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It's a perennial question, but especially in the middle of a rally: Are stocks overvalued? Two...

It's a perennial question, but especially in the middle of a rally: Are stocks overvalued? Two heavweights square off - Merrill Lynch's David Bianco (too cheap) vs. Yale's Robert Shiller (too dear).
Comments (32)
  • davidbdc
    , contributor
    Comments (3165) | Send Message
     
    If you read the article, I think it reinforces why investors are better off spending their time evaluating individual companies and making concentrated investments rather than investing in the "market".

     

    Companies with strong cash flows, solid business models and advantages, strong management, and shareholder friendly boards that return cash to shareholders are the place to be. All the rest of this type of stuff is just background noise.
    9 Apr 2011, 09:25 AM Reply Like
  • The Geoffster
    , contributor
    Comments (4013) | Send Message
     
    Ironically, this article appeared adjacent to the Market Currents article.
    seekingalpha.com/artic...
    9 Apr 2011, 10:25 AM Reply Like
  • mikeybronx
    , contributor
    Comments (347) | Send Message
     
    Davidbdc,

     

    You are absolutely correct in your comment about investing in individual companies and not the market. I have removed myself from the S&P Index funds and have found returns that have outpaced the S&P easily in a select few bluechips. Never one to dive in without due diligience, I have found myself surrounded by physical metals and etf's making a believer of me. Bull or Bear, is the glass half empty or half full ? it all comes down to ones vision and choices.
    9 Apr 2011, 01:10 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    Just buy PM, they have 100% non-USD revenue and the customers are hopeless addicts. Beats every index hands down, especially with the divy.
    9 Apr 2011, 03:12 PM Reply Like
  • Joe Morgan
    , contributor
    Comments (1500) | Send Message
     
    I prefer TOT, crack spreads are near all time highs, and of course a higher dividend yield....5%
    9 Apr 2011, 05:11 PM Reply Like
  • Ohrama
    , contributor
    Comments (515) | Send Message
     
    Look for "Companies with strong cash flows, solid business models and advantages ..... "
    Unfortunately any qualified person (fund managers etc.) would be doing the same implying that the stocks are fully priced under these scenarios. And think what happens when the company condition changes due to circumstances beyond their control? And even if that doesn't happen, when the general market crashes, it takes all companies with it. I have lived through 1987 crash to remember what happened to solid companies (Yes, they all came back quickly, but those who had cash could have scooped more at bargain basement price). Right now things look good through central governments's playing the global system, but who knows how long this game will continue?
    9 Apr 2011, 05:21 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    For once I agree with you. I own alot of TOT, cheapest major out there. Great production in Angola, Burma.

     

    And a candidate to merge with BP (other is RDS.A)
    9 Apr 2011, 05:38 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    Different sectors though. PM will prosper through any economic situation, TOT is very cyclical and a commodity inflation play. Both are good to own.
    9 Apr 2011, 05:39 PM Reply Like
  • Joe Morgan
    , contributor
    Comments (1500) | Send Message
     
    I hold MO, but have to accept PM growth potential is bigger than MO....looking to scale back on MO....and start a position with PM.
    9 Apr 2011, 06:00 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    Do your tea party cronies know you invest in (gasp) french oil companies?

     

    Then again, Cheney is probably 50% in EUR and 50% in AUD.
    9 Apr 2011, 06:19 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    Think Russia and Saudis with gazillions of US petrodollars buying $10 packs of Parliament to impress their harems.
    9 Apr 2011, 06:21 PM Reply Like
  • mikeybronx
    , contributor
    Comments (347) | Send Message
     
    as an alterntive to physical gold i am leaning towards ABX, what is your take?
    9 Apr 2011, 06:35 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    Gold miners as a whole are still undervalued compared to the metal, primarily due to increasing energy costs. ABX is the largest, "big cap" play, yet big moves in the price are unlikely.

     

    NG is the momentum play, GG is the low cost producer, high valuation (25X).

     

    NEM has some operational issues but is severely undervalued at 12X. NEM is also strong in Copper and Silver.

     

    I own NEM via options, I would see how much you want to put into Gold Miners , put 1/3 of the position in ABX, NEM, (NG/GG) each.

