ERICOPOLY Posted January 10, 2012 Share Posted January 10, 2012 I think it will happen again (market at 5x P/E). However because I don't know when it will happen I therefore can't make any use of my forecast. I also think that I'm going to die. But that doesn't help me either because I don't know when. So I can't even get dressed in the morning because I think maybe today is the day that I get killed by a drunk driver. Link to comment Share on other sites More sharing options...
bmichaud Posted January 10, 2012 Share Posted January 10, 2012 The rest was just post game celebration Hahaha. Well said. Link to comment Share on other sites More sharing options...
meiroy Posted January 10, 2012 Share Posted January 10, 2012 If I'm not mistaken Graham himself has advised that an investor should be careful when purchasing what appears to be cheap companies at market highs. Ericopoly, Malarky, you will not die. (sorry, I just really wanted to use that word.) Link to comment Share on other sites More sharing options...
bmichaud Posted January 10, 2012 Share Posted January 10, 2012 I was referring to shorting with regard to BB. It's a portfolio management decision. Greenblatt's strategy of bottoms-up stock picking got CRUSHED in the downturn. Pabrai got CRUSHED in the downturn utilizing "bottoms-up" without hedging. I'm not on a limb here worrying about market risk. I am pretty sure bb can buy ultrashort ETFs and fpa crescent fund actually hold short positions. But I think I will just leave it here and let the thread speak for itself. :) Nice edit after the fact, BTW. fpa crescent fund Link to comment Share on other sites More sharing options...
bmichaud Posted January 10, 2012 Share Posted January 10, 2012 I think it will happen again (market at 5x P/E). However because I don't know when it will happen I therefore can't make any use of my forecast. I also think that I'm going to die. But that doesn't help me either because I don't know when. So I can't even get dressed in the morning because I think maybe today is the day that I get killed by a drunk driver. I dont know if we will get down to 5x on the market (one can only pray for such an environment!), but taking a cursory look at past bear markets, they tend to last for 15 years give or take, and end at 7 or 8 times earnings on the market. If we can agree the secular bear we are currently in started in 2000, then we have the potential for a range-bound market for the next 4 years let's say. So right now the ten year median inflation adjusted EPS on the SP 500 is around $70, and if we assume a 6% growth rate for the next four years, 2015 EPS will be around $88. 10 times that is 880 on the market in 2015, so not only is it plausible the market is flat for the next four years, but could EASILY decline. Obviously that is a very crude forecast fraught with risks, but it is one way of looking at the general environment and giving yourself a rough time frame for when downside risk could materialize. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 10, 2012 Share Posted January 10, 2012 So right now the ten year median inflation adjusted EPS on the SP 500 is around $70 Everyone thinks their family is more dis-functional than others, but what can you make of this data? You've got a couple of years of recession in 2002 and 2003, then a mega recession in 2009. I mean, those three years combined don't even measure up to 2011 which is a year in which many people feel like we're still in a depression! Are we in a normal dataset or is there something a little messed up here? Oh, and our dollar depreciated like crazy during this time frame thereby boosting the earnings of our huge exporting multinationals. Our financial sector is also still taking crazy losses that are suppressing their earnings. The data: 2011-09 86.73 2011-01 80.82 2010-01 56.68 2009-01 13.08 2008-01 68.86 2007-01 91.71 2006-01 80.82 2005-01 70.16 2004-01 60.87 2003-01 35.48 2002-01 31.54 source: http://www.multpl.com/s-p-500-earnings/table Link to comment Share on other sites More sharing options...
bmichaud Posted January 10, 2012 Share Posted January 10, 2012 Look at another way. Long term profit margins are 6%, and with current sales on the SP around 1000, normalized EPS would be $60. I'm being conservative using $70, IMO. I look at it another way too, adjusting ten years worth of sales for inflation and taking the ten year median. This alleviates the problem of having the majority of years at record high profit margins distort the EPS figure. I can get to a FV of 1000 using this method. But to your question on having two recessions in the data set, that is exactly the point, to have earnings spanning economic cycles. I use the median as oppose to average in order to account for the record low EPS in 2008/2009. Hussman for example uses the average which has $19 EPS in the calculation. IMO, his numbers are overly bearish. Link to comment Share on other sites More sharing options...
