I woke up this morning (1/23) to this headline on ZeroHedge:
CNN Politics:Â Â BREAKING:Â China Dumps All Bonds, Declares South China Sea Zone Closed
My first thought was “Oh! S***” here we go. My nightmare scenario has become a reality. I quickly flipped over to my markets page to find stock futures deep in the red by….wait a minute…less than 1%? That can’t be right? If the nightmare scenario was upon us then markets should be crashing.
Sure enough by the time I got back over to ZeroHedge the page had been updated to show:
“Luckily this time it was merely a hack, as can be seen by the ‘article’s’ subsequent deletion from the live page and CNN’s mea culpa:
CNN SAYS SOME OF ITS SOCIAL MEDIAL ACCOUNTS WERE COMPROMISED
CNN SAYS COMPROMISED ACCOUNTS INCLUDE TWITTER PAGE, FACEBOOK”
While this was not the ideal way to start my morning it did get me to thinking about valuations, profits and what could cause a real correction in the markets. That is the premise behind today’s “Things To Ponder” for your weekend homework.
1) Valuation Update: Stocks Are Expensive by Doug Short
If you don’t read Doug’s site daily you are really missing something as part of your daily research. I always dedicate some of my time to review his valuation studies (here, here and here) in particular but most importantly, for me, is the combined study of 4 different valuation measures.Â
“Here is a summary of the four market valuation indicators I update during the first days of the month. The four indicators are:
The Crestmont Research P/E Ratio
The cyclical P/E ratio using the trailing 10-year earnings as the divisor
The Q Ratio, which is the total price of the market divided by its replacement cost
The relationship of the S&P Composite price to a regression trendline”
“The next chart gives a simplified summary of valuations by plotting the average of the four arithmetic series (the first chart above). I’ve also included a log-scale area chart of the real (inflation-adjusted) S&P Composite along with recessions.”
Doug correctly notes that valuation levels are not useful as short-term signals of market direction as “irrational exuberance” or “extended despondency” can last far longer than logic would dictate. However, with combined market valuations now at levels only seen before horrific market corrections it may be prudent to think that most of the “low hanging fruit” of this current bull cycle has already been harvested.