     

    A bit complicated but this way you spread out the operational risk, with big upside potential in NEM.
    9 Apr 2011, 07:04 PM Reply Like
  • mikeybronx
    , contributor
    Comments (347) | Send Message
     
    Your insight is most appreciated, thank you very much.
    9 Apr 2011, 08:05 PM Reply Like
  • bbro
    , contributor
    Comments (9852) | Send Message
     
    The Shiller 10 will miss most of the bull markets in the future at the cost of protection from a major bear market.....there are better models
    to measure valuation....
    9 Apr 2011, 10:40 AM Reply Like
  • berated
    , contributor
    Comments (389) | Send Message
     
    Which models do you use to guide your investment decisions?
    9 Apr 2011, 12:47 PM Reply Like
  • nobby73
    , contributor
    Comments (1177) | Send Message
     
    which would have been the right choice for the last decade...
    9 Apr 2011, 02:23 PM Reply Like
  • Wyatt Junker
    , contributor
    Comments (4503) | Send Message
     
    The wooden Shiller would sound better circulating a brandy sniffer, matching his high adenoidal Ivy League pitch.

     

    I would rather ask these two when was the last time either of them pumped their own gas.
    9 Apr 2011, 01:03 PM Reply Like
  • Wyatt Junker
    , contributor
    Comments (4503) | Send Message
     
    Back swan anomalies included versus not included and smoothed out.

     

    Pick your poison.

     

    I like Bianco's method of removing the unusually ahistorical one offs, but then again, they aren't really 'ahistorical' either if they occurred, right?
    9 Apr 2011, 01:15 PM Reply Like
  • DavyJ
    , contributor
    Comments (417) | Send Message
     
    I posted this on another thread a few weeks ago to mixed reviews but here it is again with updated P/Es to the end of March.

     

    Regarding Shiller's CAPE 10 P/E, one has to keep in mind that Shiller's calculations are distorted by the extreme loses in the financials in 2008 and do not reflect the true state of the economy or industry.

     

    For the first time in history, in the 4th quarter of 2008 the S&P 500 actually reported a loss $23.25 for "as reported" earnings and therefore an astronomical P/E for the year. Excluding the big financial companies, the rest of the 500 companies did just fine. The Shiller P/E won't be a reliable indicator again until 2018 when the 2008 numbers fall out of the average.

     

    For the record, the P/E of the DJIA as of the end of March 2011 was as follows:
    14.97 Trailing twelve months
    12.75 Current year estimates
    11.45 next year estimates
    9 Apr 2011, 02:45 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    The whole economy is totally disorted anyway by QE 2, I'll take Schiller's track record, foreseeing the internet and credit/real estate bubble.

     

    Anyway, S&P estimates are probably based on $75 Oil (Now $113), $100 Coffee (Now $274) and $300 Corn (Now $774) . Has anybody downgraded SBUX on the +125% increase in coffee prices?

     

    In other words, S&P estimates are completely useless with such ginormous moves in commodities.
    9 Apr 2011, 03:11 PM Reply Like
  • Econdoc
    , contributor
    Comments (2944) | Send Message
     
    No overvaluation while the earnings yield has a spread over the the BAA yield - just not possible. Yes. You get temporary day to day swings - there is always headline risk - but while this condition holds the market grinds on like a glacier fed by snow. Everything else. Everything else is noise at this point until the Fed changes policy and starts to tighten. 12 months from now.

     

    E is for earnings.

     

    E
    9 Apr 2011, 03:11 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    Right, commodity costs are irrelevant to earnings. Silly me.
    9 Apr 2011, 03:39 PM Reply Like
  • Econdoc
    , contributor
    Comments (2944) | Send Message
     
    Only up to the point at which you hit capacity - up to that point profits will increase pretty significantly and costs can be absorbed

     

    Even at that point it is a line ball on whether they matter - since 40 to 70% of the cost of most items is labor - it is changes in that component that have a much greater impact.

     

    Once you have sunk the capital into a plant and have the people in place to run it is best t to keep it churning out product - you can spread your fixed over a greater volume so even if your unit profit on any item is crimped a little by an increase in commodity costs - you make it up

     

    The cost of the corn in a box of cereal is less than 5% of the retail price - for a dress shirt - the amount of cotton could amount to less than $2 to $3 - a trifling amount when it might retail for $40 to $100.

