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If you are a discerning thinker you will notice how the propaganda has been pushed on the public about the United States as being in a recovery, our unemployment rate is under 8%, the GDP growth rate is positive, and stocks are reasonably priced, if not under-valued! Well, I hope to go into each of these topics but knocking one item out at a time, I'll concentrate herein on the overpriced stock market.

So the pundits tell you that the stock market is reasonably priced. The common explanation is in using the average PE ratio for the S&P500. Now, I ask, is today anything at all like "AVERAGE"?

The S&P500 PE values all the way up to 1990 were fairly tame. The arithmetic average of the median yearly PE values for the decades from 1900 to 1990 is about 12.8 (median is 12.6).

Years

Median PE Ratio

1901-1910

13.5

1911-1920

9.8

1921-1930

13.2

1931-1940

16.5

1941-1950

9.4

1951-1960

12.5

1961-1970

17.8

1971-1980

9.7

1981-1990

12.9

Note the chart above is quite similar to this chart, however, the difference is in the cut-off years. When data, for example, is marked as Jan 1, 1991, this would pertain to the end of year 1990 and not for the year 1991.

These earlier year PE values for the stock market support my stance that returns on investments should reflect that which is seen in other capital investments such as real estate rentals. In buying rental property, the popular similar comparison is in computing the percentage of the yearly gross returns per purchase price. If the returns are 10%, or better yet at 12%, it would generally be considered a worthwhile investment. In PE terms these ratios of 10 and 12 percent yearly returns correspond to PE ratios of about 10 and 8, respectively. Of course there are additional expenses such as maintenance, property taxes and if not so well-off to buy the property in full, there would be mortgage payments that contribute to raising the effective PE ratios.

Getting back to the stock market, a few decades ago, a couple of means were created to infuse money into the stock market. Falling short of declaring these means as a conspiracy by the wealthy, knowing that if the general public would be contributing a meager amount to the stock market (in relative terms to the upper few percent who own an overwhelming majority of all the shares of stocks), it would give those new persons who contribute a sense of increased wealth - but it's only a facade as the economics behind such price/demand curves dictates that the prices go up a far greater amount than a direct proportion of newly infused money.

IRA accounts began in 1974 and 401-K accounts began in 1978. Of course full implementation didn't take hold immediately but by the early 1990s these type of accounts were solidified in our culture. Not only this but brokerage firms were beginning to cater to the common person and by the late 1990s a plethora of on-line brokerage firms came onto the scene to capitalize on the euphoria of the internet bubble years. But the bubble was already starting to be evident in the mid-1980s as can be seen in the S&P500 chart.

Note that one can extrapolate from any time prior to 1980 with 1980 onto 2012 and the S&P500 index value would clearly be below 400. So what business does the current index value have being above 1400? Those are some gigantic aberrant humps in the graph of the S&P500 from 1990 onward. I am not pushing chart reading but this is fundamental - the obvious humps in the graph should stand out to anyone to show something very strange occurred.

There will come a time when the money going in to the stock market by the ways mentioned above equilibrates. That time has recently begun and it has Ben Bernanke running wild to manipulate the stock market up. Baby boomers are retiring and this means fund outflows are escalating. Bernanke may even be exacerbating the problem with his policies of preventing people from earning bank interest, forcing inflation on them; if they happen to be value investors and have the know-how from different angles of how overpriced this market is to then short it to cause even more monetary losses, then the outflows would be expected to be escalated at a higher rate than otherwise would occur.

Now with this narrative of the past couple of decades, let's now add to the first chart on this page:

Years

Median PE Ratio

1901-1910

13.5

1911-1920

9.8

1921-1930

13.2

1931-1940

16.5

1941-1950

9.4

1951-1960

12.5

1961-1970

17.8

1971-1980

9.7

1981-1990

12.9

1991-2000

23.4

2001-2010

21.1

11/6/2012

16

The year 1991 was the first time the PE value for the S&P500 went beyond 25, though in 1895 and 1934 the values were right up to this as aberrant years. Including for the year 1991, there were 13 years out of the past 21 years which had PE ratios beyond 20! So now you see how the propaganda pundits come up with their long-term average PE ratio for the S&P500 as being around 15 or 16. Again, I reiterate, does today look or feel like any average year? The long-term average before the bubble years was under 13. Let's now view some of the low PE years in a chart:

Year

PE Ratio

1916

6.34

1917

5.72

1918

7.93

1941

7.97

1948

6.62

1949

7.21

1950

7.47

1978

7.88

1979

7.39

So, being there is no doubt we are clearly not in any average time, economically speaking, in our country with our record high debt, massive unemployment (I will go into this in another article but as a teaser, I suggest searching for 23% unemployment rate), real large negative GDP growth rate (again, I will go into greater detail about this shortly in another article) and the effects of the world economy that will cause an averaging effect on all countries, bringing down first-world countries, why would it not be reasonable to attribute a fair PE value for the S&P500 at 6 today? Even at "fair" PE value of 8, this would indicate our present stock market at roughly 2 times overpriced. Don't fall for what those pundits throw at you. They rely on the masses not doing a little homework. Well I helped you on your assignment. I suggest writing the media companies as I do and give them a piece of your mind about how they purposely mislead the public in order to continually pump up the stock market.

Source: This 2X Overpriced Stock Market