P/E Ratios, The other elephant in the room
October 8, 2008 8:53 PM Subscribe
Down, but pehaps not down enough P/E Ratios historically revert to 11, at least from 1871-2003 after any bubble, but somehow they did not revert that far after the dot-com bust
But even though we are in the midst of an unbelievable market drop, some think there is a case to be made that based on P/E ratios, the S&P 500 is still way over-valued (scroll down)
One Theory of why we conitinually repeat these bubble-cum-bad-times behavior is that of Generational Dynamics.
According to this theory, it takes about 4 generations before we forget how bad it was 4 generations ago.
But even though we are in the midst of an unbelievable market drop, some think there is a case to be made that based on P/E ratios, the S&P 500 is still way over-valued (scroll down)
One Theory of why we conitinually repeat these bubble-cum-bad-times behavior is that of Generational Dynamics.
According to this theory, it takes about 4 generations before we forget how bad it was 4 generations ago.
general dynamics being an offshoot of strauss and howe's theories of generations in american history - the forums have their own commentary on this, with john xenakis participating
interesting, if somewhat noisy, reading - i've been lurking at both places for years
posted by pyramid termite at 9:06 PM on October 8, 2008 [1 favorite]
interesting, if somewhat noisy, reading - i've been lurking at both places for years
posted by pyramid termite at 9:06 PM on October 8, 2008 [1 favorite]
Nigel Tufnel: The ratios all revert to eleven. Look, right across the board, eleven, eleven, eleven and...
Marty DiBergi: Oh, I see. And most P/E ratios are currently at twelve?
Nigel Tufnel: Exactly.
Marty DiBergi: Does that mean it's overvalued? Is it overvalued?
Nigel Tufnel: Well, it's one overvalued, isn't it? It's not eleven. You see, most blokes, you know, will be selling at twelve. You're on twelve here, all the way up, all the way up, all the way up, you're on twelve on your historical measures. Where can you go from there? Where?
Marty DiBergi: I don't know.
Nigel Tufnel: Nowhere. Exactly. What we do is, if we need that extra bit of liquidity, you know what we do?
Marty DiBergi: Sell it at eleven.
Nigel Tufnel: Eleven. Exactly. One median-er.
Marty DiBergi: Why don't you just sell at twelve and make ten be the buying number and make that a little cheaper?
Nigel Tufnel: [pause] We sell at eleven.
posted by The Card Cheat at 9:21 PM on October 8, 2008 [11 favorites]
Marty DiBergi: Oh, I see. And most P/E ratios are currently at twelve?
Nigel Tufnel: Exactly.
Marty DiBergi: Does that mean it's overvalued? Is it overvalued?
Nigel Tufnel: Well, it's one overvalued, isn't it? It's not eleven. You see, most blokes, you know, will be selling at twelve. You're on twelve here, all the way up, all the way up, all the way up, you're on twelve on your historical measures. Where can you go from there? Where?
Marty DiBergi: I don't know.
Nigel Tufnel: Nowhere. Exactly. What we do is, if we need that extra bit of liquidity, you know what we do?
Marty DiBergi: Sell it at eleven.
Nigel Tufnel: Eleven. Exactly. One median-er.
Marty DiBergi: Why don't you just sell at twelve and make ten be the buying number and make that a little cheaper?
Nigel Tufnel: [pause] We sell at eleven.
posted by The Card Cheat at 9:21 PM on October 8, 2008 [11 favorites]
But even though we are in the midst of an unbelievable market drop,
Here's a chart a made for another board comparing this market drop to 2001's.
The two moves from the twin ~1500 peaks have been nearly identical in space and time.
Good catch on the Generational Dynamics guy! I had found this site some time ago and was holding it as a possible fpp since his thesis is certainly interesting, even if he is something of a whackjob.
posted by troy at 9:33 PM on October 8, 2008
Here's a chart a made for another board comparing this market drop to 2001's.
The two moves from the twin ~1500 peaks have been nearly identical in space and time.
Good catch on the Generational Dynamics guy! I had found this site some time ago and was holding it as a possible fpp since his thesis is certainly interesting, even if he is something of a whackjob.
posted by troy at 9:33 PM on October 8, 2008
his thesis is certainly interesting, even if he is something of a whackjob.
Hey! I resemble that remark. Well, maybe not the interesting part.
