Friday, January 03, 2014

Yes, Bill, the Market is Still Overvalued

One of the most irrelevant and insipid arguments liberals love to tender when you critique a democrat president is,


Forget that unemployment is still recession territory
Forget that underemployment is at an all time high
And forget that economic growth is stagnant

No, find that one statistic that has NOTHING to do with presidential or economic performance.  AND cite something you normally hate and loathe - Wall Street - as a metric.

Regardless, I didn't follow the market for jack during 2013.  This is in part because I have no money to invest and also in part because it is overvalued due to all the retirement dollars that have been flooding it since the advent of the 401k.  But while sitting at my favorite bar, I caught a glimpse of a chart of the DJIA on the TV.  And it looked like it was almost at 17,000.

"This couldn't be.  What has happened in the economy that would warrant that?!"

So I admitted I was ignorant about the stock market for the past year and decided to go right to the source and ask the horse, for Dr. Robert Shiller will give you the answer you'll endorse - the S&P 500 P/E ratio.

In other words, "nothing to see here people."  It's the same damn thing that it's always been.  Earnings haven't been going up, but prices have, resulting in an even more-inflated bubble.  Historically, the S&P has traded at a PE of 15, and now, WITH NO LEGITIMATE ECONOMIC REASON OR RATIONALE the market is trading at a 67% premium over its historical average.

Again, for the cheap seats, this means if you buy stocks today it is like paying:

$5.44 for a gallon of gas
$680 for an XBox One, or
$12 for a Chipolte burrito

And don't even get me started on the dividend yield.

In short, nothing has changed, except for the severity of the bubble.  Bar the Great Recession, the Dotcom Bubble and the Housing Bubble, the stock market has never been so overvalued.


Cogitans Iuvenis said...

It's very true, your comments about the 401k bubble are one of the many reasons why I scaled back my contributions to only matching levels. The question I have is this though, granted that the S&P, DOW, Russell and the other major indices are greatly inflated, however, what about individual companies?

I do expect some sort of contraction of the market in the near future since economic production in no way supports a DOW over 16,000. What I wonder how will the 401k bubble affect the individual companies. If there are companies out there that have a good dividend yield with sound earning fundamentals would that still make them sound investments even with the knowledge that the market is being bumped by QE and 401ks.

Peregrine John said...

Isn't the stock market cheerleading coming from the same crew that usually derides Wall St. gains as mere Evil Corporation evidence, wholly separate from the economy in general? What ever could have changed to make them take a different tack?

Unknown said...

The market is certainly vastly overvalued. Unfortunately it's overvalued because there's nowhere else to absorb the huge amount of "money" available for investment.

This will end badly.

Southern Man said...

I have a fair bit in the market (TIAA/CREF, and a good quarter of that was employer matching) and can't retire for a decade. So far so good but I'm really, really tempted to pull that money out as soon as I can do so without penalty. But then where would I put it?

Aaron said...

I received a note from Bill Bonner that gave two explanations for the increase in stock prices:
"the Fed's ZIRP has made it possible to borrow cheaply. Companies used the cheap credit to do two important things:
1) Refinance expensive debt, lowering interest expenses and thereby pushing
up net profit margins

2) Buy back their own shares, raising their share prices"

Smoke and mirrors - if you refinance at lower interest rates you can make your flat or declining profits look like they are increasing without having acutally improved your productivity. And of course, when you can use huge amounts of cheap money to influence your own share price, why wouldn't you?

Anonymous said...

Hey Cap,

There is a guy named Martin Armstrong ( you may want to look into and check out his blog at the linked site. He predicted the drop in gold and the run up of the stock market. He does cycles work and says that he thinks the stock market will go generally upward until about the third quarter of 2015. One of the reasons he states for the market to keep going up has to do with Europeans getting money out of Europe due to the economic repression going on over there. He also has stated that the average person hasn't gotten into the market yet. He also says that he thinks the third quarter of 2015 will be when gold will really start to go up again (though he thinks most of it's decline has already happened, but may still go a little lower until then). He did an interview November 27th with Kerry Lutz that I think is worth listening to:

Regarding the price action for silver, there are two youtube channels you may want to know about. Both are run by guys who were right in calling the run-up in prices and also right in calling for the price drop.

Josh Galt:

DayTradeShow (Don Harrold):

The second one tends to delete his older videos from time to time, but he also from time to time offers his insights on what he thinks the price action for silver will be and why (using charts) for what I think is are cheap prices (around $2-$5). He has been right in calling the movements ahead of time and I has done a better job then some other more well-known people who charge much more but have been far less right. He said silver would trade again for sub-$20 when it was up near $50 in 2011. He also talks about his approach for figuring out at what levels he plans to buy and sell.

Anyway, both of the above are starting to get bullish on silver again. Don thinks silver has the possibility to get down to the point that it could have a $13 handle on it but that now is still a relatively good time to buy. He plans to put money to work right now and at around $17, $15, $13, with putting more money into it the lower it goes. He says that silver may not get that low and that it could just go up from here.

Hope you like the links.

Anonymous said...

Certainly the market is technically overvalued.

But psychology plays a part and the psychology indicates we're in a bubble. As with any bubble, you'll do fine right up until it bursts.

