It is interesting to note that CNBC viewership largely tracks the market. Up in good times, down in bad times – with the exception of this past bull where viewership has declined to near all time lows. Doesn’t seem like retail is participating, or perhaps more accurately, even cares.
Jeremy Siegel talks about CAPE in a recent FT article. He has a few criticisms, but misses the bigger picture in my opinion.
1. He talks about write downs and how that biases CAPE. The problem is, even if you ignored the bear market, even if the earnings decline of 2008,2009, 2010 never happened, effect on PE10 / CAPE would be mild- it would go from 23.7 to 21.2. In other words it is still expensive! (This was a month ago).
Today SocGen put out an excellent piece titled “To Ignore CAPE is to Deny Mean Reversion”
They use the MSCI earnings index that doesn’t include the writedowns and they come to the same conclusions as using the S&P series.
2. CAPE isn’t really a short term timing measure for one market. Like most valuation measures, it’s not that helpful telling you what to do for the next 6 months. It makes much more sense to align the indicator with your holdings period. Here is a post we did – Broadening the Window. However, pretty much every value measure we track aligns to say the same thing – US stocks are expensive.
3. But the biggest point that he misses, is that in a global world why focus on just the US? There are well over 40 investable countries in the world, why just settle for one? We have shown numerous times that selecting countries on a relative basis on CAPE works great to not only pick winners, but also to avoid the bubbly losers. And according to CAPE, the US is the second most expensive market we track right now…and according to 1 year PE, it is the 4th most expensive…and according to P/B…etc
If you do a composite across 10PE, 1PE, FCF, P/B, and dividends…the US is still the 4th most expensive…
4. Note the potential for margin mean reversion in the below chart from the SocGen piece….which side would you rather bet on?
Conclusion from Lapthorne at SocGen:
“At the peak of the cycle, when profits are far above average and the economy is doing well, it is hard to imagine earnings collapsing back below the average, as it is to imagine a depressed region recovering. Mean-reversion in earnings, though sometimes delayed, is as undeniable as the economic cycle itself. Cyclically adjusted (or trend) PE calculations will always give a conservative valuation estimate. But that is exactly the point of valuation – to offer a degree of safety (a margin of error) and to smooth the dangers of the economic cycle. That peak profits typically accompany peak valuations only reinforces the point.
One can always discuss the idiosyncrasies of any particular valuation metric, although we reach similar conclusions to Robert Shiller’s CAPE analysis – but using a more modern time frame and a different (and more generous) earnings series. Our conclusions are that the US equity market is currently expensive. We can also reach a similar conclusion using alternative valuation metrics such as dividend yield, trend PE, and Tobin’s Q.
Most significantly, the downside risk of investing when earnings and valuations are far above historical averages should not be underestimated. from our work, peak earnings go hand-inhand with peak valuations. When earnings revert back to mean (and below), the valuation will also collapse. That many continue to argue against this, and so soon after the collapse of 2008/09, is something we find quite remarkable. “
What used to be marketed as alpha is really just simple indexes once you shed some light on it….(Sculpture from Tim Noble and Sue Webster and HT: MS)
If I were a high fee mutual fund complex I would sure hope I was near retirement. The evolution of former alpha into “alternative beta” or “smart beta” or just simply just “better indexes” continues. I’ve been harping for years wondering why some fund complexes haven’t launched some simple managed futures products with low fees, and finally I saw today one did. Lets look forward to this continuing!
Great stuff as always from the O’Shaunessey crew illustrating a few key points I agree with (my summary points):
1. US stocks are more expensive than most global markets (largely agrees with our CAPE work)
2. US dividend stocks, priced historically at a discount to the broad market , now trade at a premium. (see chart #2 from Janus / Empirical - it is a year old but conclusion remains). This is really important – remember when everyone hated dividend stocks in the 1990s? Remember how much they have outperformed since then and all of the money that has flowed into the dividend space? That tailwind is now a headwind…so be careful with your dividend stocks!
Larry Swedroe also has a great post on a similar phenomena with low vol stocks…
3. Dividend strategies have not generated alpha during rising interest rate markets since 1927, but shareholder yield strategies have done much better – on the order of 2.5-4%!
“Whereas the results for dividend yield in the U.S. in Table 1 suggest underperformance, shareholder yield historically produces positive excess returns on average more consistently across rising rate environments back to 1927. Shareholder yield outperformed in 12 of the 16 rising rate environments in Table 1 by on average +1.5 percent, making it the more consistent performer of the two yield factors during rate increases.”
I posted a series of investing ideas earlier in the year, and it is good to see people are tackling them! My friend Wes just launched TurnkeyStats in beta, which is a solid way to backtest allocation ideas. An update on the five ideas at the end of the post.
I wanted to add a sixth – A Webseries of thoughtful interviews with market participants. Think Charlie Rose style, or the sadly departed Louis Rukeyser. So many complain about the financial networks and their hyperfocus on today’s news and lack of longer, thoughtful conversations. I had beers with Josh Brown in NYC a month ago and tried to convince him to take up the project but no luck. I know Michael Covel and others do long form podcasts, but it would be fun to see some more developed video.
Who is going to step up here?
Below are links to the old ideas, let me know if I’m missing any…
I have come to post most of my links and what I’m reading over on Twitter these days, so if you’re interested you can follow there at @MebFaber
a few good links recently:
Gundlach and Shiller teaming up on CAPE fund http://www.investmentnews.com/article/20130815/FREE/130819947 …
All weather except when it’s raining on bonds. http://www.bloomberg.com/news/2013-08-14/dalio-patched-all-weather-s-rate-risk-as-u-s-bonds-fell.html …
speaking of 13F week – over ten manager clones top 10 holdings are up over 50% YTD. Saba, Baker Bros, Elm Ridge, and Par all up there.
and from some friends:
Great Citi graphic via @valuewalk – Gold miners have spent the last decade burning through $11 bil in cash http://ify.valuewalk.com/wp-content/uploads/2013/08/gold-companies-burn-11b-in-cash.png …
Price to Sales charts for all 30 $DJIA components going back to 1984 http://stks.co/df3h
The Best Hedge Fund You’ve Never Heard of http://goo.gl/fb/KM7L8
Bridgewater All Weather since inception vs 60/40 and levered portfolio. pic.twitter.com/FOTmOHrYxE
It seems like the financial news consists largely of news items on what these four managers are up to. Who is buying Herbalife, what are they doing with Apple, what are they talking about on Twitter.
However, I have yet to hear, EVER, either of the following questions which underly the entire point of talking about them.
1. Does it make sense to follow what these guys are doing, ie is it helpful, or are you wasting your time? Can you actually use this information in any way?
2. How has following these guys done historically? Have they beat the market, and if so, who is the best?
I know the answer to these two questions. Do you?
It may surprise you.
I’ve chatted with the Sports Insights crew for a while on constructing quant ideas in the sports analytics world. They consistently do a good job, and one of their favorite concepts is betting against the public. (Check out this 2011 post of mine.) They also looked at vegas prop odds for various players to win most yards in each category and compared those to Yahoo draft spots to find over and under valued players. Worth a read!
Looks like I’ll be drafting Welker, Stafford, and C Johnson….