On the plane yesterday we watched Madagascar 2 and there was a point in the movie where King Julian lamented that "the science seemed so solid" after a sacrifice into the volcano did not work as expected.On a related note Professor Jeremy Siegel wrote an opinion piece in the Wall Street Journal making a case for calculating earnings for the S&P 500 by market cap as opposed to allowing the largest company losing $1 to have the same impact on the earnings as a $1 loss when it comes from the smallest company in the index.
By his reckoning in 2008 the S&P 500 would have earned $71.10 which he says is 80% above the earnings number calculated by the S&P's method. Felix Salmon and Paul Kedrosky each jumped on this as not making sense. Felix called it astonishing and Paul said the professor was a "little nutty."
I don't think there is anything wrong with the exploration--throw it on the wall and it might stick but I don't see where this one does stick. That Jones Apparel should have less impact on SPX earnings than Exxon Mobil could make some sense but it seems that the index' earnings would not feel the full effect of AIG going from $180 billion down to $1.4 billion or Fannie Mae dropping from $65 billion down to half a bil, not even close.
If Siegal is somehow right then I suspect if they went back and refigured everthang what needed refigurin' then the current 9.4 P/E for the index that he calculated would not be anywhere near as cheap as he thinks.
I don't talk a whole lot about the P/E ratio for the market because it offers no useful predictive value. The market can be cheap or expensive based on P/E for a very long time and get cheaper or more expensive.
27 comments:
Today is a day that news will do nothing but confuse and panic the market. I think this will be the new low.
just another issue to be concerned about. Your thoughts Roger. ETF's going bankrupt? From Indexuniverse.com
ETFs are still attracting substantial asset inflows from other areas of the financial market precisely because they offer investors cheap access to a variety of markets with transparency, liquidity and collateral backing. Furthermore, many of the potential risks that we have highlighted here are not specific to ETFs - they concern other managed fund structures as well. Nevertheless, with concerns over the security of financial institutions still very much alive, it's certainly worthwhile examining what might go wrong. While none of the risks here should be enough to put investors off, ETF buyers should be aware of them all when evaluating which fund to buy.
Assuming no fraud an ETF can't really go bankrupt. The fund company can go bankrupt but the fund has investor capital invested into whatever stocks it should own to create the effect--or in some instances the currency it should own.
Different story for ETNs.
I know from reporting on IU that WisdomTree needs to about double its assets to become profitable. I have no idea about how deep their pockets are until then but should something happen to the company, the funds are still there. If they were to get liquidiated they would do so at NAV. A nuisance of course but nothing close to a wipe out.
Well if Siegel is Mr. Positive, this article on Eastern Europe's problems will certainly bring you down.
I guess one thing I can pull out of it is that at least the U.S. isn't the cause of ALL the world's financial problems.
Roger,
FYI, on the topic of living within your means while being expected to bail out those who don't, blogger Jason Kelly has a rant today that appears to go along with comments that you posted. Thought you and your readers might be interested. http://www.jasonkelly.com/index.html
Disclosure: I have no relationship with Mr. Kelley.
Roger- interesting short video interview with John Mauldin...
http://finance.yahoo.com/tech-ticker/article/195681/Don't-'Buy-and-Hope'-How-to-Survive-Until-the-Next-Bull-Market?tickers=%5Edji,%5Egspc,SPY,DIA,QQQQ,GLD
Sad off topic story. I posted a comment 'round here a few months back about my buddy's dad who's an on again, off again retiree (thanks to the up and down market over the last decade and some bad planning, IMO). He's down 40-50%, pretty much in lock step with the market. He's now talking about going back to work again. Except that his "planner" at a firm to remain nameless has shared a strategy with him that has returned 94% over the last few months for a few other clients. Planner X is so convinced that he's allegedly put up his own money and my friend's old man has put up 30K of his own money. The old man went from skeptic to complete believer in just over a week, apparently. Now he's trying to convince his son and my friend. I haven't got my hands on the strategy yet, but I can't wait. I think I know what it is, and it's an easy way to kid people into thinking they're getting solid returns with little risk. Hopefully I can get the old man's money back before something really bad happens.
