VAL9000 Posted May 9, 2013 Posted May 9, 2013 Sure, the Shiller P/E has been on average 20% higher in the US than in Europe since 1990 (although it was lower before). But now it is about >70% higher. If the Euro doesn't blow up soon (and it doesn't look like it will), EU stocks should outperform significantly. Yeah I think that's right.. I was nitpicking but that kind of discrepancy can't be ignored. I am thinking of investing in a bucket of banks over there, names like Bank of Ireland and Santander. I think they will be downside protected even if everything else continues to suck.
bmichaud Posted May 9, 2013 Posted May 9, 2013 I honestly don't see why individual greed is needed for a market top (where was the individual at the 2007 top?) - those that control the bulk of equities are balls to the wall long based on "cheap" stocks, "there is nowhere elae to earn a return", Draghi and the Fed. Margin debt is approaching all time highs - by definition I don't see how there can be so called "under exposure" when there is so much margin debt.
Guest valueInv Posted May 9, 2013 Posted May 9, 2013 I would say I am being more prudent. I have reached zero cash for the first time in years, as opposed to carrying margin. Part of this is because I have reached certain financial milestones, and see no reason to carry excess exposure any more, especially with my biggest holdings all closing on short/medium term projections. Inevitable corrections aside, we are still early in this cycle. Coming out of a recession always sees financials rally first, which is in process. Employment is picking up, and the markets, if they are a leading indicator suggest there is much more to come, in Europe and here. But a 30% correction along the way is never off the table. I think we go at least 10 years out before another meltdown the size of 2009 is anywhere in the cards. Buffett seems fairly optimitic. Given he has a handle on virtually every sector of the economy he would know. I think his cash position is the result of not being able to find big enough targets to soak it up. Klarman always carries cash. Francis is probably having trouble deploying cash using his asset based style. I bet he is all in with FFh or Kennedy Wilson on the next Private Equity deal - perhaps NBG. We all know Prem's position. I wouldn't read too much into cash positions. People are missing out some positive long term macro trends. The US has been growing slowly - that doesn't mean it will continue to do so. Once we reach full employment, you'll probably start seeing inflation kicking in. Having a lot of cash at the point is not going to help. Over the long term, cheaper energy prices are also going to make a lot of difference. As usual, I think Buffet is right. Ignore the macro; stick to things you can predict. You don't sell a good business because the market is down, why would you sell it because the market is up?
Parsad Posted May 9, 2013 Author Posted May 9, 2013 Can you comment on what the indexes should logically be priced at? Given the earning power of say the S&P 500 and where we are with interest rates, what is your calculation of the intrinsic value of the index (or even a broad range)? And if your answer is that the indexes are overvalued by x, I would ask why that changes your behavior in actively picking individual stocks? 80% or less of total market cap to GDP. Ask yourself what the total US Market Cap to GDP is presently. It does not change my behavior, but my ability to find undervalued opportunities, as they are fewer and harder to find. Cheers!
rjstc Posted May 9, 2013 Posted May 9, 2013 Can you comment on what the indexes should logically be priced at? Given the earning power of say the S&P 500 and where we are with interest rates, what is your calculation of the intrinsic value of the index (or even a broad range)? And if your answer is that the indexes are overvalued by x, I would ask why that changes your behavior in actively picking individual stocks? 80% or less of total market cap to GDP. Ask yourself what the total US Market Cap to GDP is presently. It does not change my behavior, but my ability to find undervalued opportunities, as they are fewer and harder to find. Cheers! 109.2% 2 1/2% return including dividends?
