In the Whither the Markets thread we had brought up the market being overvalued by abt 10 to 15 pct when mkt was 5 pct lower. Prof Shiller states here the P to E based on 10 yr avg earnings is 26. While average is 17. So 50 pct overvalued.
A Citigroup analyst questions this method. Stating no adjustment made for interest rates. And Shiller kind of states maybe that’s Why p to e based on 10 yr avg is high.
Re: What does Prof. Robert Shiller think about the market?
He goes on to say - since interest rates are low, where else would investors put money? Not good reasoning, Prof. Just cause interest rates are low- so bonds over valued - doesn't mean one HAS to put money in stocks. Which are also overvalued!
Re: What does Prof. Robert Shiller think about the market?
Why be wishy washy? Investing is for the long term. Just because investment A (bonds in this case) has poor prospects going forward, doesn't mean you just go to investment B. There is option C. Go to cash.
Re: What does Prof. Robert Shiller think about the market?
To your credit, you did say - maybe lighten up a little. But that message got lost in your concession to Mr. Tobayavich (spelling?).
You also correctly stated you are not a market timer. Point taken. But rebalancing, as we have stated multiple times, is one of the free meals. (Speaking of free meals, Mr. Chen the billionaire should have coughed up the 300$ don't you think?)
Re: What does Prof. Robert Shiller think about the market?
You could have also stated the following
Ok. Interest rates r low now. So there has been an accompanying expansion in P/E ratio. But what if interest rates go up. (They already have since we called the bottom in the 10 yr Treasury bond yield 1 year ago, Prof).
Re: What does Prof. Robert Shiller think about the market?
As interest rates go up, by Mr. T's logic, there should be P/E contraction. Would that not be a kick in the gut to the current bloated prices?
This is what you could have said in respond to Mr. T. Do you mind joining us in this discussion, Prof. For No one else wants to. Thanks in advance.
Re: What does Prof. Robert Shiller think about the market?
By the way, Prof, yesterday, refiners stocks were down 5 to 8 pct. Tesoro, Valero, Marathon and others were taken to the woodshed. You know why? Glad you asked.
Re: What does Prof. Robert Shiller think about the market?
Apparently, crude will be shipped overseas for refining. Laws didn't permit the big boys such as ExxonMobil to do this earlier. So due to no competition, the refinery stocks were bid up. And when the new law was passed, they paid the piper.
Re: What does Prof. Robert Shiller think about the market?
Now what is the connection of the above story to this thread, you ask. The connection, dear reader, is more than tangential.
Re: What does Prof. Robert Shiller think about the market?
When interest rates are low p to e ratios skyrocket.
When crude not shipped overseas refinery stocks skyrocket.
When interest rates go up - which they inevitably will (unless we are Japan of last 20 years) the p to e will contract.
When crude shipped overseas, refinery stocks HAVE come down.
Re: What does Prof. Robert Shiller think about the market?
Discuss.
Re: What does Prof. Robert Shiller think about the market?
"Look at the yearly earning of the S&P 500 for each of the past ten years.Adjust these earnings for inflation, using the*CPI*(ie: quote each earnings figure in 2012 dollars)Average these values (ie: add them up and divide by ten), giving us e10.Then take the current Price of the S&P 500 and divide by e10."
Explanation taken from multiple.com if I remember link properly.
So if cpi for last 10 years low , which is the case , denominator lower than if cpi bigher. So for same P the p to e higher for low cpi. I guess that is what Tobayavich meant by adjusting for interest rates?
Now if cpi for next 10 yrs higher. In 2024, the inflation adjusted E will be bigher. So p to e will have downward bias (as opposed to low cpi case)
Re: What does Prof. Robert Shiller think about the market?
So for same P mkt will appear cheaper for high cpi case.
Maybe Graham and dodd had it right? Don't bother adjusting for cpi for last 10 yrs earnings.
Note that we r just posing a question.
Re: What does Prof. Robert Shiller think about the market?
First let me just acknowledge Econmics Nobel Prize winner Prof. Robert Shiller as an affable person, as seen on TV. Very down to earth and humble to a fault. He is streets and levels ahead. This thread is simply an expression of individual opinion without ANY hint or intent of disrespect. And to add, the individual expressing opinion is NOT a financial professional. That said, lets have some fun.
Re: What does Prof. Robert Shiller think about the market?
OK Prof here we go. I kind of agree with Tobayavich (how come you haven't helped me out with correct spelling).
Re: What does Prof. Robert Shiller think about the market?
Let us say inflation rate (CPI) each of last 10 yrs is 2 pct. Case I (do u mind if we use Roman numerals to appear sophisticated? )
And inflation rate is 6 pct each of last 10 yrs - Case II
Re: What does Prof. Robert Shiller think about the market?
Snp500 now is 1950. Say p to e based on last 12 months 20. (Bear with me doc. Round numbers easy to work with).
Re: What does Prof. Robert Shiller think about the market?
So E IS 1950/20 = 97.5
Re: What does Prof. Robert Shiller think about the market?
Let us assume average of last 10 yrs earnings is 75 pct of this number. So it is 72.
Re: What does Prof. Robert Shiller think about the market?
Now let us apply 2 pct inflation rate to earnings. Assume average is 85.
So p to e is 1950/85 or 22.5 approx. All cals done in mind.
apply 6 pct. Say E is 110. P to e is 1950/110 or 10 pct lower than 19.5 or 17.5