on the CAPs game blogs, I calculated these for the S&P going by Zacks Research Wizard output and filing in the blanks in the Zacks data with data from Yahoo Finance.

price/book:  1.8

price/sales:  0.9

price/earnings (forward):  12.6

price/earnings (current year):  14.5

GMX pointed out that estimates are not GAAP earnings, and there we go... discussion over, flame war between bears arguing that stocks are 10x overpriced and bulls arguing that its cheap seems to be the only likely outcome for a discussion based on p/e.  

I spent many hours last night surfing the web and crunching numbers yet again.  I found some very nice resources including:   this very nifty link allows you to make plots for various indices over various time periods for various valuations.  Downside:  it ends in 2005  This very nifty file shows the price/book of the S&P over the last 32 years.  The average value is 2.4, they report more optimistically (i.e., cheaper) than I do that current elvels are about 1.6-1.7.  Their graph shows 1.7, but the S&P is lower now than on the last date of the graph. 

Comstock Funds are more or less permabears.  Basically every article and post on their website is bearish, they advocate shorting today (i think, read for yourself, odn't take my word for it), they lost alot of money shorting the NASDAQ bubble (they may well have ultimately made a ton of money ont hat too, but they were really early in shorting it at any rate), and they would make all but the most extreme bears happy with their commentary.  But they have a cheaper value for the S&P than I do.  So lets just take their word for it.

From their chart, the S&P is at a lower price/book than at any time since Black Monday in 1987.  Thats a 22 year low, its well lower than the historical average of 2.4 (the 50 year historical average, BTW, is closer to 2.6).  

At the march lows the price/book was cheaper than at any point since 1982, the onset of a nearly 20 year bull market.

EXTREMELY INTERESTINGLY, in the 2002 bear market stocks never dipped to the average (almost, but not quite), and never went below it.  This time, even after the recent "rally", we are well below the average.


From the barra funds link, current price/slaes of the S&P (0.9) is as low as any time since the recessoin/bear market in 1991.  An 18 year low.  At the march lows it was at a 25 year low.  Lower than black monday.

From the barra funds link, current price/book of the S&P (1.7) is at about a 25 year low, lwoever than any time since BEFORE black monday.  At the march lows this was comparable to the 1981 lows, and lower than any other time ont he graph.  

IF we take the forward p/e of 12.5, as offered by Zacks rank, thats also at a 20+ year low.  I don't care to debate p/e in this initial post, feel free to debate it below. 


Moving beyond price/book, price/sales, and the rather controversial price/earnings, lets look at the value of the S&P divided by the GDP in billions.  I calculated these numbers myself from year-end closing values of the S&P and GDP figures taken from a gov't site.  

It works out like this:  average of (S&P year end closing value / GDP for that year) is 8.5%, going back to 1950.  At year end 2008 we were at about 6.3%, the lowest in 18 years.  Currently, assuming a 2% decline, we'd be at 6.5% or something.  At the march lows we were at 4.6%, the lowest we'd seen in 25 years.  


So stocks are without any real room, in my view, for debate, cheap right now.  Impressively cheap.  To shed some perspective on the cheapness, lets take a look at valuations at the 2002 bottom.

Price/book simply reached the historical average (we are well below that now, FAR FAR FAR below that at the march lows).  Price/sales simply reached the historical average (we are well below that now, far below at the march lows).  Etc.

In 2002 stocks were of average price.  In 2009 they are cheap.

To add more to this (and I wish to cripes I could post a picture, like those super-slick posts the TA guys make, which are pretty, very pretty), in 2002 we dipped merely to the long-term S&P trendline.  In 2009 we are well below it even today, vastly below it at the march lows.  

Stocks were cheaper at the march lows than they were at any point sicne the very early 80's at the bottom of the last big bear market before the 20 year run by price/book, in 25 years by price/sales, and so forth.  

Stocks are still well below historical averages today by price/GDP, price/book, price/sales, and possiblyu price/earnings (although price/earnings is, as I mentioned, subject to some controversy right now.  I don't think many bears have even a basic grasp of how mark to market accounting works).  

In 2002, the first acute bear market in what will probably be a 15 year secular bear market by the time its done, we dropped merely to the historical averages.  In 2009 we have gone vastly below them.  I wouldn't be surprised to see the markets languish below them for several years...  until a couple years into the next secular bull market.  But ... I'd also be surpised if we see anything even resembling a retest of the march lows, and I wouldn't be surprised if dips in the next few months are the cheapest stocks are in the next decade.  

I am not a prophet, unlike the average bear or person looking for tremendous recognition on the internet, I do not presume to know the future or to be better than you at making investment decesions.

But I did get the only "A" grade in a calc based stats class in 15 years at my college, and I am able to say that stocks are cheaper today by price/book, price/sales, or price/GDP than they've been in 20 or more years.  

I can not over-stress how important I think it is toscrutinize your long positions and makesure you are comfortable not with the ommentum, butwith the underlyingcompanies and stocks, and comfortable that they still have room to move up. 

I cannot, nor hardly, predict if stocks will be up or down in the next day, week, month or even year.  But I do submit that it would take an unreasonable mind, looking at only the facts that they want to see, to argue that they are overpriced.  I cannot see any reason to assume that the market will act rationally, but it might.  :)

But stocks are cheap today, and I think it'd be tough for a reasonable mind to argue that.  

