Burton Malkiel : don't panic

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caseynshan
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Burton Malkiel : don't panic

Post by caseynshan »

http://online.wsj.com/article/SB1000142 ... on+Malkiel

First, I believe that stocks today are cheap. Price/earnings multiples are just over 14 and forward P/E multiples, which use forecasted earnings, have shrunk to less than 12. These multiples are low relative to historical precedent and are especially low when considered in comparison to a 10-year Treasury yield of 2.5%. Dividend yields of 2.5% also compare favorably with 10-year Treasurys. Multiples do not look cheap relative to average 10-year earnings (the so-called Shiller P/E multiples), but today's earnings are so much higher than average earnings that a 10-year average is not a good estimate of today's corporate-earning capacity.
Last edited by caseynshan on Mon Aug 08, 2011 8:17 am, edited 1 time in total.
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DartThrower
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Post by DartThrower »

The link didn't work when I tried it. I was able to see it at this link:

http://online.wsj.com/article/SB1000142 ... on+Malkiel

Thanks for posting that interesting article. I only had time to skim it before work this morning unfortunately.
Our patience will achieve more than our force. -Edmund Burke
livesoft
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Post by livesoft »

Saying, "Don't panic" is not really news. I'd like to read about respected market pundits (is that an oxymoron?) that say, "PANIC!"
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Cody
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Post by Cody »

My thanks to both of you. My wife had just asked on Friday "Why are we buying stocks (funds of course) right now."

I just forward the link so she can see.

Great thanks for helping us out. And of course Mr. Malkiel.

Cody
bb
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Post by bb »

Isn't saying PE10 is not a good measure because earnings are
so high an oxymoron? Isn't that the point of the PE10 in the
first place - to smooth out the spikes?
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SVariance1
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Post by SVariance1 »

bb wrote:Isn't saying PE10 is not a good measure because earnings are
so high an oxymoron? Isn't that the point of the PE10 in the
first place - to smooth out the spikes?
Yes that is the point. Obviously, the best earnings to use would be expected earnings if they were accurate. The problem is that analysts don't do a very good job of forecasting substantial shifts in earnings power. How many analysts were projecting $7 S&P 500 earnings three years ago but they fell very hard in a short period of time. If earnings fall hard again, the 1 year trailing or forward would not be very valuable
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DartThrower
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Post by DartThrower »

livesoft wrote:Saying, "Don't panic" is not really news. I'd like to read about respected market pundits (is that an oxymoron?) that say, "PANIC!"
I think they often say it implicitly. Take for instance Bill Gross on treasuries or Jim Chanos on China. When they're right it's big news. When wrong it's often swept under the rug. Take for instance the Y2K calls of ~12 years ago.


August 1999 Ed Yardeni:

"Despite progress fixing the Y2K computer glitch, there is still a 70 percent chance that it will spark a global recession, Edward Yardeni, a top U.S. economic forecaster, said on Tuesday."

http://archive.newsmax.com/articles/?a=1999/8/12/84344
Our patience will achieve more than our force. -Edmund Burke
Grt2bOutdoors
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Re: Burton Malkiel : don't panic

Post by Grt2bOutdoors »

caseynshan wrote:http://online.wsj.com/article/SB1000142 ... on+Malkiel

First, I believe that stocks today are cheap. Price/earnings multiples are just over 14 and forward P/E multiples, which use forecasted earnings, have shrunk to less than 12. These multiples are low relative to historical precedent and are especially low when considered in comparison to a 10-year Treasury yield of 2.5%. Dividend yields of 2.5% also compare favorably with 10-year Treasurys. Multiples do not look cheap relative to average 10-year earnings (the so-called Shiller P/E multiples), but today's earnings are so much higher than average earnings that a 10-year average is not a good estimate of today's corporate-earning capacity.
Although I have not read the entire opinion (will when I have some more time) - the blurb above reads to me like this "It's different this time". Sorry, but it's not different. Are equities cheaper today, yes, they are cheaper than they were on Friday and the week before. Are they cheaper than a year ago or two years ago after stripping out this false floor of liquidity?, that remains to be seen.

Am I buying equities, why yes I am, along with fixed income and cash.
Why? well, that's what my IPS says to do, that's what I am comfortable with and that's exactly what I am doing.
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Post by fredflinstone »

Some people argue that the 2008-09 recession was particularly bad and so this skews PE10 downward. However, I would argue in response that earnings in 2004-06 were buoyed by the subprime bubble, which skews PE10 upward. I think it all balances out. PE10 was 20.33 at the market's close on Friday and is probably a tad under 20 at this moment given today's modest decline in stock prices. A PE10 of 20 is considerably higher than the historical average of 16.42, but it is not outlandishly high.

When you consider the price of fixed-income investments right now (real yield on 10 year TIPS of 0.3 percent), an earnings ratio of 5% (that is, the reciprocal of PE10) looks very appealing.
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plnelson
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Post by plnelson »

It's never a good idea to panic because that means that objective analysis is being overruled by emotion.

But pollyannish faith is also an emotion. The objective, analytical side of my brain thinks we're in great danger:

The US is about to suck $2 trillion out of its economy through austerity measures. This will be a massive drop in aggregate demand. And even in doing so Washington still projects a $20 trillion debt (instead of $22 trillion) by the end of the decade!

Europe is about to implode - attempts to shore up the PIIGS's fiscal houses have failed again and again - major ratings firms are projecting defaults for several of them and all of them are engaged in massive austerity programs, again, wiping out aggregate demand. I follow the business news in the UK and Europe and virtually no one is optimistic about the ECB's current effort.

The UK has also announced a huge austerity program which hasn't even gone into effect yet.