meiroy Posted May 9, 2013 Posted May 9, 2013 Can you comment on what the indexes should logically be priced at? Given the earning power of say the S&P 500 and where we are with interest rates, what is your calculation of the intrinsic value of the index (or even a broad range)? And if your answer is that the indexes are overvalued by x, I would ask why that changes your behavior in actively picking individual stocks? 80% or less of total market cap to GDP. Ask yourself what the total US Market Cap to GDP is presently. It does not change my behavior, but my ability to find undervalued opportunities, as they are fewer and harder to find. Cheers! Why? Listed stocks on NYSE only have revenue from the US? You are saying that Apple's marketcap or Goldman Sachs' or what have you should only be connected to a local GDP even though a part of their revenue is related to other markets' GDP? Should we also ignore those trillions in investments coming in from non US countries? There is only ONE market and it is the global market with lots of small markets inside. This is why messing with big macro economic calls is so hard, there are always much more variables in the equation than it seems. Even if you are right timing can kill. That's why Value Investing works. If the market really crashes, sell at a tax loss and buy those 5 cents on the dollar. Rinse and repeat.
finetrader Posted May 9, 2013 Posted May 9, 2013 I like Howard Marks's model concerning market cycles. I think he said he feels we are in 7th inning lately. If US unemployment continue to decrease we might have wage inflation.. And that is a big treat for stocks. The day to day products and services inflation. Because this will leads to higher interest rate. Asset inflation due to low interest rate is actually very good for stocks as we can see right now. I kind of agree with this 7th inning call. I mean, i see generous valuation for stocks but no over values. Maybe some dividend stocks are a bit to high but growth stocks have rooms to go higher. And if there is a bubble right now, it is in bond. Would it burst, where would the money go? In stocks?...
dolce2think Posted May 9, 2013 Posted May 9, 2013 Sanjeev, it would be interesting to know which "discount rate" you use for your 200 stock universe. I am not asking for an exact answer, nor is a DCF always sensible, but my problem with the current valuations is simply the very low interest rate environment. The low/negative real yield will have to persist here for many years to come for the deleveraging to happen, in Europe even more compulsive than in the US. Or you have to see a growth pick up from somewhere. So this is in my opinion leading the whole market - and as earnings have likely peaked, it is a risky jigsaw game. Therefore people are hesitant to leave the market and go cash, while I also see a disconnect building, that will eventually lead to a heavy correction. Over time - inlcuding corrections - one could argue that more and more money will get sucked into the markets, into the remaining stocks that offer stable/rising earnings streams. Negative real yields will drive irrational decisions.
Parsad Posted May 9, 2013 Author Posted May 9, 2013 Can you comment on what the indexes should logically be priced at? Given the earning power of say the S&P 500 and where we are with interest rates, what is your calculation of the intrinsic value of the index (or even a broad range)? And if your answer is that the indexes are overvalued by x, I would ask why that changes your behavior in actively picking individual stocks? 80% or less of total market cap to GDP. Ask yourself what the total US Market Cap to GDP is presently. It does not change my behavior, but my ability to find undervalued opportunities, as they are fewer and harder to find. Cheers! Why? Listed stocks on NYSE only have revenue from the US? You are saying that Apple's marketcap or Goldman Sachs' or what have you should only be connected to a local GDP even though a part of their revenue is related to other markets' GDP? Should we also ignore those trillions in investments coming in from non US countries? There is only ONE market and it is the global market with lots of small markets inside. This is why messing with big macro economic calls is so hard, there are always much more variables in the equation than it seems. Even if you are right timing can kill. That's why Value Investing works. If the market really crashes, sell at a tax loss and buy those 5 cents on the dollar. Rinse and repeat. This is the same argument we heard in 1999 and 2007. What we all found out is that doing the above provides far less return on investment than simply being patient and waiting for a fat pitch. Incidentally, if you are including the global market, you should be even more concerned, as I feel that the U.S. economy is actually in far better shape than the global economy...I've said that for the last two years. Every time investors have bought assets with a low risk premium, based on the low interest rate environment, they've been burned considerably. Just because Buffett is buying stocks, doesn't mean that a significant correction isn't around the corner. Remember, he was bullish on stocks back in October 2008, yet the bottom did not hit until early 2009 after a 25%+ drop. Just like Prem being bearish since early 2010 hasn't been right either. No one ever gets the timing right...but the risk premium should always be adequate...otherwise you could end up breaking "Rule #1"! Cheers!