Guest Posted January 10, 2012 Share Posted January 10, 2012 As far as markets go, are stocks cheap based on pre-1980 valuation methods? I would think that with more and more people adding to the market, plus increased profitability with leverage, that the markets may not get as cheap as they were in the 1980s unless something really, really bad happens. Link to comment Share on other sites More sharing options...
StubbleJumper Posted January 10, 2012 Share Posted January 10, 2012 Hey, don't worry about broad market valuation in a historical context. It's different this time. ;D ;D ;D SJ Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 10, 2012 Share Posted January 10, 2012 The data is inflation adjusted per share earnings. Does anyone have data that strips out the effect of share issuance/repurchase? Surely it matters to you too. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 10, 2012 Share Posted January 10, 2012 Historical dividend payout ratio (not going back as far as I would like): http://www.early-retirement-planning-insights.com/SP500-dividend-payout-chart.html Do you guys reckon any per-share return is earned on the retained earnings? Berkshire Hathaway grows it's earnings per share at an above average rate in part because it retains it's earnings (the rest is pure magic of course). Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 10, 2012 Share Posted January 10, 2012 Second question: If retained earnings are used to acquire cash cow bolt on acquisitions (like when JNJ buys a medical device maker)... What is your method? Do you disregard the new earnings from the retained-earnings-induced-acquisition -- that is, do you just pretend it didn't happen and use the prior decade-ago earnings when you value JNJ? Link to comment Share on other sites More sharing options...
vinod1 Posted January 10, 2012 Share Posted January 10, 2012 Look at another way. Long term profit margins are 6%, and with current sales on the SP around 1000, normalized EPS would be $60. I'm being conservative using $70, IMO. I look at it another way too, adjusting ten years worth of sales for inflation and taking the ten year median. This alleviates the problem of having the majority of years at record high profit margins distort the EPS figure. I can get to a FV of 1000 using this method. But to your question on having two recessions in the data set, that is exactly the point, to have earnings spanning economic cycles. I use the median as oppose to average in order to account for the record low EPS in 2008/2009. Hussman for example uses the average which has $19 EPS in the calculation. IMO, his numbers are overly bearish. I have been making pretty much the same argument since 2005 to myself and to anyone who would listen to my rants. This is probably one of the root causes for me personally in avoiding much of financial crisis. As with many of these kinds of questions, I always ask myself "What would cause me to change my mind that the mean for profit margins has migrated to a higher level?" I noted that if profit margins in the years around 2010 still remain elevated I need to revise my thinking on this since it is more likely that I was wrong if profit margins could remain elevated for so long. I had written out my thoughts in that period in a sort of investment diary. I am now leaning towards the fact that normalized profit margins might justifiably be higher than they have in the past. If we use S&P 500 margins. First, the composition of the industries that are in the index is going to change and that would impact the profit margins as well. A larger percentage of retailers in the index would reduce profit margins say when compared to say having a larger percentage of Tech. Second, if many companies outsource lower margin operations to other countries then profit margins must trend higher on those that remain. I do not think the estimate of $100 and $105 for 2011 and 2012 for S&P 500 earnings are normal. However, I also think the estimate of $60 might be too pessimistic. Normalized margins might more likely to be in the 7-8% range. I agree with Grantham that profit margins are the most mean reverting of all in a capitalistic economy. But he (or others) does not say anything about what profit margins are normal or that mean profit margins should not change with structural changes in economy. I think profit margins might be more likely to be mean reverting around the 7-8% range going forward. Vinod Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 10, 2012 Share Posted January 10, 2012 My portfolio is concentrated in financials which trade well below the mean, however I remain very interested in the market valuation level as a whole. Partly because it impacts financials. What is going to cause this mean reversion in profit margins? Will it be an investment and hiring boom from upstart competitors that will blow bank earnings and growth through the roof? Is S&P500 mean profit margin reversion something for me to fear as a bank investor or is it instead an opportunity? Link to comment Share on other sites More sharing options...
