Monday, October 30, 2006

hussman on sp 500 valuation / bewertungen

this is quite and simple one of the best and most rational calculation i´ve hear the last time. it should be no surprise that all the media and wall street is still in the "cheap valuations" etc camp. unfortunalty they are basing their calculations on proforma 2007 earnings that are still rising with wider margins etc.......

das ist in eine der besten und rationellen berechnungsmethoden. kein wunder das diese nicht von den medien und wall street geteilt wird. die sind immer noch im lager drejenigen die sagen "der makt ist billig". dumm nur das deren schötzungen nicht auf kern sondern den berüchtigten proformagewinnen basiert und zudem unterstellt das 2007 die gewinne weiter wachsen und die margen sich weiter ausweiten.......
Re-defining the standard of value

Let's talk about those fundamentals. Currently, the S&P 500 trades at over 18 times record earnings on record profit margins. Earnings for the S&P 500 are also at the top of the long-term 6% growth channel that connects prior earnings peaks going back nearly a century. Historically, when earnings have been anywhere near that 6% peak-to-peak trendline, the P/E multiple on the S&P 500 has averaged about 9 or 10.

Similarly, the S&P 500 trades at a price/revenue ratio of about 1.5 currently, compared with a ratio that has historically fluctuated between about 0.5 and 1.0, with an average of about 0.8. With few exceptions, the valuations that we've observed over the past decade are valuations that have only been observed over the past decade.

So shouldn't we “adapt” our valuation measures to reflect the higher level of recent valuations? More generally, rather than looking at say, the price/peak earnings multiple on the S&P 500, wouldn't we get a better measure of valuations if we adjusted that ratio based on its average level over the most recent decade or so?

Short answer: No.......

..... That said, suppose we allow for the possibility that 18 is the new 11. Historically, the price/peak earnings multiple on the S&P 500 has had a median of 11, a level that we observed, for example, at the 1990 market trough. But suppose that valuations simply deserve to be higher here. Suppose the current P/E of 18 is “just right” (Cough). Well, even in that case, we would still expect stocks to fluctuate around that norm over time.

Suppose then, that earnings continue to grow along their peak-to-peak growth trend of 6%, but that perhaps 4 years from today the P/E on the S&P 500 will briefly dip to 16 times those future record earnings.

Well, let's do the math. Given the current dividend yield of 1.8%, the annualized total return on the S&P 500 over that 4-year period would be just [(1.06)(16/18) ^1/4 + .018(18/16+1)/2 – 1 = ] 4.84%. That's still less than T-bill yields or 4-year Treasury yields. (i think this calculation doesnt´t include the buybacks/denke das hier die buybacks nicht eingerechnet sind)

In other words, it's not enough to argue that “the standards of value have been raised.” Unless investors are also willing to assume that the market will no longer fluctuate around those standards, it's very difficult to conclude that stocks are priced to deliver satisfactory long-term returns.

There is, in my view, no compelling evidence to support such a change in the standard of value. What we do observe is a market that has attained high multiples on record profit margins, and now requires the permanent maintenance of both in order to achieve even moderate long-term returns. ....

Adding to the general impression of an overextended stock market, Vickers notes that corporate insiders of stocks traded on the NYSE ramped up their selling activity last week to 7.81 shares sold for every share bought. On the Nasdaq, the insider sell/buy ratio shot to 6.36. Both ratios have more than doubled over the past few weeks. One wonders, if corporate insiders have so little optimism about their own shares, why should investors?

still a good time to buy.......?


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