Monday, December 18, 2006

"p/e equivalent valuations / hussman"

as always sober and excellent stuff from Hussman".
to read the full piece klick on the headline.

wie immer ne nüchterne und sehr gute analyse von hussman. bitte auf die überschrift für den vollen bericht klicken.

....when the price/peak earnings multiple for the S&P 500 has been 16 or higher (the current multiple is over 18), we find that the S&P 500 has experienced a loss, including dividends, averaging -6.5% over the 18-month period following the final hike of a Fed tightening cycle.
Only 4 bull markets over the past 75 years had life spans which exceeded the current one.” Those included 1949 (which began at a price/peak earnings multiple of 6), 1974, 1982 (both which began at multiples of 7), and 1990 (which began at a multiple of 11 and ended in a hypervalued frenzy at nearly 34 times peak earnings). The current advance began at a multiple of 16, so even from the beginning we had less room for valuations to expand, compared with those unusually long bulls. And as noted below, valuations have now moved far higher (on the basis of a broad range of fundamentals) than current earnings would lead investors to believe.
Of course, that's part of the difficulty here. As long as investors perceive valuations to be acceptable, there is no compelling reason why the actual facts should get in their way over the short-term. That allows for the possibility that the current speculative blowoff will continue further
The following chart illustrates the current disconnect, and presents the market's price/revenue, price/book, price/dividend, and enterprise value/EBITDA multiples, scaled by their historical relationship to the S&P 500 price/peak earnings multiple.


While the current price/peak-earnings multiple is already at an elevated level above 18, what I'll call the “P/E equivalent” multiples on other fundamentals are: 21 on the basis of book values, nearly 23 on the basis of enterprise value/EBITDA (which factors in the increasing share of debt on corporate balance sheets), over 25 on the basis of revenues, and 29 on the basis of dividends (largely because dividend payout ratios remain relatively low even on the basis of normalized earnings
Among these alternatives, my impression is that the “P/E equivalent” figure of just over 25, based on revenues, is the most accurate measure of “true” current valuations on the basis of normalized earnings. You can see from the chart why everybody loved EBITDA in the late 1990's, and why it's not so popular anymore. Wall Street analysts seem to pick the fundamental that gives them the lowest valuation to tout. Recently, a few analysts have even appeared on CNBC quoting metrics like “price to 2010 operating earnings.” Now there's a bag of wishes for sale.......

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