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Ben Sharvy
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I've been investing for about 10 years.
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  • Market Indicators at Year's End
    There are three well-known ways of valuing the stock market that are based on publicly available information.

    Two are based on earnings: 1) The ratio of total stock market capitalization to gross national product (GNP), popularized by Warren Buffett. 2) A cyclically adjusted PE ratio (typically a 10-year PE ratio). The 10-year PE was popularized by Robert Schiller (but not first proposed by him).

    The other ratio is Tobin's Q, similar to a market price-to-book ratio. It measures the replacement cost of publicly traded companies.

    Taken as a whole, where do these indicators stand? The total market capitalization of US stocks is approximately 15.5 trillion. The GNP is also roughly 15.5 trillion. In other words, the Buffett ratio ratio is roughly 1. According to Buffett, that is average; he considers a ratio of around .75 to be a good deal. In his 2001 article when the ratio was 1.3, he suggested the market might return 7% annually over ten years (it yielded around 2%).

    Schiller publishes the 10-year PE ratio on his Web site. It is currently 21, in comparison to the historic average of 16.4. Again, the market seems to be overvalued, or at least no screaming deal.

    Finding values for Tobin's Q is a bit more complicated. Smithers & Co. (an asset manager) tracks it. According to that source, the market is roughly 33% overvalued (it was 29% overvalued on SEP 30.

    What other buy/sell signals are there for the market as a whole? Valuation indicators are bets on mean-reversion. What about betting on the trend? The market is just below its 200-day moving average. Nothing bullish there.

    There is one highly bullish economic signal. The yield curve is substantially positive. A difference of more than 65 basis points between the 3-month and 10-year Treasury is bullish. The current spread is 187 basis points. But, that is because the 3-month Treasury yields virtually nothing. This is an economic indicator, rather a stock market indicator per se, although it is histocially correlated with bull markets. The current low rates stimulate the market because the world's main investment choices are corporate and sovereign, and sovereign debt is expensive when rates are low. However, a stimulus is, by definition, not sustainable long-term, and this particular stimulus has been operating since the financial crisis.

    In summary, we enter the new year with the following picture:  
    3 valuations, 1 trend, and 1 economic indicator = kinda bearish

    Notes
    * Schiller updates the 10-year PE ratio on his Web site. Hussman funds discusses the value of a cyclically adjusted PE ratio (NYSEARCA:CAPE), preferring a 5-year ratio. CXO Advisory supports the 8-year PE ratio.
    * The GDP is easier to find than the GNP. Gurufocus tracks Buffett's ratio using the GDP. The St. Louis Fed publishes the GNP. My source for total market cap is the two total stock market indices. The Wilshire 5000 (1 point is 1.2 billion dollars) and the Dow Jones Total Stock Market Index. They produce slightly different values, probably because of different ways of adjusting for float (the full cap, non-float-adjusted version seems logical to me, but that gives a higher valuation than some other measures). Both are in the $15 trillion range. Buffet's article was
    published in Fortune magazine.
    * The Treasury spread is published at the Treasury's Resource Center. Discussion of the spread's effect on markets can be found at Crossing Wall Street and in last week's Barron's interview with Van Hoisington.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: SPY, VTI, valuation
    Jan 03 11:36 PM | Link | Comment!
  • Alternative energy not tracking oil
    Alternative energy is getting none of the boost that it has previously gotten from high oil prices. The reasoning has always been that high oil prices incentivizes investment in alternatives. It makes them cost competetive, and it makes the public conscious of the need to develop a diversity of sources. Yet, this graph suggests the reasoning is not present in the markets at the moment. The red and blue lines represent the price of oil (NYSEARCA:USL) and the iShares energy ETF; the green and pink lines are solar (NYSEARCA:TAN) and wind (NYSEARCA:FAN) ETFs, respectively:



    One likely expalanation is that wind and solar are primarily candidates for power generation, and as such compete with coal, natural gas, and nuclear. Oil, since it's portable, is a transportation fuel.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: TAN, FAN, USL, energy, solar, wind
    Dec 22 1:36 PM | Link | Comment!
  • Test
    This is a test. Sweden and Australia have cheap stock markets. 

    Disclosure: none
    Mar 21 4:33 PM | Link | Comment!
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