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« Trading the Economic Indicators | Main | Little Known Facts about the Payroll Employment Report »

May 01, 2007

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Sebastian

Stevey G said: "Another example of this has been the recent posting on a number of influential blogs, of the chart comparing the recent stock market up to the end of March against the 1987 stock market crash. I tried recreating the comparison on Excel, and it looked nothing like the fitted chart used on the example..."

Prof. Shiller's ("Irrational Exuberance") long-term EPS/DIV data on the SP500 has been an excellent resource for me when "vetting" such things.

http://www.irrationalexuberance.com/shiller_downloads/ie_data.xls

As an example of how this data can be applied: In February (before the March selloff) of this year, SP500 PE (TTM, as-reported) was around 18, with EPS growth at around 14%. Moderately overvalued, but with good earnings growth. (Standard and Poor's is the source for this recent data.)

In August, 1987 (the top before the "crash", as per Shiller data) the PE was around 20 (a multi-decade high), with TTM EPS growth slightly *negative*. Considerably overvalued, with falling earnings.

Not exactly an apples-to-apples comparison.:)


Sebastian

oldprof

Steve and Stevey G --

Thanks for stopping by and taking the time to comment. I am delighted that some are finding this work to be useful.

Modern software has made it easy for people to crank out these curve-fitting charts. I taught courses that showed the power of deceptive charts, but I was still amazed at the reaction to the Kass chart.

People - many people at Calculated Risk -- looked at the "Batman section" and inferred correlation. The regulars at that site were quite polite, but clearly thought I was crazy! And on a mission.

Most did not seem to appreciate that I have not left my professorial roots, and the mission is one of education.

Thanks again!

Jeff

Stevey G

Jeff

You make an excellent point, and when I track back and look at your original blog on this topic, you mention that Doug Kass has been trying to flog this chart remorselessly.

I think this is part of a tendency of late by many bloggers, some of who should know better and who I am sure have an interest in promoting their bias, to redraw charts/curve fit, focus only on extremely negative news, and make rather spurious assumptions.

Another example of this has been the recent posting on a number of influential blogs, of the chart comparing the recent stock market up to the end of March against the 1987 stock market crash. I tried recreating the comparison on Excel, and it looked nothing like the fitted chart used on the example. I also look back at the data of the past two days, particularly the relatively strong ISM number, this barely gets a mention anywhere, yet I am pretty sure had this number been sub-50 (or more specifically 45) it would have been all over the blogs as another example of the impending US recession.

Personally I am no wiser than anyone else when it comes to knowing where the US economy is heading, although I am guessing slow growth but low possibility of a recession is most likely. - However, I must thank you for many of your postings over recent months, I find your analysis has been extremely refreshing and illuminating amongst so much of the dribble I have seen elsewhere. Keep up the good work.

Regards

Stevey G (London)

Steve

I forgot all about that. I'm glad you revisited it.

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