Western economies are currently demand-limited and with virtually all of them making huge spending cuts, and their major trading partners doing the same, there seems little reason for optimism.

In the 1930's "cash was king" because that depression was deflationary. If we enter a new depression that might still be the case, but unlike the 1930's debt is the major factor driving this crisis, and in that environment governments are often tempted to inflate their way out from under Mt Debt (e.g., the QE's). If that's the case cash is suicide.
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Post by Grt2bOutdoors »

fredflinstone wrote:Some people argue that the 2008-09 recession was particularly bad and so this skews PE10 downward. However, I would argue in response that earnings in 2004-06 were buoyed by the subprime bubble, which skews PE10 upward. I think it all balances out. PE10 was 20.33 at the market's close on Friday and is probably a tad under 20 at this moment given today's modest decline in stock prices. A PE10 of 20 is considerably higher than the historical average of 16.42, but it is not outlandishly high.

When you consider the price of fixed-income investments right now (real yield on 10 year TIPS of 0.3 percent), an earnings ratio of 5% (that is, the reciprocal of PE10) looks very appealing.
One could also make the argument that firms carrying a higher level of debt are benefitting from an unusually low market rate of interest expense (easy money policy), thereby artificially boosting earnings. If historical interest rates were charged earnings would be much lower properly reflecting the higher level of risk being incurred by heavily leveraged firms. Therefore p/e ratios are not a valid indicator.
Grt2bOutdoors
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Post by Grt2bOutdoors »

plnelson wrote:It's never a good idea to panic because that means that objective analysis is being overruled by emotion.

But pollyannish faith is also an emotion. The objective, analytical side of my brain thinks we're in great danger:

The US is about to suck $2 trillion out of its economy through austerity measures. This will be a massive drop in aggregate demand. And even in doing so Washington still projects a $20 trillion debt (instead of $22 trillion) by the end of the decade!

Europe is about to implode - attempts to shore up the PIIGS's fiscal houses have failed again and again - major ratings firms are projecting defaults for several of them and all of them are engaged in massive austerity programs, again, wiping out aggregate demand. I follow the business news in the UK and Europe and virtually no one is optimistic about the ECB's current effort.

The UK has also announced a huge austerity program which hasn't even gone into effect yet.

Western economies are currently demand-limited and with virtually all of them making huge spending cuts, and their major trading partners doing the same, there seems little reason for optimism.

In the 1930's "cash was king" because that depression was deflationary. If we enter a new depression that might still be the case, but unlike the 1930's debt is the major factor driving this crisis, and in that environment governments are often tempted to inflate their way out from under Mt Debt (e.g., the QE's). If that's the case cash is suicide.
If you hold debt, pay it off - inflation doesn't work well when there is no demand. If the government is contracting, and private investment is contracting you have deflation. Do you see expansion in any of those categories? Take a look at Japan, was it better to invest or pay off debt? Cash is a versatile tool and its benefits should not be overlooked. Return of capital will always overweigh a supposed return on capital.
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Post by BlueEars »

SVariance1 wrote:
bb wrote:Isn't saying PE10 is not a good measure because earnings are
so high an oxymoron? Isn't that the point of the PE10 in the
first place - to smooth out the spikes?
Yes that is the point. Obviously, the best earnings to use would be expected earnings if they were accurate. The problem is that analysts don't do a very good job of forecasting substantial shifts in earnings power. How many analysts were projecting $7 S&P 500 earnings three years ago but they fell very hard in a short period of time. If earnings fall hard again, the 1 year trailing or forward would not be very valuable
The issue: the E10 in PE10 has a very high standard deviation versus historical. Statistically this looks suspicious. So PE1 may be better right now.
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tadamsmar
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Post by tadamsmar »

Les wrote:
SVariance1 wrote:
bb wrote:Isn't saying PE10 is not a good measure because earnings are
so high an oxymoron? Isn't that the point of the PE10 in the
first place - to smooth out the spikes?
Yes that is the point. Obviously, the best earnings to use would be expected earnings if they were accurate. The problem is that analysts don't do a very good job of forecasting substantial shifts in earnings power. How many analysts were projecting $7 S&P 500 earnings three years ago but they fell very hard in a short period of time. If earnings fall hard again, the 1 year trailing or forward would not be very valuable
The issue: the E10 in PE10 has a very high standard deviation versus historical. Statistically this looks suspicious. So PE1 may be better right now.
Nah. When picking stocks, July 2001 earnings are equally important as the other 119 trailing month's earnings, and more important than every other bit of information that could conceivably be available. All that other information should be completely ignored. :lol:
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Dan Moroboshi
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Post by Dan Moroboshi »

Image

Although, given the tone, a picture of Marvin the Paranoid Android would be more appropriate...
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Post by zeugmite »

fredflinstone wrote:Some people argue that the 2008-09 recession was particularly bad and so this skews PE10 downward. However, I would argue in response that earnings in 2004-06 were buoyed by the subprime bubble, which skews PE10 upward. I think it all balances out. PE10 was 20.33 at the market's close on Friday and is probably a tad under 20 at this moment given today's modest decline in stock prices. A PE10 of 20 is considerably higher than the historical average of 16.42, but it is not outlandishly high.

When you consider the price of fixed-income investments right now (real yield on 10 year TIPS of 0.3 percent), an earnings ratio of 5% (that is, the reciprocal of PE10) looks very appealing.
I recall a 2.5% or so risk premium was not that great historically... If it gets above 3%, then it gets interesting.
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LH
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Post by LH »

livesoft wrote:Saying, "Don't panic" is not really news. I'd like to read about respected market pundits (is that an oxymoron?) that say, "PANIC!"
http://www.theatlantic.com/business/arc ... se/243287/
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