55 Comments – Post Your Own

#1) On June 25, 2009 at 12:41 AM, portefeuille (98.91) wrote:

You might also want to have a look at comment #1 here and the links that comment contains (that way you would reach comment #6 here which is that comstockfunds P/B chart).

and never forget (hehe) 


More importantly, the book value of the S&P 500 is overstated relative to its lows in the early 1980s, as neither technology or biotechnology R&D spending (the biotechnology industry was not born until the late 1980s) is capitalized and treated as an asset on the balance sheet.  For example, Amgen and Genentech – two of the better performing stocks on the S&P 500 over the last 18 months, have P/B ratios of 2.42 and 5.49, respectively.  Even Microsoft, a mature cash cow in the software industry, has P/B ratio of 3.94.  Assuming (conservatively) that 15% of the S&P 500 are made up of such companies that did not exist in their current forms in the early 1980s, and assuming that the book value of such companies are understated by about 50%, the S&P 500's book value for 2008 is closer to around $638 a share.  On a R&D-adjusted basis, the P/B ratio for the S&P 500 is approximately 1.07, or its lowest level since the beginning of the greatest bull market in history in late 1982.  In addition, analysts are still projecting the S&P 500's earnings to be in the range of $35 to $50 a share this year, suggesting that the S&P 500's book value will continue to grow this year.  Based on the price-to-book ratio of the S&P 500, the core earnings power of the S&P 500's components, and the range of liquidity schemes implemented by the Federal Reserve and Bank of England, there is no doubt that stocks now present the greatest buying opportunity of our generation.


(from here, another article (from March 8, 2009 (!)) featuring that by now well-known P/E chart again.)

March 8 was a very good day to publish an article that proclaims that (on the basis of that adjusted P/B) stocks were not cheaper since 1982 ...


Report this comment
#2) On June 25, 2009 at 12:58 AM, checklist34 (98.58) wrote:

interesting comments on price/book as calcualted today, thats a bullish perspective. 

AND YOU BROUGHT THIS UP TO ME, the strength-of-dollar-making-us-stocks-even-cheaper-to-foreign-folks argument is darn good.  You said stocks are down 75% from early 2000 in some foreign currencies...

and folks also shouldn't forget that USD devaluation and US market inflation = good for commodity stocks and good for export stocks, and, quite possibly, good for the country over the long run.  :)

Report this comment
#3) On June 25, 2009 at 1:10 AM, rofgile (99.24) wrote:

Good post again checklist34-

Report this comment
#4) On June 25, 2009 at 1:12 AM, portefeuille (98.91) wrote:

You said stocks are down 75% from early 2000 in some foreign currencies...

That was the Euro. I said so in comment #34 here. tastylunch also liked that result (see comment #36 to that post).

Report this comment
#5) On June 25, 2009 at 1:15 AM, JakilaTheHun (99.92) wrote:

I like your analysis.  Very interesting statistics.  All the same, I wouldn't put too much stock into them, because, as I've already suggested, figures like that can be distorted, especially when dealing with large sets of data.   


Some thoughts on random items: 

GMX's argument in regards to "GAAP earnings" runs into some severe problems.  For one "GAAP earnings" includes one-time write-downs that are unlikely to recur.  In some cases, it's not even possible for the items to recur (e.g. a company writes down its entire goodwill).  If everything were calculated using GAAP earnings, you'd have very nonsensical results right now. 


Price/Book is interesting in that it validates my basic belief that people looking only at earnings are failing to look at underlying asset values behind companies.  One could argue that P/B is distorted as well by items such as goodwill, intangibles, and possibly some other inflated asset accounts.  However, that arguments runs into some severe problems, too, not because it's inaccurate.  Rather, it's more of a failure to understand the consistencies of things.  While I have no stats to back me up, I've scanned through hundreds upon hundreds of financial statements over the past year and I'm willing to wager that we've been through the biggest period for asset write-downs in the history of America.  So yes, book values can be inflated, but they are signifcantly less inflated than they were at every other point in the last 15-20 years. 


There are a few indicators that I find interesting.  This is not "scientific"; rather these have simply been my own observations on the market:

(1) There are some REITs and other beaten-down companies that have very consistent cash flows that have been buying back their own debt like there's no tomorrow. 

So what, you say?  Well --- not so fast!  Why have they been buying back debt?  Is it simply to deleverage themselves?  That might be part of the reason, but there's something more afoot.  The reality is that the market has so thoroughly discounted all securities relating to some of these companies that these cash-cow companies could simply use their hordes of cash to buy back their debt at severely depressed prices and make huge gains on it!!!!

Think about that for a moment.  What does that suggest?  To me, it suggests that the market has dramatically overreacted and prudent executives have taken advantage. 

