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« Critics of the BLS Birth/Death Adjustment Proven Wrong | Main | Whom Should We Trust? »

October 05, 2008

Comments

RB

Mike,
Here's the source:
http://www.smithers.co.uk/page.php?id=34

It used to be that the q-measure was higher than CAPE, but they seem to have modified the q-numbers.

Mike C

RB,

Do you have a link for the Tobin Q number? I thought it was significantly lower then 1200. Off the top of my head, I think Grantham's and Hussman's fair value number is lower then 1100.

Just my opinion, and this has been discussed at length, but I think any valuation model HAS TO (at least if you want to buy with a margin of safety and not get a quick 12 month 30% haircut) account for the cyclicality of earnings and the business cycle otherwise stocks look cheap based on forward earnings just as the business cycle is peaking and forward estimates are way too high. That is exactly what happened a year ago. The forward estimates had no basis in reality given the deteriorating fundamentals.

The same thing will happen at the trough on the flipside as stocks might look expensive on forward earnings that are too pessimistic when they might actually be decent values on some sort of normalized long-term earnings.

The scary thought is if the ultimate bottom is at some 30% below fair value level. I think you would have a generation that would never buy a stock again.

RB

Value is in the eyes of the beholder it appears -- I've seen valuation models pegging the S&P at 1200 (Tobin's q), 1150 (CXO's Fed model), 1100 (Grantham/qualified Hussman), and 975? (Ritholtz) and Jeff probably places it higher. Extreme outliers are at 750ish (Rosenberg/Sedacca) and analysts (>1300). Only one uses current forward earnings estimates but altogether we arrive at +/- 30% around a fair value neighboring 1050 ... which is helpful.


Mike C

I think the GONG just rung! :)

http://www.msnbc.msn.com/id/27045699/

Bullish investors should turn into shrinking violets as the stock market continues its shocking downward spiral, CNBC’s “Mad Money” host Jim Cramer told Ann Curry on TODAY Monday.

In what Curry called a “dramatic statement,” Cramer emphatically urged any investor who has money they may need in the next five years tied to stocks to pull their dough out.

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.”

Jeff

Mike - No "gong" signal so far. The methodology is much different from VIX approaches, which have given multiple false signals in this decline.

I monitor this daily, of course.

Logic check: stock price changes do not show that someone was "correct" about valuation, as you well know. In an environment where everyone can just pick their own number for forward S&P earnings without any particular methodology, valuation is not very relevant.

Thanks for the question, and I'll do further updates on the gong.

Jeff

Mike C

Just curious if there is an update on the "Gong model"?

From a sentiment perspective, it seems like we have excessive fear/bearishness. VIX over 50, multi-year record outflows from stock funds, and calls to go to cash NOW after the market is down 30% YOY.

From a technical perspective, most indicators seem to register deeply oversold.

And lastly from a fundamental valuation perspective, I noted (in my regular reading) that a few who might be thrown into the "bearish pundit"/"permabear" camp have now indicated that valuations are reasonable if not cheap after correctly identifying stocks were expensive a year ago.

It would seem a possibility that numerous factors are lining up to go long at least for a substantial trading rally even if the ultimate bear market bottom has not been reached? Jeff Saut in his recent weekly strategist piece noted that since 1960 roughly 80% of 4th quarters have positive performance.

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