JBird Posted May 9, 2013 Posted May 9, 2013 Can you comment on what the indexes should logically be priced at? Given the earning power of say the S&P 500 and where we are with interest rates, what is your calculation of the intrinsic value of the index (or even a broad range)? And if your answer is that the indexes are overvalued by x, I would ask why that changes your behavior in actively picking individual stocks? 80% or less of total market cap to GDP. Ask yourself what the total US Market Cap to GDP is presently. It does not change my behavior, but my ability to find undervalued opportunities, as they are fewer and harder to find. Cheers! I hope this doesn't sound pedantic, but why 80%? I would love as many details as possible.
Parsad Posted May 9, 2013 Author Posted May 9, 2013 Can you comment on what the indexes should logically be priced at? Given the earning power of say the S&P 500 and where we are with interest rates, what is your calculation of the intrinsic value of the index (or even a broad range)? And if your answer is that the indexes are overvalued by x, I would ask why that changes your behavior in actively picking individual stocks? 80% or less of total market cap to GDP. Ask yourself what the total US Market Cap to GDP is presently. It does not change my behavior, but my ability to find undervalued opportunities, as they are fewer and harder to find. Cheers! I hope this doesn't sound pedantic, but why 80%? I would love as many details as possible. http://www.gurufocus.com/stock-market-valuations.php Cheers!
meiroy Posted May 9, 2013 Posted May 9, 2013 Can you comment on what the indexes should logically be priced at? Given the earning power of say the S&P 500 and where we are with interest rates, what is your calculation of the intrinsic value of the index (or even a broad range)? And if your answer is that the indexes are overvalued by x, I would ask why that changes your behavior in actively picking individual stocks? 80% or less of total market cap to GDP. Ask yourself what the total US Market Cap to GDP is presently. It does not change my behavior, but my ability to find undervalued opportunities, as they are fewer and harder to find. Cheers! Why? Listed stocks on NYSE only have revenue from the US? You are saying that Apple's marketcap or Goldman Sachs' or what have you should only be connected to a local GDP even though a part of their revenue is related to other markets' GDP? Should we also ignore those trillions in investments coming in from non US countries? There is only ONE market and it is the global market with lots of small markets inside. This is why messing with big macro economic calls is so hard, there are always much more variables in the equation than it seems. Even if you are right timing can kill. That's why Value Investing works. If the market really crashes, sell at a tax loss and buy those 5 cents on the dollar. Rinse and repeat. This is the same argument we heard in 1999 and 2007. What we all found out is that doing the above provides far less return on investment than simply being patient and waiting for a fat pitch. Incidentally, if you are including the global market, you should be even more concerned, as I feel that the U.S. economy is actually in far better shape than the global economy...I've said that for the last two years. Every time investors have bought assets with a low risk premium, based on the low interest rate environment, they've been burned considerably. Just because Buffett is buying stocks, doesn't mean that a significant correction isn't around the corner. Remember, he was bullish on stocks back in October 2008, yet the bottom did not hit until early 2009 after a 25%+ drop. Just like Prem being bearish since early 2010 hasn't been right either. No one ever gets the timing right...but the risk premium should always be adequate...otherwise you could end up breaking "Rule #1"! Cheers! Sorry, but I don't see much consistency in your arguments so not clear how to reply to that. You have started this thread due to worrying and concern about a general market/economic situation. The "wait for a fat pitch" and only buy cheap individual stocks compared to their individual IV is a basic investing method which one would apply regardless of the market situation. Of course the cheapness has to be compared to the estimated IV and not because other stocks are much more expensive. You do agree that timing the market in the long run is impossible, so why worry about it. Just don't time. And if it drops again 25% as you say, you can rinse and repeat again. Even the dip last year was used for that. Anyhow, I'll stop here and will just agree to disagree and would just repeat my recommendation to kick out the TV from your life. One of the best things I did in the past few years. You could always buy DVDs of movies and series, it actually saves a ton of money considering the higher productivity and the peace of mind. You are obviously very talented and intelligent, no doubt more than I, yet we all should be proactive about defending our decisions from emotional biases and kicking the dumb tube is one of the best things to do.
