Monday, October 26, 2009 4 comments ++[ CLICK TO COMMENT ]++

Smithers says stock market 40% overvalued (according to Q ratio)

I ran across a Bloomberg article quoting Andrew Smithers as saying that the stock market is overvalued by 40%:

The U.S. Standard & Poor’s 500 Index is about 40 percent overvalued and headed for a drop as central banks pull back on securities purchases that pushed up asset prices, according to economist Andrew Smithers.

Declines are likely because banks will need to sell more shares to raise capital, the economist and president of research firm Smithers & Co. said in an Oct. 23 interview at Bloomberg’s Tokyo office. The closing price on Oct. 23 of 1,079.6 was 40 percent above 771.14, a level last seen in March, according to data compiled by Bloomberg.

“Markets are very vulnerable to an end of quantitative easing,” said Smithers...


Andrew Smithers, for those familiar with him, is famous for maintaining and evaluating market valuations based off the q ratio. The following chart, courtesy Smithers & Co, shows the current state of affairs:

(source: Smithers & Co)


The CAPE (aka cyclically adjusted P/E ratio; aka Graham-Dodd 10 year P/E ratio) also suggests that the market is overvalued by 36.5% as of September 17 of 2009.

Valuations measures such as these are why I have stayed away from the market. However, you need to keep in mind that these valuation measures move very slowly. If you strictly followed these measures, you may remain out of the market for a long time—possibly even decades. Smithers appears to have remained out of the market since the late 90's and only came into the market in the last year, and that is extremely difficult for most people.

Furthermore, the overvaluation does not necessarily mean that the market will plunge; it is possible that the market goes sideways for five to ten years.


Smithers also had some interesting comments about Japan in that Bloomberg article:

Not all equity markets are as overpriced as the U.S., Smithers said. Japan may be the world’s cheapest major market though he doesn’t forecast short-term gains from betting on the nation’s stocks.

Profit margins at Japanese companies are likely to improve as companies invest less, lowering depreciation costs, he said. Depreciation eats up about two-thirds of earnings in Japan, compared with less than half for U.S. corporations, according to Smithers. Firms plan to cut capital spending 10.8 percent this year, the Bank of Japan’s quarterly Tankan survey released this month showed.

“It’s quite likely that Japan is the only significant market in the world that is not seriously overvalued,” he said. “When investment comes down, depreciation comes down.”


Japan has a bunch of other issues that may weigh it down—in fact some bears are claiming that the Yen is going to collapse due to their high debt levels—so it's not clear how much this investment/depreciation issue matters. In any case, it's an interesting thought.

Tags: ,

4 Response to Smithers says stock market 40% overvalued (according to Q ratio)

Contrariandutch
October 27, 2009 at 6:25 PM

Financial markets hate moving sideways, and never do. Although they may go nowhere over a long period of time they do so by swinging wildly around (over the last twelve years, the US stock market is roughly flat, it definitely didn't feel that way to participants).

Now didyou seriously call Marx a great economist? Could you please point to a bit of his "analysis" that makes sense as anything but wild-eyed prophecy? (not trying to be snarky here, but I can't think of Marx as anything but ersatz religion, not economics, history or any other remotely scientific attempt of reasoning).

As to me being bullish on USD, yes, I am although this round-tripping is no fun at all. Still, the USD story still seems compelling to me. Also, I still think eur has some considerable weakening ahead of it.

Sivaram Velauthapillai
October 27, 2009 at 8:46 PM

ContrarianDutch: "<span>Financial markets hate moving sideways, and never do. Although they may go nowhere over a long period of time they do so by swinging wildly around (over the last twelve years, the US stock market is roughly flat, it definitely didn't feel that way to participants)."</span>


<span>Yep. Going sideways sounds good but it is usually very volatile. The market is said to have gone sideways from 1966 to 1982 but, boy, that is one wild ride. </span>


<span>ContrarianDutch: "As to me being bullish on USD, yes, I am although this round-tripping is no fun at all. Still, the USD story still seems compelling to me. Also, I still think eur has some considerable weakening ahead of it."</span>

<span>I'm getting crushed. Sort of. I have most of my holdings in US$ but my earnings is in C$ so it's not as bad as it seems. </span>

<span>I haven't thought of placing a direct US$ bullish bet but have considered going long the US Treasury bond. All sorts of cross-currents in the bond market right now. Treasuries, amazingly, sold off yesterday while stocks also sold off. I think it's best to wait and see how the bond market behaves are the FedRes ratchets down its asset purchases.</span>

Sivaram Velauthapillai
October 27, 2009 at 8:59 PM

ContrarianDutch: "Now didyou seriously call Marx a great economist? Could you please point to a bit of his "analysis" that makes sense as anything but wild-eyed prophecy? (not trying to be snarky here, but I can't think of Marx as anything but ersatz religion, not economics, history or any other remotely scientific attempt of reasoning)."


This is a complicated topic. Maybe I'll write an opiion piece one day--conservatives like you will probably be fuming  ;)

Anyway, I am influenced by Karl Marx. Because of the diasterous results of Communism he will always be dismissed but I truly believe he was a great thinker. But do note that this is no the same thing as saying that everything that he said was true or even desirable. It's no differnet than other great thinkers of the past. For instance, many American Founding Fathers, who are held in high regard, even by me, were blatant racists and, most importantly, were in favour of slavery.

Karl Marx is important, not as an economist per se, but as a political economist. He understood the interplay between politics and economy and how 19th century Europe was. I consider him as more of a social scientist than an economist. Even right now, social science schools consider him as highly influential whereas economics schools have largely ignored him. He was probably the first one to seriously consider the econopolitical realm as a struggle between classes.

Since you are on the right, I suspect you don't want to even admit the notion of classes but I think that is how the world was, and is, in many parts of the world. This is also why I think the only way to resolve class conflict is for everyone to become workers and capitalists at hte same time. This is sort of how the developed world has gone, with many workers owning shares in companies and the like.

One idea from Marx (actually it may be someone else before that but I first encountered it from Marx and he probably popularized the concept) that has influenced me is the notion that the economic pie is split between workers, capitalists, and government. You may or may not agree wtih me but my opinion is that, looking at many world problems in such a manner is more insightful. For instance, consider what happens when wealth accrues to government, rather than labour or so-called capitalists (e.g. most failed African and Asian states.) Or consider what happens when wealth accures to the capitalists but not to workers or government (e.g. Mexico).

Sivaram Velauthapillai
October 27, 2009 at 9:15 PM

It's not just me who thinks Marx was insightful on some key items. Even the great management theorist, Peter Drucker, who is as much a capitalist as anyone, has admitted at times how Marx was insightful:

QUOTE from Druker's essay, The Age of Social Transformation (The Atlantic Monthly, Nov 1994)

"Marx's great insight was that the factory worker does not and cannot own the tools of production, and therefore is "alienated." There was no way, Marx pointed out, for the worker to own the steam engine and to be able to take it with him when moving from one job to another. The capitalist had to own the steam engine and to control it."

Drucker goes on to point out how Marx's views became useless over time (I'm not going to go into it but Drucker's thesis is based on the view that the industrial worker rose and kept gaining power--Drucker actually goes on to imply that the knowledge worker of the modern era will end more powerful than the so-called capitalist (knowledge becomes more powerful than capital, as hard as that may be to believe.))

Post a Comment