Disconnect between Stock prices and profits:Interesting Reading

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annu
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Disconnect between Stock prices and profits:Interesting Reading

Post by annu » Fri Jun 26, 2020 10:40 pm

https://thefelderreport.com/2020/06/24/ ... t-history/
Some plots below

https://thefelderreport.com/wp-content/ ... .52-PM.png

https://thefelderreport.com/wp-content/ ... .40-PM.png
But what a simple price-to-earnings ratio doesn’t account for is the fact that Dotcom bubble appears so severe in the chart above largely because profit margins were relatively depressed at the time. Furthermore, profit margins in recent years became extremely inflated.
https://thefelderreport.com/wp-content/ ... .50-PM.png
So if we normalize profit margins (hat tip, John Hussman), we can see that stock prices today are more expensive than they were 20 years ago at the peak of the Dotcom mania. It turns out that the current disconnect between stock prices and sustainable profits is, in fact, greater than anything we have seen in modern history.

https://thefelderreport.com/wp-content/ ... .19-PM.png
The last time we saw prices and earnings disconnect in such an extreme way famously led to a “lost decade” for the stock market from 2000 to 2010.

ValuationsMatter
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Re: Disconnect between Stock prices and profits:Interesting Reading

Post by ValuationsMatter » Fri Jun 26, 2020 11:18 pm

The real question is what to do with money. There's got to be something better than treasuries. Seems like you can be absolutely right in predicting a collapse, except that the fed can step in and print their way out of anything. Holding cash when it can be so easily debased is far from a guarantee of safety.

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annu
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Re: Disconnect between Stock prices and profits:Interesting Reading

Post by annu » Sat Jun 27, 2020 12:05 am

ValuationsMatter wrote:
Fri Jun 26, 2020 11:18 pm
The real question is what to do with money. There's got to be something better than treasuries. Seems like you can be absolutely right in predicting a collapse, except that the fed can step in and print their way out of anything. Holding cash when it can be so easily debased is far from a guarantee of safety.
Well, bonds are to buffer the losses, so are treasuries and TIPS. But if nothing makes sense, keeping cash is probably a good option as well. But the data the dude has, atleast simple to understand and not using some crazy ass unicorn shape graphs to show some analysis.

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Re: Disconnect between Stock prices and profits:Interesting Reading

Post by MikeG62 » Sat Jun 27, 2020 6:51 am

I largely share the same view as the author. Having said that, there are some reasons why the current period may be different. Among them are the unprecedentedly low interest rates (and Fed's stated intention to hold them there through at least 2022) and the record level of support from the Fed and Congress. Also, the broad market indexes are being driven to a degree by a handful of stocks (Amazon, Alphabet, Apple, Microsoft and Facebook), which stocks seem somewhat impervious to the impact of the pandemic. Average stocks are down more than it appears from just looking at the overall index.
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aj76er
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Re: Disconnect between Stock prices and profits:Interesting Reading

Post by aj76er » Sat Jun 27, 2020 7:02 am

Where do those P/E ratios come from? Vanguard trailing 12month P/E is close to 20 right now, and I’ve not seen it go above 25 for the past few years.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

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annu
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Re: Disconnect between Stock prices and profits:Interesting Reading

Post by annu » Sat Jun 27, 2020 10:30 pm

aj76er wrote:
Sat Jun 27, 2020 7:02 am
Where do those P/E ratios come from? Vanguard trailing 12month P/E is close to 20 right now, and I’ve not seen it go above 25 for the past few years.
I am curious as well, will like to know if it is possible to get this information for free or only through paid sources. The graphs do look like made in Microsoft Excel :D

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aj76er
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Re: Disconnect between Stock prices and profits:Interesting Reading

Post by aj76er » Mon Jun 29, 2020 1:30 pm

annu wrote:
Sat Jun 27, 2020 10:30 pm
aj76er wrote:
Sat Jun 27, 2020 7:02 am
Where do those P/E ratios come from? Vanguard trailing 12month P/E is close to 20 right now, and I’ve not seen it go above 25 for the past few years.
I am curious as well, will like to know if it is possible to get this information for free or only through paid sources. The graphs do look like made in Microsoft Excel :D
I think he's using Shiller PE10 which averages inflation adjusted previous 10 years of P/E data. This metric has been very bearish for a long time.