vinod1 Posted January 10, 2012 Share Posted January 10, 2012 My portfolio is concentrated in financials which trade well below the mean, however I remain very interested in the market valuation level as a whole. Partly because it impacts financials. What is going to cause this mean reversion in profit margins? Will it be an investment and hiring boom from upstart competitors that will blow bank earnings and growth through the roof? Is S&P500 mean profit margin reversion something for me to fear as a bank investor or is it instead an opportunity? LOL. You are always so optimistic. Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power? Vinod Link to comment Share on other sites More sharing options...
vinod1 Posted January 10, 2012 Share Posted January 10, 2012 My portfolio is concentrated in financials which trade well below the mean, however I remain very interested in the market valuation level as a whole. Partly because it impacts financials. What is going to cause this mean reversion in profit margins? Will it be an investment and hiring boom from upstart competitors that will blow bank earnings and growth through the roof? Is S&P500 mean profit margin reversion something for me to fear as a bank investor or is it instead an opportunity? LOL. You are always so optimistic. Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power? Vinod Thinking a bit more about this, I think the argument could be much simpler. Banks have consumers and businesses as their major customers. The fact that profits for one (businesses) would reduce the profits of the other (customers), so I would think they should roughly even out and it should not make much of a difference to banks profits. There might be an optimal balance of profits between the two sets of customers of banks but overall I do not see much impact to banks profitability based on how the pie (profits) get divided between the two. Vinod Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 10, 2012 Share Posted January 10, 2012 My portfolio is concentrated in financials which trade well below the mean, however I remain very interested in the market valuation level as a whole. Partly because it impacts financials. What is going to cause this mean reversion in profit margins? Will it be an investment and hiring boom from upstart competitors that will blow bank earnings and growth through the roof? Is S&P500 mean profit margin reversion something for me to fear as a bank investor or is it instead an opportunity? LOL. You are always so optimistic. Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power? Vinod Hire 6 million people and pay them $50k each. That's $300 billion. Nice dent in the unemployment rate. What drives bank consumer losses BTW? Link to comment Share on other sites More sharing options...
bmichaud Posted January 10, 2012 Share Posted January 10, 2012 Eric, The attached spreadsheet should have all the data you're looking for as far as payout ratios. The payout ratio column is my own construction, as Schiller does not provide in his spreadsheet. The highlighted box shows the median payout ratio since 1945, 1960 and 1980 to be, 51%, 48% and 43% respectively. Even more interesting, IMO, are the historical growth rates for EPS and DVPS. Dividend growth per share has stayed remarkably stable over time, stabilizing at around 5% per annum. EPS ont he other hand, has averaged 12% over the last 10 years, 6% over the last 30 years, and 7% over the last 50 years. These are unadjusted GAAP earnings for the market. IMO, if share repurchases were achieving their intended effect, we would see DVPS growth move higher over the last ten or twenty years. So the actual cash investors are receiving has stayed relatively constant on a growth basis for some time, which would indicate to me, reported EPS is for some reason overstating true sustainable FCF to equity holders. Perhaps the O&G industry is contributing to the profit margin bubble due to the fact that D&A in that industry understates the maintenance CAPEX needs for the industry to sustain current earning power. It certaintly would be interesting to analyze on a sector by sector basis. FWIW - sales per share as of Q411 were 1,018, and 10y median inflation-adjusted sales per share are 959. I went back and looked at what the market was trading at on a price-to-sales basis (using the 10y median inflation-adjusted sales figure) when WEB wrote his NYT op-ed - adjusted sales per share were 833, and the market was around 916, for an approximate 1.1x multiple. Applying that to the current 959, brings us to around 1,050. Schiller_December_2011.xls Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 10, 2012 Share Posted January 10, 2012 Even more interesting, IMO, are the historical growth rates for EPS and DVPS. Dividend growth per share has stayed remarkably stable over time, stabilizing at around 5% per annum. EPS ont he other hand, has averaged 12% over the last 10 years, 6% over the last 30 years, and 7% over the last 50 years. These are unadjusted GAAP earnings for the market. IMO, if share repurchases were achieving their intended effect, we would see DVPS growth move higher over the last ten or twenty years. So the actual cash investors are receiving has stayed relatively constant on a growth basis for some time, which would indicate to me, reported EPS is for some reason overstating true sustainable FCF to equity holders. Dividend rate may be retarded somewhat by the piles of cash being retained overseas by US multinationals (the S&P500 is after all a large cap weighted index). I would expect some improvement (how much I'm not sure) if there were no US tax levied on repatriated profits. This slope might be associated with the increasingly globalized nature of the profits (or might not): http://www.early-retirement-planning-insights.com/SP500-dividend-payout-chart.html Has there been any historical rise in acquisitions using retained earnings? Like for example the rise of conglomerates in the index. Link to comment Share on other sites More sharing options...
