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« Weighing the Week Ahead: Will Earnings Measure Up? | Main | Weighing the Week Ahead: Have Stock Investors Dodged the (Correction) Bullet? »

July 10, 2013

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Paul Boland

I always thought it would be nice to calculate the CAPE for each individual stock even if sometimes it is a non-helpful metric. It's still probably better then the P/E... you can do it at http://www.caperatio.com which is discussed by Mebane Faber here: http://www.mebanefaber.com/2013/09/06/cape-ratio-for-stocks-and-weekend-reading/

It also has the Sector values for CAPE in the newsletter section which I see was discussed earlier...

I think this might provide a modified approach to that being discussed.

oldprof

Johan - As you can readily see from other comments, I am happy to reply when I have something to add.

CMP has a different viewpoint about how people use CAPE. He thinks that most do what he does. It does not square with what I see every day in my business. I think he is smarter than the average Shiller follower. I made my point in the post, and I have published his comments to give his viewpoint a fair hearing.

Feel free to add something substantive to the discussion if you want. Meanwhile, thanks for giving me the opportunity to repeat my approach.

Jeff

Johan Lindén

Very good comments here. Ashame no one of them got answered. Keep up the good works folks!

CMP

Jeff, you quote my previous comment at the top of the list above, but I'm not sure you understood it.

You seem to believe that a "Shiller disciple" would not own stocks unless they decline 30% or so. This is wrong. I'm not sure of I'm a disciple, but I can see the truth in Shiller's arguments, yet I own LOTS of stocks and have been overweight stocks since 2009.

The reason for that is that stocks still offer decent relative value (and hence decent forward returns) in comparison to other assets e.g. bonds. What the CAPE tells you is that stocks currently offer poor relative value (and hence poor forward returns) in relation to their own history.

These two concepts are very different, but it seems to me that you have been conflating them. Knowing that stocks offer poor forward returns in comparison to their history (as Shiller disciples do) does not mean sell. It means you should figure out their likely returns in comparison to other contemporary assets. I don't know anyone who uses the CAPE in what you describe as "the usual way".

Your latest approach seems to be a step forward, in that you are now using the CAPE in a legitimate way to compare like with like. By the way, there are other ways to use the CAPE profitably too. Meb Faber has written about one of those.

Proteus

Jeff:
In one of my comments I joked about unit roots and other economic fantasies. I will now do the same for mean reversion. I spent the past few weeks in part reading about mean reversion in the stock market indices. Despite being a fairly easy calculation (search Hurst exponent) four papers couldn't agree on when the stock market was trending and when it was mean reverting. Should be simple, right, to do a couple of stupid calculations. But if we can't even agree on whether the market measured by price is mean reverting, I just see no hope in claiming that profits or margins are mean reverting.

Eric

Where can one review CAPE values by sector? I see that Mebane Faber has shared them on occasion and as recently as April 2013, but is it available anywhere else?

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