For broad-based, cap-weighted index funds, I personally like just looking at the trailing 12 month, which shows that equities are fairly priced (or maybe slightly over-priced). Trailing U.S. Total Mkt is about 21 and trailing xU.S. Total Mkt is about 15. Thus, global equities are trading at trailing P/E of about 18.

A bit high by historical standards but, then again, bond yields are incredibly low by historical standards. And, if you discounted the U.S. market price for buy-backs, I don't think it looks over-valued at all.
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

sean.mcgrath
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Re: Disconnect between Stock prices and profits:Interesting Reading

Post by sean.mcgrath » Mon Jun 29, 2020 1:50 pm

annu wrote:
Fri Jun 26, 2020 10:40 pm
But what a simple price-to-earnings ratio doesn’t account for is the fact that Dotcom bubble appears so severe in the chart above largely because profit margins were relatively depressed at the time. Furthermore, profit margins in recent years became extremely inflated.
https://thefelderreport.com/wp-content/ ... .50-PM.png
So if we normalize profit margins (hat tip, John Hussman), we can see that stock prices today are more expensive than they were 20 years ago at the peak of the Dotcom mania. It turns out that the current disconnect between stock prices and sustainable profits is, in fact, greater than anything we have seen in modern history.
Why would you "normalize" profit margins? There is much more industry concentration and monopoly power today then during DotCom, especially in Tech, where the network effect appears to be real. But also in other parts of the economy.

Quasi monopolies generate quasi monopoly rents. If you believe they will persist, that has a value.

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annu
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Re: Disconnect between Stock prices and profits:Interesting Reading

Post by annu » Mon Jun 29, 2020 6:40 pm

aj76er wrote:
Mon Jun 29, 2020 1:30 pm
annu wrote:
Sat Jun 27, 2020 10:30 pm
aj76er wrote:
Sat Jun 27, 2020 7:02 am
Where do those P/E ratios come from? Vanguard trailing 12month P/E is close to 20 right now, and I’ve not seen it go above 25 for the past few years.
I am curious as well, will like to know if it is possible to get this information for free or only through paid sources. The graphs do look like made in Microsoft Excel :D
I think he's using Shiller PE10 which averages inflation adjusted previous 10 years of P/E data. This metric has been very bearish for a long time.

For broad-based, cap-weighted index funds, I personally like just looking at the trailing 12 month, which shows that equities are fairly priced (or maybe slightly over-priced). Trailing U.S. Total Mkt is about 21 and trailing xU.S. Total Mkt is about 15. Thus, global equities are trading at trailing P/E of about 18.

A bit high by historical standards but, then again, bond yields are incredibly low by historical standards. And, if you discounted the U.S. market price for buy-backs, I don't think it looks over-valued at all.
Your guess is probably correct, as more details are hidden behind paywall, so cannot see. I can understand it to be bearish but looking at past data, it does reflect what happened in 2008 was due to real issues, while 2002 and 2020, are mostly due to huge gaps in profits vs valuation.

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Re: Disconnect between Stock prices and profits:Interesting Reading

Post by firebirdparts » Mon Jun 29, 2020 7:35 pm

sean.mcgrath wrote:
Mon Jun 29, 2020 1:50 pm

Why would you "normalize" profit margins? There is much more industry concentration and monopoly power today then during DotCom, especially in Tech, where the network effect appears to be real. But also in other parts of the economy.
Exactly right. Philosophically, the OP went way off in the woods and around the bend calling profits "depressed" and "inflated". If a company is losing money, it might just be that they don't know how to make any. Burning through startup capital is a very normal part of the life cycle of a company.

if you want to normalize something, normalize the cost of capital.
A fool and your money are soon partners

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