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Stock Valuation

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February 23, 2010 – Comments (6)

I love the graph on this Big Picture post.

So, the graph is suggesting looking at what the market would be priced at for a P/E value from a low of 8.33 to a high of 16.35 giving a range for the S&P based on P/E today of 384 to 753.  That makes it over valued from the expensive side of that range by 45%.  That range is their long time average plus or minus 1 standard deviation.

It is a real shame that Greenspan was so influencial.  The monetary expansion that occured under his rein truly distorted values of everything, stocks, home prices, wages in some sectors relative to others, huge mal-investments and poor  deployment of capital because of cheap access to capital. 

The distortions essentially hid the degree of economic imbalance and encouraged foolish financial behaviour.  And it royally screwed financially prudent people.  Take a young couple that been taught the old wisdom of saving 20-25% of the value of your home before you buy it and were saving at the beginning of Greenspan's financial destruction of the economy.  Well, if you were following a plan that ought to have gotten you further ahead, as it did in the past, well, Greenspan would have cost you your economic future.  An affordable home at say 2.5-3 times household income would have you needing to save 50-60% of your household income.   That would take you probably 3-5 years depending on how aggressively you saved.  Well, 5 years later you would have 20% of the old home price, but there would have been a good chance the home prices went up more then you could save.  In Vancouver home prices doubled about a 7 year window and they never came back to affordable levels.  Jumping in with a foolish 5% down ended up being the "wise" economic choice because of that moron being at the helm.

Mathematically, we should all be better off if we concentrate on paying ourselves first and reducing debt.  Money in savings and debt at the same time creates a spread that the banks take.  Paying the spread to yourself should make you better off finanically.  Somewhere because of low rates it came to make sense to borrow to invest.  So, of course money that ought not be in the market is going to increase demand for stocks and push the price up, along with an aging population.  If you are being responsible, you are putting money aside for retirement, well, with an aging population that is going to create more demand for stocks.

So, today the S&P is priced 93% higher then its long term average.

I can't help but think there is going to be some major price corrects as some of the factors that increased demand for stocks reverse, ie, people pulling money from stocks increase of increasing stock investment.  

What is interesting to me, when the market reached it low before this rally, it was where I was considering looking at the market again, and that was pretty close to the long term average valuation for the market.

6 Comments – Post Your Own

#1) On February 23, 2010 at 10:56 PM, portefeuille (99.59) wrote:

This P/E discussion will never stop, will it?

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#2) On February 23, 2010 at 11:37 PM, checklist34 (99.72) wrote:

no, porte, it will never stop.  it will never stop because everybody who wasn't in from march through september (or after, we're about flat the last several months) didn't make returns-of-a-lifetime, and they want to justify that with intellectual arguments. 

Never mind that I calculated a bunch of stuff in July and blogged about it 5 times and couldn't come to the conclusion, then, that the S&P wasn't still under its long term value.  Never mind that book value doens't even include tech and biotech R&D.   

Never mind that the price/book of my portfolio EVEN AFTER QUINTUPLING FROM THE MARCH BOTTOMS is still less than 1, AND THAT COUNTS A HUGE STAKE IN DOW CHEMICAL WHO OF COURSE, AS WITH ALL AGING INDUSTRIAL COMPANIES HAS DEPRECIATED THE VALUE OF ITS BOOK ASSETS FAR BELOW REALITY, DITTO FORD, DITTO TECK RESOURCES ALTHOUGH THEY HAVE PROBABLY JUST BEGUN TO DEPRECIATE, etc.  Hell I still own some casino stocks (not for long!) and their valuations are flat retarded.  AND I'M UP MORE THAN 5X FROM THE MARCH BOTTOMS AND MY PRICE/BOOK IS STILL UNDER 1.  I'm not even sure my price/tangible book is over 1.  

Never mind any of that, never mind that most of the big blue chips are trading at reasonable p/es like 10 (VZ and T).  Even aapl and goog aren't THAT bad, trading at forward p/es in the mid to upper teens.  

Never mind that AIG's losses alone and once-in-a-lifetime uber-stunning losses at basically all cyclic companies (like thea uto industry) massively mar the trailling P/E.  Ditto banks.  Ditto insurers.  

Never mind that the sudden and brutal recession caused the write-down of vast amounts of goodwill in one big crunch.  

Never mind all those bear posts from the bottoms encouraging people to sell, to short, get out now.  How many people did the members of this board encourage to NOT make the return of a lifetime in 2009 with all that?

Never mind any of that.  No it will never end, porte, it will never end.  

I will rec this post as compense for putting this rant here.

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#3) On February 24, 2010 at 12:35 AM, portefeuille (99.59) wrote:

I will rec this post as compense for putting this rant here.

I like it.

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#4) On February 24, 2010 at 7:29 AM, devoish (97.59) wrote:

http://mysite.verizon.net/vzeqrguz/housingbubble/ 

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#5) On February 24, 2010 at 9:49 AM, devoish (97.59) wrote:

http://www.harpfinancial.com/InterestRateHistory/FederalFundsRate3.htm 

http://seekingalpha.com/article/115464-new-home-prices-vs-median-income-chart 

 

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#6) On February 27, 2010 at 6:48 PM, Dobbes (< 20) wrote:

There is a fairly prominent body of research on relative valuation measures (like P/E) having no value as market timing devices or predictors of future returns on the indexes.  You can probably surmise how weak that relationship is from the current 93% disparity.

Vancouver couldn't be a more cherrypicked example.  It is in the top 10, if not top 5 most expensive cities in the world to live in.  Its above Tokyo.

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