In a strange sense, the longer the prices for securities stay suppressed, the more beneficial it will be to these companies.  They'll just slowly keep claiming massive gains on extinguishment of their own debt!!! This is nonsensical.  It suggests that the market needs to correct upwards for companies like this.  (See LXP and DIN for two examples engaging in this practice --- however, DIN might've have stopped after the huge run-up in price for them)

(2) I'm a very cautious deep value investor.  I've also tried to learn more about shorting with mixed success.  However, one thing I'm starting to notice is this:  there are very few companies that are so overvalued, that I think it becomes a sure enough thing to short based on risk-reward principles.  But in the rare event that I find one (like NILE), it almost always has some completely massive short interest.  For NILE, it's over 40%!!!

That suggests to me that shorters are desperately searching for a good play and having difficulty finding them.  So, you end up with extremely crowded trades like this. 

Both of those facts signal something to me and it's that the market is probably still undervalued.  At the very least, there are entire sectors that need to move upwards to correct. 

Report this comment
#6) On June 25, 2009 at 1:15 AM, checklist34 (98.58) wrote:

and... the last time stocks were this cheap, we had treasuries yielding double digits.  15% even. 

that provided tremendous competition for equitites that simply isn't likely to exist today.  if treasuries hit 15%, stocks are liklely to languish (but still, in the fullness of time, remain a great buy), if treasures don't hit anywhere near that, stocks aren't likely to remain so undervalued for long.

just a thought.  its all supply and demand, if treasuries don't soar, i can't see stocks staying so cheap for an extended period of time. 

Report this comment
#7) On June 25, 2009 at 1:17 AM, checklist34 (98.58) wrote:

hey rofgile, thanks alot.  :)

porte, what country are you from anyway?  I asked that the other day but i never read an answer if one materilized.  

Jak the Hun, I'll scrutinize your post in a second, for now i'll just say thanks for posting. 

Report this comment
#8) On June 25, 2009 at 1:23 AM, mrindependent (38.14) wrote:

I have done some of the same analyses as you and reached similar conclusions for the time periods you discuss.  The scary part is that when you go back further in time you see that 1982 was the start of an unbelievable bull market accompanied by continuously decreasing interest rates, surprising political stability and economic growth.  By 1986 or so, stock prices began to get pricey in relation to the 70's and early 80's.  Stock prices have been unusually high for the last 20 years.  This tells me that there is room to go lower depending on the course of events n the political/economic arena.  I am staying very picky -- just like you.  I am particularly careful to avoid financial leverage.  The economy is simply too unstable.

Report this comment
#9) On June 25, 2009 at 1:28 AM, portefeuille (98.91) wrote:

My rather lengthy answer is in comment #10 here.

The short answer is "Germany.".

Report this comment
#10) On June 25, 2009 at 1:32 AM, checklist34 (98.58) wrote:

jak hun, that was a great post...  its a good day when the short trades are crowded (like MGM, or NILE as you offer, I hadn't heard of that one before). 

there aren't alot of good shorts today (unless your goal is to short/long and just hope the long does better than the short).  

Stocks today are cheap.  

I'll look into the stocks you suggest.  I'm reallyu long DIN in real life (its one of my biggest positions) from 7 bucks avg.  I'm not selling until i've held for 1 year but i sold big covered calls when it hit 35 bucks a month ago as a hedge.  DIN, imo, isn't cheap anymore.  nor is it excessively priced, but its not cheap.  The hedges have worked out well htere.  long term, I believe in applebees, its by far cheaper than anywhere else you can get food so good here in the US.  Save a local diner that'll make a cheeseburger to die for for 6 bucks!

Report this comment
#11) On June 25, 2009 at 1:39 AM, JakilaTheHun (99.92) wrote:

Checklist, I agree that DIN isn't cheap any more.  I've red thumbed it on here and I'm shorting it on my simulated portfolio.  But it is very interesting to me, all the same, that management was buying their own debt back in rapid fashion when the prices were more suppressed.

I feel you on the one-year thing.  I debated selling out of some of my real life holdings like Hexcel (HXL) and Zoltek (ZOLT) right when they hit their peaks.  They've dropped a bit now, so my intuition was right, but I still felt it would be better just to hold on and not pay as much taxes when I do eventually cash out.

I'm actually keeping away from most of the restaurants now.  Most of them were cheap a few months ago, but then they had absurd run-ups. 

Report this comment
#12) On June 25, 2009 at 1:40 AM, checklist34 (98.58) wrote:

porte, i'm norwegian (100%) by nationality, american by country, and Norwegians are quite literally Germanic people who moved north to worse country to escape rule by various johnny come lately Germanic warlords.  We later grew to one of the most succesful countries ever, 3 mil norwegians in an barren country 1000 years ago. 

We are violent, we like to fight i guess, we movedinto a fair percentage of the world including russia, england and ireland (ruled them for centuries), mainland europe, north america centuries before columbus (i grewup in spittin distance from norsk relics dating bcak a millenia).  

We aren't remember fondly by society at large because US hsitory remains to some extent englands hitory, and england was so traumatized by Viking raidres/rulers that at one point scandanavian people were banned from owning property there for years.

I have visited Germany at times for biz and I feel oddly at home there, in a way more at home than I do here in the US. 

I have never visited Norway.  I don't know if I could bear to see my ancestors socialistic and accomodating millions of welfare-laden immigrants. 