     

    Rising commodity prices are in some ways great news for retailers and their suppliers - it gives them ample cover to try to raise prices - that is why they talk this up at every turn. But if you raise the price of a box of Corn Flakes by 5% - you have taken care of a lot of corn price inflation - prices are up 50% YOY so the small price hike more than covers that and more - which is actually the point.

     

    so - yes - maven - you are being silly.

     

    E
    10 Apr 2011, 12:45 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    Therefore Zimbabwe must be the world's greatest economy.

     

    No wonder your currency goes down 1% per day. Mine goes up.
    10 Apr 2011, 04:54 PM Reply Like
  • MarketGuy
    , contributor
    Comments (3983) | Send Message
     
    Idiotic...sure, just raise prices in an economy of record un and under employment. Typical tunnel vision economics from you again.
    12 Apr 2011, 02:34 PM Reply Like
  • fxmaven
    , contributor
    Comments (1455) | Send Message
     
    For food the COGS are 40-50% of the sales price, not 5%. I ran a Food plant for five years, you can't BS anybody on this one. No Way. So they are hammered by high energy and ag prices.

     

    For apparel the major costs are Asian labor (skyrocketing), and transport prices. Just because US labor markets are so awful people accept a real wage cuts just to have a job this is not true in Asia, the true driver of the world production economy.

     

    You are also ignoring the transport costs (higher fuel), for both consumers and distribution.

     

    just cherry picking data which fits your arguments, which are so easily refuted.
    17 Apr 2011, 04:30 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5423) | Send Message
     
    Bianco is right. As far as the time period, data since 1987, the first computer driven market crash, should be used.

     

    Before the advent of computerized trading, there was not enough volume to make listed prices credible. Buy and hold was the norm. You can't draw conclusions about strategy and prices from that era because you couldn't buy enough stock at the listed prices to do anything. If you had tried, by the time everybody cranked up the phone and talked to each other the price would have doubled.

     

    The huge writeoffs from the 4th quarter of 2008 don't have anything to do with normalized earnings. Citigroup and AIG between them wrote off enough to bring the S&P earnings to zero. Many other companies made draconian staff cuts and restructuring, or wrote off goodwill from acquisitions, all of which made them leaner and stronger. Investors have been looking past those writeoffs when they evaluate the individual stocks and they will do the same with the index.

     

    The simple proof: Shiller's analysis would have put you back on the sidelines months ago, and kept you from participating in the fine bull market.

     

    I did an article on the subject back in May of last year, it also covers risk premium and the relationship of stock and bond prices.

     

    seekingalpha.com/artic...
    9 Apr 2011, 04:02 PM Reply Like
  • dividend_growth
    , contributor
    Comments (2895) | Send Message
     
    I don't think write-offs should be taken lightly, because they mean that those managements have wasted shareholder capital on overpriced assets.

     

    If you look at AIG's combined ratio in 2010, it's still terrible. The 10Ks says that those losses were basically a result of poorly written policies prior to 2007, and the company doesn't know how longer those long-tail losses could still drag on.
    9 Apr 2011, 08:04 PM Reply Like
  • superpatrol
    , contributor
    Comments (616) | Send Message
     
    who is right? i'll bet against the merrill lynch guy 9 times out of 10. Shiller is far more reliable
    9 Apr 2011, 09:22 PM Reply Like
  • superpatrol
    , contributor
    Comments (616) | Send Message
     
    bianco has a point with subtracting off the dividend yields. A while back, I reran the Shiller data after subtracting off dividends. But I still found that stocks are overvalued. I also think one should subtract off the amount spent on share buybacks, but I can't find the data needed to make that calculation.

     

    It appears that the biggest adjustment that Bianco is making is ignoring the write-offs. I think this is a poor decision.

     

    Anyway, the Shiller/Bianco PE has less predictive power than valuation metrics based off Tobin's Q. These valuation metrics make it very clear that stocks are overvalued.
    9 Apr 2011, 09:41 PM Reply Like
  • dividend_growth
    , contributor
    Comments (2895) | Send Message
     
    Some old valuation metrics such as Market Cap / GDP is also losing its usefulness. Since half of S&P 500 earnings already come from foreign countries and world equity markets are becoming more correlated, Global Market Cap / Global GDP may be the better metric.
    9 Apr 2011, 10:13 PM Reply Like
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