JBird Posted May 9, 2013 Posted May 9, 2013 Did you pick the 80% figure because the Guru article posits that as a fair value, or do you agree with their underlying logic? If you agree with their logic, do you also agree that returns will average 2.5% over the next 8 years?
Parsad Posted May 9, 2013 Author Posted May 9, 2013 Did you pick the 80% figure because the Guru article posits that as a fair value, or do you agree with their underlying logic? If you agree with their logic, do you also agree that returns will average 2.5% over the next 8 years? The 80% figure was written before I found that site...taken from the Ned Davis slide presented in Fairfax's 2009 AGM. Outside of the tech bubble and related years (1996 to 2010), markets had stayed below 80% and the median was 60.6% in the previous 70 years. I posted the link to the site, because it was one of the sites that showed up when you asked me a question and I did a search, and had a pretty decent explanation that I thought you could understand. I cannot tell you for certain what the rate of return will be over the next few years...except to say I cannot see it being anywhere near what we have enjoyed for the last four and a half years. Cheers!
Parsad Posted May 9, 2013 Author Posted May 9, 2013 Sorry, but I don't see much consistency in your arguments so not clear how to reply to that. You have started this thread due to worrying and concern about a general market/economic situation. Not sure what I've been inconsistent about...I was pointing out the fact that markets have risen dramatically and the risk premium that investors are paying aren't adequate for most stocks and definitely the broad market...that I'm concerned about this. You do agree that timing the market in the long run is impossible, so why worry about it. Just don't time. And if it drops again 25% as you say, you can rinse and repeat again. Even the dip last year was used for that. Timing the market "perfectly" is impossible. But when broad market valuations increase to the point where risk premiums are lower and lower, you are indirectly timing the market when your investments have reached intrinsic value, and you do not have replacement ideas so you have more and more cash...it's just prudent behavior. Cheers!
JBird Posted May 9, 2013 Posted May 9, 2013 Sorry, but I don't see much consistency in your arguments so not clear how to reply to that. You have started this thread due to worrying and concern about a general market/economic situation. Not sure what I've been inconsistent about...I was pointing out the fact that markets have risen dramatically and the risk premium that investors are paying aren't adequate for most stocks and definitely the broad market...that I'm concerned about this. You do agree that timing the market in the long run is impossible, so why worry about it. Just don't time. And if it drops again 25% as you say, you can rinse and repeat again. Even the dip last year was used for that. Timing the market "perfectly" is impossible. But when broad market valuations increase to the point where risk premiums are lower and lower, you are indirectly timing the market when your investments have reached intrinsic value, and you do not have replacement ideas so you have more and more cash...it's just prudent behavior. Cheers! I disagree with your thesis that returns for the general stock market are insufficient over the risk-free interest rate. I think that stocks are reasonably priced. In any case, what you're saying is perfectly reasonable.
bmichaud Posted May 9, 2013 Posted May 9, 2013 Sanjeev is correct on the risk premium - projected returns are around 3 to 3.5% over the next ten years, while the ten year treasury is around 1.8%. So the MRP is less than 2% with an artificially low rate!!!!