The very core of Viking society was anti-welfare.  The law was, in essence, taht one had to take care of himself and so forth.  Today its much different there.  I wonder at times if the last Vikings live in Minnesota and North Dakota...  the Viking moved to the US 100 years ago.  :)

I am very proud of my germanic heritage, I think Hitler is the ultimate stain on our image.  He revered scandanavians, but what he never stopped to realize is that we are quite possibly the LEAST self-obsessed people ever.  We have bred in with populations across the world, from native americans to basically all of Eurpe (as we conquered it or parts of it 1000 years ago).


Report this comment
#13) On June 25, 2009 at 1:41 AM, portefeuille (98.91) wrote:

In that comment #34 I also mention (implicitly) that we (in Europe and North America) have entered in March the 10th year of the current bear market. There have been much longer ones (Japan is currently in the 20th year or so of theirs) of course ...

Report this comment
#14) On June 25, 2009 at 1:46 AM, checklist34 (98.58) wrote:

jak hun, i agree the restuarants run-up has been a bit too much.  There is literally no restaurant right now that i'm intersted in buying besides maybe Hardees, CKE.  But CKE isn't THAT cheap and I own no shares...

Ithink Hexcel is going to do well by you.  I've never heard of ZOLT. 

I'll check out your ideas that i've never heard of, sweet.  

Report this comment
#15) On June 25, 2009 at 1:48 AM, portefeuille (98.91) wrote:

my favourite viking: 1

Report this comment
#16) On June 25, 2009 at 1:48 AM, checklist34 (98.58) wrote:

what nobody, porte, talks about when they discuss japan is population growth.  Japans problem, ultimately, is supply and demand.  Even slight pop growth = a big shift on the supp/demand curve.

China would do well to soon release their breeding restrictions...

Report this comment
#17) On June 25, 2009 at 1:52 AM, checklist34 (98.58) wrote:

hey mrindependent, good call.  I think, though, that stocks have been expensive only since '94 or so (until october of last year).  they were REALLY cheap in the late 70s early 80s in part, i think, because the yields on zero-risk treasuries were 10++ percent.  as treasury yields lowered, stocks rose because treasury yields became longer such good competition for stocks.

its always a real good imo to sit down oncein a while (nearly dialy for me) and make sure you still think your stocks are cheap/have room to run

if they don't, you should hedge them ro sell them imo

Report this comment
#18) On June 25, 2009 at 1:56 AM, LongTermBull (89.55) wrote:

Nice post.

Report this comment
#19) On June 25, 2009 at 1:59 AM, checklist34 (98.58) wrote:

thanks LTB your $0.02 means alot. 

Report this comment
#20) On June 25, 2009 at 8:34 AM, Londamania (52.40) wrote:

Binve I hope you read I read your latest blog series (excellent of course :) ) the one weakness I saw in it was your use of the S&P P/E number of 40 which was a fast and loose number (IMO) that came out of some earlier CAPS posts.  If you take your same reasoning but apply THESE p/e numbers it changes quite a lot I think about what might happen next.

Ty very much for this info checklist I have been looking for something like this to gauge how big a pullback we might have over the summer.  Barring mega-doom events, probably it won't be that much.  Will wait for California to bankrupt and see what happens - might be time to get back in at that point :)

Report this comment
#21) On June 25, 2009 at 9:14 AM, russiangambit (28.70) wrote:

I would be intested to see the P/E of high-beta stocks vs. low beta stocks. High beta stocks seem to be overpriced vs. more defensive names like MSFT, MCD for example. Defensive usually means a cash cow, low debt .High beta stocks are more risky and they usually are such either due to their very cyclical nature (like commodities) or high debt level or both. P/E doesn't tell you anything about the debt level, but if a company cannot roll-over its debt or has to pay huge interest on it, all the earningns projections go out of the window.

Report this comment
#22) On June 25, 2009 at 10:40 AM, checklist34 (98.58) wrote:

To add to Porte's comment about price/book being artificially high because tech firms aren't "booking" their R&D (see Portes posts above with associated links), i'd add that as time rolls by the process of depreciating assets probably also artificially raises book value.

This isn't meant as a bullish argument, but think about a company like Ford or Dow Chemical.  How many bililons of dollars worth of plants and equipment have they depreciated but still use?

My old businesses had practically no book value, yet we had alot of stuff (trucks, forklifts, etc.), all depreciated.

Report this comment
#23) On June 25, 2009 at 10:48 AM, checklist34 (98.58) wrote:

londa, i took comfort in those numbers as well (as I'm by and large quite long in real life) and I'm satisfied that the stocks I own are undervalued and all.

And I hope the summer correction is sideways and not sharply down, but one never knows, we'll just have to see. Just because stocksa re cheap doesn't mean they couldn't get alot cheaper.  But I hope we don't see a big plunge.

Report this comment
#24) On June 25, 2009 at 10:52 AM, checklist34 (98.58) wrote:

gambit, i think that the high beta world contains both the deepest values and the most overpriced names, while in general I think that the lower beta names are pretty averagely priced.

For example I have a high beta portfolio with a price/book of about 0.6, 3x lower than the market as a whole. 

My take would be that high beta names contain extremes of valuation right now, low beta names have pretty normal valuations.