vinod1 Posted January 10, 2012 Share Posted January 10, 2012 Hire 6 million people and pay them $50k each. That's $300 billion. Nice dent in the unemployment rate. What drives bank consumer losses BTW? I get your point, but the $300 billion is going to spread out over many different economic segments of the population. Some of it is going as salary increases or bonus pools of people who are already in the high income bracket. I would bet a pretty significant chunk of it goes to this segment. Some of it should go into denting unemployment as you point out. I would also think that some of this would be mitigated by higher chargeoffs and lower revenues from the now poorer non-financial companies. So I am not sure how much net benefit banks would get from lower profit margins overall. Vinod Link to comment Share on other sites More sharing options...
ERICOPOLY Posted January 10, 2012 Share Posted January 10, 2012 If it's only 1/3 of the money going to new hiring, the 2 million new jobs at $50k each adds a lot to new household formation. New household formation drives recovery in home construction, and that drives new jobs and new household formation even further. Anyhow, like I said I've concentrated my portfolio upside in BofA. So my narrative fits my strategy. What a coincidence :o Link to comment Share on other sites More sharing options...
vinod1 Posted January 10, 2012 Share Posted January 10, 2012 My portfolio upside is concentrated in BAC as well. Cognitive dissonance though for me :) Vinod Link to comment Share on other sites More sharing options...
rijk Posted August 15, 2012 Share Posted August 15, 2012 why would the bac data on MC/GDP (160%) be so different from the GuruFocus figure (97%)? regards rijk http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/08/20120815_stock2.png http://www.gurufocus.com/stock-market-valuations.php Link to comment Share on other sites More sharing options...
NormR Posted August 15, 2012 Share Posted August 15, 2012 One of them used GNP instead? (Btw, doesn't it make more sense to use GNP instead of GDP in any event?) Link to comment Share on other sites More sharing options...
twacowfca Posted August 16, 2012 Share Posted August 16, 2012 My portfolio is concentrated in financials which trade well below the mean, however I remain very interested in the market valuation level as a whole. Partly because it impacts financials. What is going to cause this mean reversion in profit margins? Will it be an investment and hiring boom from upstart competitors that will blow bank earnings and growth through the roof? Is S&P500 mean profit margin reversion something for me to fear as a bank investor or is it instead an opportunity? LOL. You are always so optimistic. Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power? Vinod Hire 6 million people and pay them $50k each. That's $300 billion. Nice dent in the unemployment rate. What drives bank consumer losses BTW? Hire them? For something productive? Don't bet on the government doing something productive. On the other hand, a $300B cut in the most regressive tax of all, the employment security tax, paid by both individuals and employers would stimulate hiring in 1001 productive (translation profitable) ways. The unemployment rate would soon come down to normal as increased profits by the forgotten engine of the economy, the small businessperson,would bring into the workforce less desirable workers that big businesses won't hire. Then, GDP would increase sharply as it has not with handouts. Link to comment Share on other sites More sharing options...
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