Xenakis is an MIT grad. I don't even think you qualify for financial aid unless you check the whackjob checkbox.
posted by Rafaelloello at 9:43 PM on October 8, 2008
Hey! I resemble that remark. Well, maybe not the interesting part.
Xenakis is an MIT grad. I don't even think you qualify for financial aid unless you check the whackjob checkbox.
posted by Rafaelloello at 9:43 PM on October 8, 2008
In the minnow markets that I play in, the NZ and Australian exchanges, the PE is actually around historical levels now and not abnormally inflated. I think, though I could be wrong, that this is very much a US phenomenon.
I wonder why?
posted by i_am_joe's_spleen at 9:50 PM on October 8, 2008
I wonder why?
posted by i_am_joe's_spleen at 9:50 PM on October 8, 2008
What is the first elephant in the room?
I was thinking Credit Default Swaps ($62 Trillion) and Credit Derivatives ($700 Trillion), which exceed the total money that actually exists in the world by an order of magnitude. I would explain, but that would detract from another good FPP.
posted by Rafaelloello at 10:02 PM on October 8, 2008
I was thinking Credit Default Swaps ($62 Trillion) and Credit Derivatives ($700 Trillion), which exceed the total money that actually exists in the world by an order of magnitude. I would explain, but that would detract from another good FPP.
posted by Rafaelloello at 10:02 PM on October 8, 2008
thinking about the dotcom crash and P/E going forward . . . I think the baby-boomer peak income years had something to do with the run-up in P/E coming into 2000, and I think baby-boomer retirement liquidations are going to put significant pressure on P/E over the next 20+ years as the baby-boomer market turns from net-buyers to net-sellers of equities.
counterbalancing this is inflation. If the wheels come off, we print, full stop, damn the consequences, since a 1970s situation is preferable to a 1930s one.
So buying here & now may not necessarily be a mistake, P/Es be damned since a 40% amero devaluation against our creditors' currencies is a distinct possibility if not necessity, and the associated wage inflation will correct the housing market.
posted by troy at 10:17 PM on October 8, 2008 [2 favorites]
counterbalancing this is inflation. If the wheels come off, we print, full stop, damn the consequences, since a 1970s situation is preferable to a 1930s one.
So buying here & now may not necessarily be a mistake, P/Es be damned since a 40% amero devaluation against our creditors' currencies is a distinct possibility if not necessity, and the associated wage inflation will correct the housing market.
posted by troy at 10:17 PM on October 8, 2008 [2 favorites]
I've been invested in solar energy stocks, and most of them have price to earnings ratios of like 6 or 7 now. And these are for high growth companies. On the other hand one of them has a P/E of like 400, according to Google.
Anyway, government subsidies are going to rain down on this industry in the next few years so I'm not to worried. There was actually a little mini-drama going on during the bailout with solar energy stocks, The solar energy tax credit was going to expire this year without renewal, and while the senate had passed an extension, there was some worry that the house wouldn't get to it. But, they ended up attaching it to the bailout and the cap got lifted, which means people can recoup even more money from solar installs.
Not that spared anyone from the massive crash over the next few days. One of the companies was trading just 10% over it's book value, that is, the amount of money you'd get if you shut down the company and sold all the companies assets.
posted by delmoi at 11:33 PM on October 8, 2008 [3 favorites]
Anyway, government subsidies are going to rain down on this industry in the next few years so I'm not to worried. There was actually a little mini-drama going on during the bailout with solar energy stocks, The solar energy tax credit was going to expire this year without renewal, and while the senate had passed an extension, there was some worry that the house wouldn't get to it. But, they ended up attaching it to the bailout and the cap got lifted, which means people can recoup even more money from solar installs.
Not that spared anyone from the massive crash over the next few days. One of the companies was trading just 10% over it's book value, that is, the amount of money you'd get if you shut down the company and sold all the companies assets.
posted by delmoi at 11:33 PM on October 8, 2008 [3 favorites]
One of the companies was trading just 10% over it's book value, that is, the amount of money you'd get if you shut down the company and sold all the companies assets.
Ticker, plox.
posted by ryoshu at 11:43 PM on October 8, 2008
Ticker, plox.
posted by ryoshu at 11:43 PM on October 8, 2008
The ones with super-low P/E ratios were YGE (7.57 P/E) and SOL (5.88 P/E). Both of those companies beat earnings last quarter, but not by that much in YGE's case. The book value for YGE is 5.18, and the current price is 6.1.