Report this comment
#25) On June 25, 2009 at 11:02 AM, darroj (28.11) wrote:

Really nice post, checklist! What are some of the things you are looking at now? I bought some BP the other day.  Won't need that cash for a while and 7% is a lot better than my bank account.

Report this comment
#26) On June 25, 2009 at 11:05 AM, portefeuille (98.91) wrote:

... , i'd add that as time rolls by the process of depreciating assets probably also artificially raises book value.

I think you meant "artificially lowers book value" (as your examples illustrate that point).

Report this comment
#27) On June 25, 2009 at 11:18 AM, LongTermBull (89.55) wrote:

I would be intested to see the P/E of high-beta stocks vs. low beta stocks. High beta stocks seem to be overpriced vs. more defensive names like MSFT, MCD for example. Defensive usually means a cash cow, low debt .High beta stocks are more risky and they usually are such either due to their very cyclical nature (like commodities) or high debt level or both.

I own/plan to own high beta stocks with 0 debt.  In fact every stock that I have money in or plan to put money in is high beta, 0 debt.

Report this comment
#28) On June 25, 2009 at 11:23 AM, checklist34 (98.58) wrote:

I think BP is a good buy.  Lately I've been trickling some cash ont othe market into stocks like GE, high yielding BDCs like PNNT, FSC, ARCC, I bought a little BA this morning. 

Report this comment
#29) On June 25, 2009 at 11:24 AM, checklist34 (98.58) wrote:

porte, yes, you are right.  artificially lowers book value.

I meant to say artificially raises price/book valuation.


Report this comment
#30) On June 25, 2009 at 11:28 AM, checklist34 (98.58) wrote:

LTB, what are some examples of high beta 0 debt stocks?  That sounds like a recipe for success.


Report this comment
#31) On June 25, 2009 at 11:39 AM, MattH42004 (28.18) wrote:

"what are some examples of high beta 0 debt stocks?  That sounds like a recipe for success."


Report this comment
#32) On June 25, 2009 at 11:52 AM, LongTermBull (89.55) wrote:

TC is one (though they aren't quite at 0).  DTPI, SWIR, and ASF are ones I have real money in or plan on putting real money in.  There are actually a lot of them, just run a screen for LT Debt/Equity of 0 and Beta greater than 1.01 or whatever you deem high beta.  I just use that as a starting point, they still need to be low on the p/fcf ratio for me to even think about putting money into them.

Report this comment
#33) On June 25, 2009 at 11:54 AM, LongTermBull (89.55) wrote:

Also check out BVSN.  They are a micro cap but they have enough cash in the bank to buy almost every share of stock and also have 0 debt.  Just haven't looked at them in enough detail to decide if they are worthy of my hard earned money.

Report this comment
#34) On June 25, 2009 at 12:57 PM, JtHExperimental (20.58) wrote:

This isn't meant as a bullish argument, but think about a company like Ford or Dow Chemical.  How many bililons of dollars worth of plants and equipment have they depreciated but still use?

You'd think Ford would have a lot of understated assets on their B/S, but when I examined them (back in maybe December?), it appeared they didn't have too much in the way of assets that would be significantly understated.  Maybe a little bit --- it's always difficult to tell, but a lot of stuff on their B/S was just Account Receivables, Inventories, and that sorta stuff.  

Report this comment
#35) On June 25, 2009 at 1:09 PM, masterN17 (< 20) wrote:

Very interesting article with solid long-term perspective.  Rec #24.

Report this comment
#36) On June 25, 2009 at 1:47 PM, Imperial1964 (93.97) wrote:

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly." -- Jeremy Grantham

Profit margins have been at as high as 13% in recent years (2006 specifically), but the historical norm has been half of that.  

When valuing the market as a whole you should adjust your P/E figures for a profit margin more like 6.5%, the historical norm.  That gives us a normalized P/E of 14.  Neither overvalued nor undervalued based on normalized P/E alone.

However, that 14% is without context.  Mean reversion implies often spending a period of time below the mean.  So I do not anticipate margins hitting the mean and stabilizing there without going below.  By mathematical definition you have to spend some time blow the mean sometimes.

Furthermore, I see economic headwinds that are at a minimum going to slow any recovery and at a maximum crush any potential recovery and plunge us into recession again.

So my conclusion is that from a long-term perspective the market is fairly valued.  But from a shorter-term perspective the market is much more volatile and risky than normal, so I believe it should be valued at a lower P/E multiple to compensate investors for the extra risk.

Therefore I think the market as a whole is slightly overvalued, but that is not necessarily a prediction of market direction.  There are values out there and I am buying them as I see them.  Currently I am unhedged and 11% in cash.

I may copy this post and make a blog out of it.

Report this comment
#37) On June 25, 2009 at 2:25 PM, checklist34 (98.58) wrote:

thanks matt, LTB, i will dig into those.  Thats a search angle that I haven't taken - focusing on zero debt.  I would love to have bought some dawson or tc at the lows...  oh well.

jakila, i took a look at Fs cash flow statement and it looks like they depreciate 15-20B a year.  I'm just suggesting that for some of those old blue chip industrials this formula

(replacement cost - liabilities) or

(approximate current value - liabilities) would likely be greater than

(GAAP assets - liabilities)


Report this comment
#38) On June 25, 2009 at 3:03 PM, checklist34 (98.58) wrote:

thanks much, master.