berkshiremystery Posted May 9, 2013 Posted May 9, 2013 I can only say that I watch this rising market daily with disbelief. No scientist can exactly predict the minute or second in which an earthquake will accrue, so neither can we predict the day when a major temporarily down trend in the stock market will start. My personal gut feeling let me say that the <invisible> "risk premium", relative to the current <actual> "risk premium" has come down considerably with this recent fast rise in the stock market and investors are currently living on some illusionary cloud seven in dreamland. With <invisible> risk premium I mean, if there is for some unforeseen reasons some dramatic shift what investors expect as a so called "risk premium". And this might only be some small shift of some butterfly wings, like changes in interest rates, Fed policy or something else. So can we quantify this <invisible> "risk premium"? My lazy brain (to be roughly right), only tells me that for sure, it only can be lower than this fake <actual> "risk premium" that investors perceive as currently normal. Market cap vs GDP, Corporate profits vs GDP, historically low interest rates are all some blurry warning signs that we can't dream forever this way on the cloud, and some day for sure will be some rough awakening probably through some yet invisible feedback loops to the main gravity center. Only the when this might happen is some open date. Remember,... Michael Burry went through some torturous time himself -- waiting. Cheers! http://www.ritholtz.com/blog/wp-content/uploads/2012/07/7-20-12-Market-Cap-1.gif Source: http://www.ritholtz.com/blog/2012/07/market-capitalization-as-a-percentage-of-gdp-2/ Actual Source: http://www.thechartstore.com/ ----- http://2.bp.blogspot.com/-yBFmN2eJ85A/UYaWcC5IlsI/AAAAAAAAF48/sUQ2kx9r6kc/s1600/Market+cap+to+GDP.jpg http://1.bp.blogspot.com/-ZJ0ZDCyEEu0/UYaTbTpuRXI/AAAAAAAAF4s/geidfAze-Ps/s1600/LT+Dow.png Secular Bull or Bear? Actual Source: http://humblestudentofthemarkets.blogspot.com/2013/05/secular-bull-or-bear.html
berkshiremystery Posted May 9, 2013 Posted May 9, 2013 http://2.bp.blogspot.com/-dxtQrBEnMAU/TsvkqSmnovI/AAAAAAAAF-o/gOH-5VNerYg/s1600/Corporate+Profits+vs+GDP.jpg http://4.bp.blogspot.com/-HDQQhljk9dk/TsvlBeImAzI/AAAAAAAAF-4/TXZXBP_W4wI/s1600/Profits+%2525+of+GDP.jpg http://4.bp.blogspot.com/-Na8Ez_Z-7RY/Tsvl8l9O5hI/AAAAAAAAF_I/7Az8qj8WCBY/s1600/Corporate+Profits.jpg http://2.bp.blogspot.com/-pn9svTLtteo/TsvmEu-_BrI/AAAAAAAAF_Q/ALlLcQo9Z1s/s1600/After-tax+Corp+Profits.jpg Source: http://scottgrannis.blogspot.com/2011/11/corporate-profits-are-still-very-strong.html
berkshiremystery Posted May 9, 2013 Posted May 9, 2013 Also some recap of Buffett's and Munger's thoughts on corporate profits relative to GDP from the recent Berkshire AGM. ----- Q10, Carol Loomis: Philadelphia. You said in 1999 in Fortune Magazine, that you have to be wildly optimistic to think that corporate profits can sustain above 6% of GDP. Now they are 10%. How should we think about it? WB: It is pretty unusual, profits are extraordinary as a percentage of GDP at least on looking back on history of US. What is interesting about it is that US business is complaining frequently about corporate income tax, and it is half of what is was 40 years ago as a percentage of GDP but profits are two times. I would take with a grain of salt any complaints about US corporate tax rates. US business has done very well. Inequality has widened, but businesses have done well. It will be interesting to see if levels can be maintained. Business has come back strongly from the precipice of 2008. Employment has not come back the same way. That will be subject of a lot of public discourse. If I had to bet on whether corporate profits would be 10% of GDP, with much of that is earned outside, I think it trends downwards, but GDP will be growing so it won’t be horrible. CM: I wouldn't be too surprised if 6% is on low side. Just because Warren thought something twenty years ago doesn't mean it is law of nature. [laughter] WB: We'll talk about that at lunch. CM: Stocks are owned by endowments and pension funds. There is no [automatic] correlation between the figures. WB: Is 10% too high? CM: If rest of world keeps coming down, it will be hard for us to keep it up. I don't mind paying more, but would like to see corporate rates down. WB: He's republican, I'm the democrat! --- Source: Transcript of the Berkshire 2013 AGM
hyten1 Posted May 9, 2013 Posted May 9, 2013 the metric warren use % of profit vs GDP i do think need to be adjusted for a global economy now by how much i have no idea it simple common sense, many US corp's profit are from outside of the US. to compare present vs the past % of profit to GDP, we will prob need to take into account the portion of GDP outside of US into the equation again by how much i don't know, anyone have come across anything regarding this. i understand people are concern. % of profit vs GDP is definitely one of the talking points, even warren and charles has eluded to the need to consider gdp outside of US.