By the way, this company EXM, a shipping company has a share price of $10.59, and a price to earnings ratio of 1.38. Their book value is 61/share. I don't know that much about them, but they were mentioned in an article that also mentioned LDK, another solar company. I really don't know what's going on there. They're down from $80 in January.
posted by delmoi at 1:05 AM on October 9, 2008
By the way, this company EXM, a shipping company has a share price of $10.59, and a price to earnings ratio of 1.38. Their book value is 61/share. I don't know that much about them, but they were mentioned in an article that also mentioned LDK, another solar company. I really don't know what's going on there. They're down from $80 in January.
posted by delmoi at 1:05 AM on October 9, 2008
Wow many thanks for posting that generationaldynamics site link; I hadn't seen that guys work before. Very interesting, and ties in well with the history of finance, so good job there!
Yeh, it does seem like stocks are still too damn expensive.
The S&P 500 is still trading at a P/E of about 20.6, with The Dow at 12.3.
This is significant as I've seen data from The Leuthold Group showing a long run mean for price to earnings ratio of about 16.1; in other words (and this is considering just a single valuation ratio, mind you) shares are currently about 24% overvalued.
The S&P 500 is off about 34% since Q1 2000, down some 15% this month alone; this precipitous drop markedly exceeds the 8.9% decline we observed in share prices during the 1930's after the 1929 stock market crash.
Earnings across the S&P 500 member companies are estimated to fall about 1.6% in Q3 (YOY, compared to Q3 2007 data). This is the fifth consecutive quarterly decline in earnings - something we haven't observed since Q1 2002. As the value of a share price is a function of earnings (amoung other things), this is indeed concerning.
That being said, it does seem most of this carnage to date has been confined to the markets. During the depths of The Great Depression we saw well over 7,000 banks failing [ .ppt] with no such a white knight as the FDIC to be seen. Folks life savings were wiped out, time and time again. Now, of course, the regulators have learned from that lesson and not only monitor the economic health of banks but also move very, very quickly should one being to struggle financially.
Also of note: between 1929 and 1933 the US Economy shrank by some 46% and unemployment approached 25%. Most recent forecasts show the US Economy marginally contracting, with 2009 growth expected to total 0.1%.. The same article puts Euro Zone growth at 0.2% for 2009, with total world growth of some 3% expected.
But markets are strange beasts, driven, as we've seen recently, to no small extent by emotions. So we shouldn't fully consider the numbers - there are also issues about political stability and relative growth to keep in mind. The US tends to rebound faster from recessions than other countries. This is something that at least partially explains the current US dollar strength.
If you're thinking of dipping your toe in the market, although past performance is by no means an indicator of future returns, the 10Y US Treasury was up about 86% this decade, and some folks see the S&P 500 as being setup for a 17% rally.
Ah the optimists, you gotta love 'em!
ryoshu -- "Ticker, plox."
Ah if you want companies with low P/Es and even lower prices compared to book, you've gotta look at financial servcies! Here's one that I'm (*cough*) familiar with priced at about a 23% discount to book value. Pays a 19% dividend as well.
posted by Mutant at 1:25 AM on October 9, 2008 [7 favorites]
Yeh, it does seem like stocks are still too damn expensive.
The S&P 500 is still trading at a P/E of about 20.6, with The Dow at 12.3.
This is significant as I've seen data from The Leuthold Group showing a long run mean for price to earnings ratio of about 16.1; in other words (and this is considering just a single valuation ratio, mind you) shares are currently about 24% overvalued.
The S&P 500 is off about 34% since Q1 2000, down some 15% this month alone; this precipitous drop markedly exceeds the 8.9% decline we observed in share prices during the 1930's after the 1929 stock market crash.
Earnings across the S&P 500 member companies are estimated to fall about 1.6% in Q3 (YOY, compared to Q3 2007 data). This is the fifth consecutive quarterly decline in earnings - something we haven't observed since Q1 2002. As the value of a share price is a function of earnings (amoung other things), this is indeed concerning.
That being said, it does seem most of this carnage to date has been confined to the markets. During the depths of The Great Depression we saw well over 7,000 banks failing [ .ppt] with no such a white knight as the FDIC to be seen. Folks life savings were wiped out, time and time again. Now, of course, the regulators have learned from that lesson and not only monitor the economic health of banks but also move very, very quickly should one being to struggle financially.