Imperial:  i think its very possible to over analyze.  A downside of analysis - and this for sure applies equally to me and my tendency to look at the markets bullishly over the long term (year or 2 or 5) - is that its usually possible to find some data to support what you want it to support.

I think the bears are in that camp, especially in march.  In march with so many valuation metrics at 25 year lows, all time lows, they drug out those p/e charts on the S&P and used them as proof stocks were still overpriced. 

Bull were guilty of th esame in 2007.  Ignoring historically high profit margins and coming up with various arguments to support the view that stocks were cheap.

The preponderance of evidence as shown above suggests that stocks are cheap now. 

And the prediction of a cyclic contraction in profit margins has happened quite dramatically.  Commodities companies ahve seen margins basically evaporate with falling prices for metals, etc. 

Maybe the correct outlook is whichever one requires the least explanation. 

Grantham described margins, risk premiums, and housing prices as in an "over-correction" phase in May.

Report this comment
#39) On June 25, 2009 at 5:25 PM, darroj (28.11) wrote:

I think BP is a good buy.  Lately I've been trickling some cash ont othe market into stocks like GE, high yielding BDCs like PNNT, FSC, ARCC, I bought a little BA this morning.

Which is your favorite BDC? I'm lazy and would like your research summary :)

What are your thoughts on pipeline companies... such as EVEP, LINE, ATN...   I've been looking at some energy trusts too (PWE, PVX, HTE) and I can't stop eying VLO with a nice P/E of 5 and trading at almost half its book value.

Report this comment
#40) On June 25, 2009 at 5:42 PM, TigerPackFund (< 20) wrote:


I hope you can participate in the new "collective" picking system portfolio we have devised for a small group of Top CAPS members.  Click below to read the blog under the new TigerPackFund member name explaining our effort:

We could absolutely use your smarts and experience to generate a higher return for readers.

We are basically asking you to pick up to 5 stocks at time, under the normal CAPS rules and scoring system.  Our goal is to find a solid group of 40 members who have proven themselves already, to be our regular contributing stock pickers.


Report this comment
#41) On June 26, 2009 at 11:23 PM, portefeuille (98.91) wrote:

an article from 2004.


Tim Hayes/Ned Davis Research - Why Big Profits Are Bad for Stocks

By Brian Hunt, Vice-President, Investment U

[Today, I've invited Investment U Vice President Brian Hunt to tell us about a great new book that exposes the myth about earnings and how they affect stock market performance. Enjoy Steve Sjuggerud, President, Investment U]

Surging profits are bad for the stock market? I couldn’t believe it but it’s true.

Buying stocks when earnings growth is slowing down sounds like a bad idea but it’s actually the best time to jump in the market according to Tim Hayes at Ned Davis Research (NDR).

You’ve probably never heard of Tim Hayes or Ned Davis Research (although we have mentioned NDR in this space before). Your financial planner probably doesn’t know them. And - chances are - 99% of the “experts” putting out stock market advice don’t know them.

That’s too bad, because the folks at Ned Davis Research do some of the best market analysis in the world and NDR’s brilliant strategist Tim Hayes has written a book called The Research Driven Investor that contains some surprising advice on investing. It’s advice that could save you a ton of money - by doing exactly the opposite of what the so-called “experts” are recommending.

Tim Hayes: CNBC’s Talking Heads Are Full of It

The experts on TV telling you to buy into the market based on big earnings growth are wrong. They haven’t done their homework. They’re just repeating what their bosses tell them - that it’s always time to buy stocks.

In The Research Driven Investor, Tim Hayes explains:

“To an armchair investor tuned into CNBC or the other sources of financial news that discuss favorable earnings news in bullish terms and unfavorable news in bearish terms, it may seem counterintuitive or illogical that rapid earnings growth is consistent with weak market performance

And it may seem equally odd that the historical record shows weak earnings growth consistent with strong market performance.”

Tim Hayes has done the homework, he’s taken time to run the numbers and it shocked me when I read his conclusion.

Hayes crunched the numbers all the way back to 1932 - and found when earnings growth (as measured by S&P 500 earnings) is strong, you make a measly 1% per year in the stock market.

During periods of negative S&P 500 earnings growth, stocks do great - earning about 15% a year.

The pattern between earnings and stock market performance seems crazy But remember: The stock market looks into the future, not the past. It’s a cliché, but the stock market is the ultimate discounting mechanism the good news of the future is already priced in.

By the time companies are reporting earnings growth of 20%, the market is already looking to the future - when earnings might slow down or decline.

Where Buffett’s Putting $36 Billion Now (Hint: Not in Stocks)

When it can’t get any worse, when the public hates stocks - that’s when buying stocks makes you big money.

Legendary investors like Warren Buffett and Sir John Templeton (yes, Templeton is so good he’s been knighted) have made fortunes by committing a lot of money to stocks when the public can’t stand the thought of buying them.

But Warren and Sir John are negative on stocks now everyone else loves them, and earnings growth, at a projected 10% for 2004, is high.