Can you believe the nerve of some of these people? Once I convince the old man that he's being fleeced, I'll tell him to start reading Roger every day :)
yikes--the go for broke
Low humor :-) for the day:
"Dublin-based discount airline Ryanair (RYAAY) may charge passengers one pound (about $1.40) to use the lavatory when in flight - or, as they say on the far side of the pond, folks may have “to spend a pound to spend a penny.” ("Spend a penny" is British slang for, well, never mind.)" from Minyanville
How doe one know whtat Fidelity, Schwab, etc. is not one large ponzi scheme? When RIA firms and/or individual investors purchase stocks they do not generally get the stock certificates....
if that is something you are really worried about, there is no answer that will placate you.
No predictive values in P/E ratios? How do you explain the table in the top left of this chart then?
http://www.comstockfunds.com/files/NLPP00000%5C026.pdf
according to that chart PE's became expensive in 1995 and kept going up until 2002.
i don't think the warning in 1995 was particularly effective.
You are completely missing the point, which is that when stocks in aggregate are at multiples less than 10x you can expect good returns over the next few years. How is their no predictive power to that?
No model is perfect, but if you are looking to buy stocks, P/E's under 10x have been a very rewarding time to do so. I am talking about the market (S&P 500), not individual names.
Be wary of any chart in a log scale. It exaggerates rises and falls, and people often use it to make something more noticeable.
Stephen, forget the chart. Facts are facts, go to the bottom of page 8 of the following
http://www.frontlinethoughts.com/pdf/mwo022009.pdf
"Hope for the best" but always be
prepared for the worst
http://online.wsj.com/article/SB123561056456077505.html
"In all cases, throughout the years, the level of returns correlates very highly to the trend in the market’s price/earnings (P/E) ratio." and "Very simply, stock markets go from periods of high valuations to low valuations and back to high" are not facts. They are observations.
Rising p/e ratios do not predict stock valuations. They reflect them. It's like saying the sunrise predicts the end of darkness.
And the of course at the end the guys says "tune in next time for my market timing tips."
Lets get ready for a bear market rally! It is about time.
Best to all!
We've all been brought up and schooled in the doctrine that capitalism is the best method for advancement of society. Perhaps this is not correct.
What we are witnessing is concentrated power....of the financial institutions. If a society permits one group to gain too much power; it is to the detriment of others.
I don't advocate socialism or whatever term you prefer to use. I do firmly believe, with proper regulation AND intelligent decisions, this current collapse could have been prevented.
Now everyone must ask themselves....(at least from an investment standpoint)...
Is this just the beginning of demise of our society as we've known it, or is this a bad downturn in the economy and the United States will once again reign supreme.
"Now everyone must ask themselves....(at least from an investment standpoint)...
Is this just the beginning of demise of our society as we've known it, or is this a bad downturn in the economy and the United States will once again reign supreme."
Myself said to myself....if things
were so terrible Nancy Peloci
would not be charging taxpayers 6 million dollars on fuel to go back an forth to work each year.
Next Speaker of House should be
from Washington DC.
Long, Long Trendline on S&P:
http://stephenvita.typepad.com/.a/6a00d834523db869e201127911257128a4-pi
Roger,
Ok, you do not use the P/E ratio for the market because it offers no useful predictive value. What may I ask do you use?
Interesting article from Barron's -SEI INVESTMENTS (TICKER: SEIC), like many of its peers, has felt the effects of deteriorating economic conditions. But while the investment manager is trying to woo clients, two of its longtime insiders are liquefying their own assets, taking out $7.9 million in the past two weeks even as the stock wallows at levels not seen in years.
On Feb. 23 and 24, Executive Vice President Edward Loughlin sold 624,675 shares for $7.5 million, an average of $12.02 a share. Loughlin, who has been at the company since 1979, continues to hold 13,176 shares directly.
Richard, kind of a vague question, what do I use for what?
If what I think you are asking is....
The stock market goes up the vast majority of the time. It warns of unhealthy demand for equities when it goes below its 200 DMA. When this occurs I take defensive action. Literally hundreds of posts on this.
Roger,
Ok, the 200DMA is your market indicator and when the market goes below its 200DMA you take defensive action.
Now, 2 days later, after reading the Top Down discussion, I understand what I meant to ask and the complete answer would take a large about of space and time.
My question is what primary indicators do you used for Countries, Markets, Sectors. I would guess you use yield curve for the financial sector.
Thanks for the response and the blog -
Richard certain sectors lead late cycle, others lead early cycle. Learning this can help. Reducing sectors that get too big can help, 20% is a useful number 30% is clear danger.
The attributes of countries don't change all that often so then it boils down to following the countries and having an opinion about whther to reduce or add to a country based on what you observe.
i could sum up with knowing history and assessing current events to make a forward looking analysis.
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