Also of note: between 1929 and 1933 the US Economy shrank by some 46% and unemployment approached 25%. Most recent forecasts show the US Economy marginally contracting, with 2009 growth expected to total 0.1%.. The same article puts Euro Zone growth at 0.2% for 2009, with total world growth of some 3% expected.
But markets are strange beasts, driven, as we've seen recently, to no small extent by emotions. So we shouldn't fully consider the numbers - there are also issues about political stability and relative growth to keep in mind. The US tends to rebound faster from recessions than other countries. This is something that at least partially explains the current US dollar strength.
If you're thinking of dipping your toe in the market, although past performance is by no means an indicator of future returns, the 10Y US Treasury was up about 86% this decade, and some folks see the S&P 500 as being setup for a 17% rally.
Ah the optimists, you gotta love 'em!
ryoshu -- "Ticker, plox."
Ah if you want companies with low P/Es and even lower prices compared to book, you've gotta look at financial servcies! Here's one that I'm (*cough*) familiar with priced at about a 23% discount to book value. Pays a 19% dividend as well.
posted by Mutant at 1:25 AM on October 9, 2008 [7 favorites]
So Mutant, can you assure me that that's next year's earning figure too?
posted by pompomtom at 1:55 AM on October 9, 2008
posted by pompomtom at 1:55 AM on October 9, 2008
GE has a P/E of 9.6, just say'n. I suppose they'll fall further because they have epic debt and new credit is tight, but Warren Buffett just bought $3 billion, although getting preferred shares.
posted by jeffburdges at 2:10 AM on October 9, 2008
posted by jeffburdges at 2:10 AM on October 9, 2008
One Theory of why we conitinually repeat these bubble-cum-bad-times behavior is that of Generational Dynamics.
See also Kondatiev Cycles
posted by Phanx at 3:40 AM on October 9, 2008
See also Kondatiev Cycles
posted by Phanx at 3:40 AM on October 9, 2008
it's book value, that is, the amount of money you'd get if you shut down the company and sold all the companies assets.
That's actually not true, at all. Plenty of companies run accumulated deficits and in reorg still somehow walk away with equity or warrants. Book value is based upon the book value of the assets. But assets are depreciated not based on market value, but on accounting methods, which often creates a significant disconnect between what a company's totals assets are, and what a company's enterprise value is. In addition, the value of goodwill and intangibles artificially props up book value. And so on and so on.
Book value is an interesting metric, but in the grand scheme of things, pretty useless. Ask the banks (whose book is widely followed, but has proven completely inaccurate).
posted by SeizeTheDay at 4:50 AM on October 9, 2008
That's actually not true, at all. Plenty of companies run accumulated deficits and in reorg still somehow walk away with equity or warrants. Book value is based upon the book value of the assets. But assets are depreciated not based on market value, but on accounting methods, which often creates a significant disconnect between what a company's totals assets are, and what a company's enterprise value is. In addition, the value of goodwill and intangibles artificially props up book value. And so on and so on.
Book value is an interesting metric, but in the grand scheme of things, pretty useless. Ask the banks (whose book is widely followed, but has proven completely inaccurate).
posted by SeizeTheDay at 4:50 AM on October 9, 2008
I don't think think that the drop stock prices is due to fundamentals or concerns about earnings. The recent drop in stock prices is being caused to a large extent by a) panic b) forced sellers with no contras due to a) plus redemption funding. Oh, and while the title of the post talks about PE@11 the graph shows PE@6ish.
posted by sfts2 at 5:01 AM on October 9, 2008
posted by sfts2 at 5:01 AM on October 9, 2008
stfs2, I'd argue that the TTM P/E will be better than the (actual, not BS analysts') forward P/E for the foreseeable future, due to the credit implosion surrounding the household and federal debt carrying capacity. Something's gotta give here, AFAICT.
posted by troy at 10:45 AM on October 9, 2008
posted by troy at 10:45 AM on October 9, 2008
"But there's a bigger problem: there is no "E" in the P/E. In English, there is no Earnings in the Price/Earnings Ratio.
Look at the estimates now: S&P 500 price is 975; many estimates of earnings for the S&P 500 for 2009 are around $75 for the index.