I've never been a fan of market timing - even if you manage to sell before the bubble bursts, you have to figure out when to get back in.

That said, I'm not buying stock now, but I'm not selling either. I have a long enough time horizon that I can tolerate a 20% correction - when it hits, it will be a good buying opportunity.

Anonymous said...

Last year, after four decades of saving and investing, and building up an IRA of several million dollars, I decided that it was time to pull back. Although the stocks in my IRA are fairly priced, the threat of government taxation or confiscation of retirement accounts is remote but a growing concern. So I cut my IRA in half, will pay the income taxes, and have the last laugh when I dropped the IRA shares down to my children, saving them lots of estate taxes down the road. My children won't have enough money to kick back and do nothing, but they will have a nest egg to get a start in the "real world".

I am absolutely loving your new "Bachelor Pad Economics" book. The section on investing is quite basic, but it is an excellent primer for most young men. And while a college professor would not give you an "A" for what you have done, the truth is that you have done a far better job than most of our so-called experts. In fact, I was reading your book while Jim Cramer was making some increasingly strident, desperate and meaningless comment on CNBC in the background. It is no wonder that CNBC's ratings with younger viewers are in the toilet.

So while your style is edgy, I respect what you have done and hope to see more great books from you.

Wannabe Trader said...

If the market is overvalued, then isn't a good investment right now just to buy out of the money put options on indices?

Anonymous said...

Did you take into account that people have nowhere else to put their money to try and get a return on it ?

You don't get interests at the bank, you get fees. Gold is horribly expensive and complicated to buy and own physically.

Money markets give low yields.

Under inflation, people have no choice but to play the stock market casino.

Jesse said...

The real bubbles are those created by the dollar carry trade since 2008. All that inflation the Fed hoped to manufacture to rescue the over-leveraged banks and consumers ended up in places like Peru (borrowing dollars at 0% and earning 9% on Peruvian debt + nuevo sol vs. dollar appreciation)

The story of 2014/2015 will be the great unwind of the biggest carry trade the world has ever seen. A bunch of third world economies will go up in smoke, as well as the dipshit fund managers who put the trade on.

Anonymous said...

Got this in my e-mail today from Steve Reitmeister of which takes the view that the market isn't overvalued and his reasoning.

"The main issue at this stage revolves around valuation. Those who point to a historical average PE of 15 say the market is fully valued at this time given expected S&P 500 earnings per share of $120 this year.

This is a short-sighted view. First, that 15 average PE concept goes back too far in time when investors did not properly appreciate the risk/reward relationship of stocks versus bonds. Since then 16-17 PE has been more the norm.

Second, a maturing bull market will always have higher valuations than average. That is the difference between fair value and fully valued.

Third, valuation is also about the attractiveness of stocks versus other investment alternatives. Cash continues to be trash with ultra-low interest rates. Bond funds are losing money as rates go higher. Real estate has stalled out (also thanks to higher rates). Gold is going nowhere. And please let's not waste our time talking about bitcoins.

Add it all up and this points to another year of gains for stocks."

In my opinion, there will be a correction of of 20%, maybe 30%. The question is when. Of course that throws you into timing the market both when to get out and when to get back in. If you have a reasonably long time horizon, I'd say don't bother with selling and getting back in.

I think Obamacare will force the issue - when those uninsured penalties crank up to 4%, that's 4% of disposable income that will leave the economy. We're also seeing that Obamacare coverage is vastly more expensive to buy and has a huge deductible, which also reduces disposable income. When you take that much disposable income out of the economy, I think it will throw us into another recession.

Of course the Democrats want amnesty because they want more votes and big business wants amnesty to depress wages. I expect some form of amnesty to be passed, which will also weaken the economy, although it is hard to say.

As for me, I'd go Galt and retire, but Obamacare wants to soak me $25K for medical coverage for my wife and I, with a deductible of $8K per person. Right now, I pay about $8K of my share of insurance including copays and that's for a excellent plan with excellent coverage. I have to stay employed just to keep my insurance.

Kristophr said...

Not scary enough.

Convert the DOW into ounces of gold instead of US dollars.

Kristophr said...


Incorrect. You always have gold and silver as a door out of the market.

If you look at the chart I posted, the Dow Jones Index has actually been a value losing proposition.

Grading the DJI performance in dollars is a sucker's bet when the Fed prints dollars like it was running Zimbabwe.

Kristophr said...

Oh, and gold is easy to own and easy to buy. Not complicated, unless you live in some socialist country that hates gold owners.

Go to a coin shop with a wad of cash, and buy a US Silver Eagle, or a Gold Eagle. No reporting required for US Treasury "$1" and "$50" coins.

If you need to move a large amount of money, buy gold, or a Treasury monster box of silver. The coin dealer can fill you in.

Spend $1000 or so in a gunsafe, and bolt it to a wall. Put your coins in that.

If you insist on leaving it in an IRA or a 401k ( risky, IMO ) you can move it into a gold-based IRA.

Anonymous said...

And the market is overvalued due to QE.. whatever… so it’s artificially overvalued.

But why would National Socialist left want this to be taking place?

That’s the question you need to ask.