Tuesday, 15 February 2011

Market increasingly expensive

Cullen Roche at Pragmatic Capitalism says the US stock market is getting increasingly expensive.

As the market continues to grind higher each and ever day it’s useful to gain some perspective on just how much Bernanke is impacting valuations and generating disequilibrium in the market. In order to do so we’ll review a number of long-term valuation indicators.

The first is Warren Buffett’s self proclaimed favorite valuation tool (see here for more). He uses the total market cap of the US stock market compared to GNP. He has generally maintained that levels below 80% are bullish. The latest reading of 106% is well below the levels seen at the last two market peaks, but well above the historical average levels...

John Hussman’s latest piece succinctly describes the current market environment...

Last week, the S&P 500 Index ascended to a Shiller P/E in excess of 24 (this “cyclically-adjusted P/E” or CAPE represents the ratio of the S&P 500 to 10-year average earnings, adjusted for inflation). Prior to the mid-1990′s market bubble, a multiple in excess of 24 for the CAPE was briefly seen only once, between August and early-October 1929...

Using his expected returns methodology Mr. Hussman is looking for annual returns of just 3.15% in the coming decade...

Dshort brings us the Q Ratio which has now hit “nosebleed” territory again. This is consistent with the other metrics which all showed relatively stable ranges until the Fed began its unusual policy of propping up markets following the 87 crash. The latest reading of 1.17 is well below the Nasdaq bubble peak, but is higher than any other historical peak. “Nosebleed” could be an understatement.

See the original post for charts.

Among economic reports released on Monday, Japan's economic contraction in the fourth quarter was among the most significant. Japan's relatively weak growth in 2010 allowed China to overtake it as the second largest economy in the world.

As for China, AFP/CNA reports that its trade surplus shrank in January.

China said Monday its politically sensitive trade surplus shrank in January but analysts warned the data may have been skewed by a surge in imports leading up to the Lunar New Year holiday...

The trade surplus fell 53.5 per cent to $6.45 billion in January as both exports and imports grew strongly ahead of the holiday, the General Administration of Customs said.

Exports increased 37.7 per cent from a year earlier, while imports surged 51 per cent.

Meanwhile, in Europe, Eurostat reports that industrial production dipped in December.

In December 2010 compared with November 2010, seasonally adjusted industrial production fell by 0.1% in both the euro area (EA16) and the EU27. In November 2010 production rose by 1.4% and 1.2% respectively.

In December 2010 compared with December 2009, industrial production grew by 8.0% in the euro area and by 7.7% in the EU27.

1 comment:

Anonymous said...

I would feel better about Dr. Hussmann if his fund was making money. Apparently, he would rather be smart than make money.

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