Do the math: 975/$75 = 13 x earnings. Now, this is modestly cheap. The historic average is 15 x earnings, so 13 x is a little cheap, but not much.
Here's the problem: that $75 estimate is baloney. No one has a CLUE what earnings will be. All we know is they keep dropping. "
posted by Rafaelloello at 2:17 PM on October 9, 2008
Look at the estimates now: S&P 500 price is 975; many estimates of earnings for the S&P 500 for 2009 are around $75 for the index.
Do the math: 975/$75 = 13 x earnings. Now, this is modestly cheap. The historic average is 15 x earnings, so 13 x is a little cheap, but not much.
Here's the problem: that $75 estimate is baloney. No one has a CLUE what earnings will be. All we know is they keep dropping. "
posted by Rafaelloello at 2:17 PM on October 9, 2008
The four generation theory is interesting, but my family is an exception to its generalities. During the Depression, my dad's father was a soil bacteriologist, and my mom's father was a small-town doctor who sometimes accepted chickens and other food as payment in lieu of cash. So anecdotally at least, not everyone suffered. My parents were born just before WWII, so they aren't quite boomers, and I was born in the mid 1970s, putting me at the late-ish end of GenX. I don't hate the boomers. Indeed, my dad's younger brother, who is one, adopted two kids from Honduras when it turned out his wife couldn't bear children. How can I hate someone like that?
One of my regrets in life is that when my mom's father came to live with us for a year before she put him in a nursing home, I didn't ask him more about his life. But he was a gruff old man, probably upset about the recent death of my grandmother, and I was a meek 13-year-old. But I bet he had some interesting stories to share.
posted by A dead Quaker at 9:31 PM on October 9, 2008
One of my regrets in life is that when my mom's father came to live with us for a year before she put him in a nursing home, I didn't ask him more about his life. But he was a gruff old man, probably upset about the recent death of my grandmother, and I was a meek 13-year-old. But I bet he had some interesting stories to share.
posted by A dead Quaker at 9:31 PM on October 9, 2008
A dead Quaker: "22The four generation theory is interesting, but my family is an exception to its generalities. During the Depression, my dad's father was a soil bacteriologist, and my mom's father was a small-town doctor who sometimes accepted chickens and other food as payment in lieu of cash. So anecdotally at least, not everyone suffered. My parents were born just before WWII, so they aren't quite boomers, and I was born in the mid 1970s, putting me at the late-ish end of GenX. I don't hate the boomers. Indeed, my dad's younger brother, who is one, adopted two kids from Honduras when it turned out his wife couldn't bear children. How can I hate someone like that?
One of my regrets in life is that when my mom's father came to live with us for a year before she put him in a nursing home, I didn't ask him more about his life. But he was a gruff old man, probably upset about the recent death of my grandmother, and I was a meek 13-year-old. But I bet he had some interesting stories to share."
I agree. There are a lot of edge cases, and I include myself in that group. My parents were born both born in '36 so their earliest memories are post-depression. I was born in '60 and my wife in '63 ( her parents born in '32 and '36) so we are both on the trailing edge of the baby boom born to parents who have no memories of the worst times, kind of sandwiched between the different generations with some of the qualities of both but not wholly fitting into either. Probably you and I will be the objective historians of these times as we're not aligned with the masses of others our age. Or maybe we'll just be isolated misfit fuck-ups. Either way, it sounds like fun.
posted by Rafaelloello at 9:06 PM on October 11, 2008
One of my regrets in life is that when my mom's father came to live with us for a year before she put him in a nursing home, I didn't ask him more about his life. But he was a gruff old man, probably upset about the recent death of my grandmother, and I was a meek 13-year-old. But I bet he had some interesting stories to share."
I agree. There are a lot of edge cases, and I include myself in that group. My parents were born both born in '36 so their earliest memories are post-depression. I was born in '60 and my wife in '63 ( her parents born in '32 and '36) so we are both on the trailing edge of the baby boom born to parents who have no memories of the worst times, kind of sandwiched between the different generations with some of the qualities of both but not wholly fitting into either. Probably you and I will be the objective historians of these times as we're not aligned with the masses of others our age. Or maybe we'll just be isolated misfit fuck-ups. Either way, it sounds like fun.
posted by Rafaelloello at 9:06 PM on October 11, 2008
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