Warren Buffett has about $36 billion in cash he’s not putting into stocks - because the talking heads on CNBC are bragging about earnings And the public is pouring money into the market.

Now is a good time to remember Tim Hayes’ research and it’s always good to know what Warren Buffett is doing.

They’re both saying it’s a good time to hold lots of cash instead of lots of stocks maybe you should do the same.

Good investing,

Brian Hunt


Has anyone read that book mentioned in the article ("The Research Driven Investor")? It is mentioned here as well.

Report this comment
#42) On June 26, 2009 at 11:29 PM, portefeuille (98.91) wrote:

You’ve probably never heard of Tim Hayes or Ned Davis Research (although we have mentioned NDR in this space before). 

Well, if you have read the find print under the chart that checklist has posted here you have heard of them ...


Report this comment
#43) On June 27, 2009 at 5:00 PM, checklist34 (98.58) wrote:

hey porte, nice link/commentary.  Basically Hayes is saying the same kind of "greedy when others are fearful", "blood in the streets buy land", "buy the big dips" kind of thing in a more clinical way.

When the market starts crashing, really crashing, its time to start thinnking about buying.  By the time the recession has been declared officially over and earnings are officially growing, it'll already be too late and the bulk of the move will have been missed.


Report this comment
#44) On June 27, 2009 at 5:24 PM, checklist34 (98.58) wrote:


    Its hard to say which BDC is the best one right now.  There are different ones with different situations.  Some that are worth looking at are

-ACAS/ALD.  Simliar situations.  Formerly high flying stocks with big market caps, both fell victim to a combination of the recession, the dramatic plunges in various markets (for private equity, stock markets, bond markets, mortgage markets) forcing them to mark down the book value of their assets.  Which resulted in a technical default of various loans, which creates a very challenging situation for them and plunging stock prices.  These are relatively complex situations in which a bankrtupcy is not impossible, and where very large returns from todays share prices are also possible, and where even in bankruptcy or a run-off shareholders might come out well ahead of todays prices.  ACAS is one of my biggest positions from an avg price of <$1... 

The odds of shareholders coming out ahead with ACAS from todays share prices are ultimately in my view good (and better than ALD), but the ride is likely to be gut wrenching and absolutely not anything anybody faint of heart or weak ofconviction wants to get involved in.  

For shareholders to experience a really good case scenario, the companies would first have to negotiate new terms with their lenders to cure current default (btw, ACAS is easily current on all debt payments, its not that they can't pay, its that one of the loan covenants requires a certain debt/equity ratio and the drops in various markets caused this to be violated, hence a default).

For shareholders to experience a really good case outcome, the economy would have to at least stabilize and stop declining.  Severe ongoing declines in the economy would cause bankruptcies and defaults at the portfolio company level to rise, of course, and in an extreme case the loss of value to ACAS or ALD could be extreme. 

a return anytime soon to previous share prices is unlikely for either of these companies and both have likely sustained at least semi-permanent damage.

-MCGC.  similar situation as ACAS/ALD, similar deep value, but they do not have a default at this time, putting them one step ahead. 

Those are some deep-value, high risk, high reward, turnaround-plays that absolutely shouldn't be bought by anybody who doesn't understand the situation and waht they are getting into, or anybody who would panic if their stocks fell 20 or 30 or 50 percent in a week, which may and frankly has happened with these at various times.


I also really like the BDCs who don't have defaults, who have current dividends (often with extremely high yields), and still have really favorable price/book, forward p/e, etc.

I think PNNT, ARCC, FSC, and HTGC are possibly the most stable, and each yields 10+% currently.  PSEC is another one I think, and AINV has a great current yield also.


I think ACAS at 60 cents in March was one of the lowest risk buys ever, but today at essentially a 7x higher share price (it carried a huge dividend in march that is no longer with the stock, the dividenditself is a long story and confusing) it isn't without some risk.

hope that helped.


Report this comment
#45) On June 27, 2009 at 5:26 PM, checklist34 (98.58) wrote:

tigerpack, I'd be happy to tkae a look and try to help your new portfolio.

Its likely that a portfolio like that will wind up being a long/short portfolio, as if you ask a variety of persons to participate...  you'll wind up with some bulls, some bears, and a sort of long/short system will wind up inherently in place.

I would note that my time horizon when picking stocks tends to be long and my market timing skills aren't great. 

Report this comment
#46) On June 27, 2009 at 5:36 PM, portefeuille (98.91) wrote:

find print

fine print


more from Hayes of Ned Davis Research:


AFTER the wild swings of last year and early 2009, many markets have been returning to more typical ranges in a process of “mean reversion,” said Timothy W. Hayes, chief investment strategist at Ned Davis Research in Venice, Fla. His firm last week shifted its asset-allocation recommendation to the most aggressive rating for equities, a judgment that the stock market rally is very likely to continue.


(from a June 6, 2009 nytimes article)

Report this comment
#47) On June 27, 2009 at 6:19 PM, checklist34 (98.58) wrote:

so timothy hayes seems to agree that stocks have been cheap in 2009, thats good to know... 

I read dozens of articles on last night.  These guys are clearly very, very smart, clearly very experienced and they called the onset of a secular bear market that they said started in late 1999 and they said it would last 15 years.  They are more or less proven correct, it doesn't look like we'll eclipse the 2009 highs permanently for at least a few more  years (quite possibly longer).