berkshiremystery Posted May 9, 2013 Posted May 9, 2013 Market Cap vs GDP The Infinite Compounding Fallacy --- <snip>.... Over the last 30 years, the total stock market capitalization has grown at approximately 9% per year, while GDP has grown at approximately 5% per year. When these assumptions are extended out to 2025, the infinite compounding fallacy becomes quite clear. in order to maintain the historical rates of appreciation that are used in almost every financial planning model, the stock market will need to be $17.4 Trillion dollars larger than US Gross Domestic Product by the year 2025. .... This disconnect raises an interesting question. How much longer can the stock market continue to grow faster than the economy? </snip> Source: http://businessoflifellc.com/the-business-of-life/the-infinite-compounding-fallacy/ ------ Somehow personally I think this gap over the last 30 years was caused by the tailwind of interest rate declines, but for sure this can't last forever. ------ http://businessoflifellc.com/wp-content/uploads/2011/07/MKT-to-GDP-Ratio.png http://businessoflifellc.com/wp-content/uploads/2011/07/MKT-CAP-vs-GDP.png http://businessoflifellc.com/wp-content/uploads/2011/07/Regress-to-Historical.png
hyten1 Posted May 9, 2013 Posted May 9, 2013 the market cap vs gdp and corp profit vs gdp are all somewhat related how do we adjust these number base on globalization? imagine a world were US GDP collapses (imagine a world were US has become rome, just a thought experiment) and US company make MOST of its profit outside of US. this is an extreme example to illustrate we need to take globalization into account in the data, anyone have any data on this? Market Cap vs GDP The Infinite Compounding Fallacy --- <snip>.... Over the last 30 years, the total stock market capitalization has grown at approximately 9% per year, while GDP has grown at approximately 5% per year. When these assumptions are extended out to 2025, the infinite compounding fallacy becomes quite clear. in order to maintain the historical rates of appreciation that are used in almost every financial planning model, the stock market will need to be $17.4 Trillion dollars larger than US Gross Domestic Product by the year 2025. ....</snip> Source: http://businessoflifellc.com/the-business-of-life/the-infinite-compounding-fallacy/ ------ http://businessoflifellc.com/wp-content/uploads/2011/07/MKT-to-GDP-Ratio.png http://businessoflifellc.com/wp-content/uploads/2011/07/MKT-CAP-vs-GDP.png http://businessoflifellc.com/wp-content/uploads/2011/07/Regress-to-Historical.png
value-is-what-you-get Posted May 9, 2013 Posted May 9, 2013 Market Cap vs GDP What does market cap have to do with GDP? What if public companies buy up private enterprises at an increasing rate. Then market cap should increase relative to GDP because a former stream of GDP has now been "market capped". Definitely too inaccurate to peg a ratio too and I believe we've already covered smooth graphs going out decades in another thread.
Vish_ram Posted May 9, 2013 Posted May 9, 2013 I can say for sure that Fed actions are having the intended effect. There are folks I watch, who lost money in 2000 and 2008. They were so burnt out and have now started investing (should I say speculating) again. One such fella is in DDD. Greed is setting in now. We are setting the stage for another pull back. The volume of junk bond issuance and junk bond yields are a sure sign that fear is all but gone. The major beneficiary of this market has been the PE crowd. Their ability to borrow at ultra low rates and buyout companies has been nothing but spectacular. All levering up ends in tears. this is where the seeds of next bust are sown. I think we are in 7th innings.
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