Stock Market Valuation June 2nd 2011

reminiscences of a stock operator pdf


I found the current valuations astonishing. No I am not refering to linkedin or Groupon or the high fliers. The overall market is so overvalued considering the macro picture. I am not a macro investor, but Wall Street is. It makes no sense for the Shiller PE to be at 23 (an earnings yield of 4.3%), when the deficit is out of control, there is inflation accross the board except Real estate (the one asset class QE2 was really supposed to help!), housing is in a double dip, unemployment cannot come down for years unless there is job growth of 500k a month (close to impossible). Additionally, the Euro zone is experiencing a big crisis, Japan suffered a catastrohpic humanitarian and economic disaster, and countries like China are starting to get nervous about over heating in their economies.

What further demonstrates the inefficiencies in the market, is the valuation of small caps to large caps. The perma-bulls are looking for companies that have large exposure overseas, especially in emerging markets. However, the large cap companies produce far more of their revenue from overseas than small caps. Yet, large caps are far cheaper than small caps. This really defies logic.

Without further to do:

The current level of the S&P500 is 1313, and the Dow is at 12,248– slight lower than last month. As evidenced below, market valuations did not change much over the last month.

I update market valuations on a monthly basis. The point of this article is to measure the stock market based on seven different metrics. This article does not look at the macro picture and try to predict where the economy is headed. It only uses these several metrics which have been very good past indicators of whether the market is fairly valued.
To Recap

1. P/E (TTM) – Fairly Valued 15.9

2. P/E 10 year – Extremely overvalued 23.2

3. P/BV – Extremely overvalued – 3.68 (using numbers discussed above from April)

4. Dividend Yield – Indeterminate/ overvalued 1.78

5. Market value relative to GDP – Moderately Overvalued 95.2

6. Tobins Q – Extremely overvalued 1.19

7. AAII Sentiment – Investors are slightly bullish

8. GMO – Overvalued

To see full article click on the following link-

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