But they predicted that ultimately the massive secular bear we were entering could see stocks cut nearly in half, that S&P 800s was likely.  

When we hit S&P 800s they upped the ante saying it needed to go 700's.

Later they upped the ante and said it could go below 700, even to 650.

It did.  But they just upped the ante again and stayed bearish.  Saying then that it had to go to 600.

This seems to be a trend among bears or at least perma bears in this whole crash. 

Every time their predictions for fair value or how low the market could go came true, they just lowered their predictions. 

They never turned bullish, even when their wildest predictions came true, they just made new lower predictions and kept being bearish.  

Report this comment
#48) On June 27, 2009 at 6:46 PM, checklist34 (98.58) wrote:

and by the same token today...  i think that alot of bulls will do the same thing if we go in the other direction.

they predict radical things like S&P 1000 or 900 or 1100.  but if we get to 1100, I bet alot of t hem will just stay bullish and then predict 1300.  at 1300 1500 and so forth.

Doug Kass wrote a piece once about the "cult of the permabears" and talked about this phenomenon, and about who permabulls and permabears rarely actually make big money, and that the key to making big money is to change gears when appropriate.

Report this comment
#49) On June 27, 2009 at 7:55 PM, portefeuille (98.91) wrote:

Doug Kass wrote a piece once about the "cult of the permabears" and talked about this phenomenon, and about who permabulls and permabears rarely actually make big money, and that the key to making big money is to change gears when appropriate.


... which again brings us to one of my favourite quotations.


The top players here can't shift gears even though this is when your supposed to buy.  I don't know if you've noticed but their scores have mostly flatlined.  So in all of this turmoil, since October I've gone from 4000 points to 9000 caught up and passed those I thought were unreachable.  And I thought this was a bear market.


(from a comment made by foolsmethrice on February 11, 2009 here.)


Report this comment
#50) On July 01, 2009 at 12:08 AM, checklist34 (98.58) wrote:

nice quote porte, i just saw it.


I did calculate this:

if the p/e of the S&P (TTM earnings) was 15, SIMPLY REMOVING AIG WOULD MAKE IT ABOUT 12.5.  if it was 20, simply removing AIG would amke it 16.5 or so.  If it was 100, simply removing AIG would drop it to 45. 

AIG lost $100B via the miracle of GAAP accounting.  

To put that into perspective, consider these:

-mkt cap of the S&P 500 right now is about 8.4 trillion.  The Bears love to post a p/e of 100 graph, which would imply about 84B of profits.  AIG had 100B of losses, which alone would move the S&P to 184B of earnings and vastly lower the multiple.

Throw in NON-REALIZED losses due to mark to market at insurance companies alone and the automakers, and you'd probably have darn near twice that non-considerable, one-time, oddity, loss.  That'd make for a fairly dramatic change.

AIG=100B of losses, F=15B, GM=31B.  Thats $150B... throw in the mark-downs on the balance sheets of ACAS ($3B), HIG, etc, etc, etc, and I bet we approach $200B of losses that are either anamolies that the market as a whole shouldn't be judged by or aren't actually losses but mark downs on investments here and there that may well, at least in part, be marked up one day.

Even just taking $150B for AIG + Autos... if the S&P had a TTM P/E of 100, it would be 35 without those.

My point is we have a REALLY BIG skewing of p/e's caused by things not likely to repeat or things which are temporary.  Throw in the question of how many companies were forced to write down goodwill due to the very bad economic conditions OR just chose to take charges out of the way and the figure of non-considerable losses gets even higher.


insurance companies MARK DOWN REVENUE for investment portfolio mark-downs, so the P/S figures quoted above are acutally lower as well.  Witness HIG, AIG, and others had negative revenue in certain quarters.  

Some of those M2M markdowns will be marked up one day, plain and simple.

This is more complex than I originally anticipated, but it does seem that the preponderance of the complexities point towards cheaper, not towards more expensive.

I have not blogged my last blog on this topic. 


Report this comment
#51) On July 01, 2009 at 1:48 AM, portefeuille (98.91) wrote:

... mark downs on investments here and there that may well, at least in part, be marked up one day.

I am pretty sure they will demand to exclude those markups when they occur.

Report this comment
#52) On July 01, 2009 at 3:01 AM, checklist34 (98.58) wrote:


     the bears you mean, they will demand to exclude them?


Report this comment
#53) On July 01, 2009 at 3:24 AM, portefeuille (98.91) wrote:

I mean the very ones that demand to include the markdowns right now.

Report this comment
#54) On July 01, 2009 at 4:11 AM, ozzfan1317 (72.13) wrote:

Nice post thanks for the info +1 REC

Report this comment
#55) On July 01, 2009 at 12:52 PM, checklist34 (98.58) wrote:

yes, porte, i agree. 

They will claim that the mark-downs were absolutely correct, the mark-ups are "mark to myth" fantasy accounting, cry foul, and not take a moment to understand how mark to market really works and how wild the impact it can have on GAAP #'s is. 


ozzfan, thanks very much

Report this comment

Featured Broker Partners