US Stock Market Valuation Measures (Excerpt)

Professor Robert Shiller, the man renowned for spotting irrational exuberance, is starting to warn that based on the valuation multiples he compiles, stocks aren’t cheap. However, his P/Es are controversial for all sorts of reasons including his use of 10-year trailing earnings to calculate them. I much prefer analysts’ consensus expected 52-week forward earnings based on a time-weighted average of their latest forecasts for the current and the coming years’ earnings estimates.

For the S&P 500, the forward P/E was at 13.5 on Friday. Monthly data show that the ratio of the forward P/E to consensus expected long-term earnings growth (which tends to have an upwards bias) was 1.26 during February. That’s about the same as the 1.21 average of this PEG ratio since 1985.

Another useful valuation measure is the ratio of the market value of all stocks traded in the US to nominal GDP. It is highly correlated with the market capitalization of the S&P 500 divided by S&P 500 revenues. Both of these measures have recovered from their lows of 2009, but remain well below their previous two cyclical peaks.

Today's Morning Briefing: Animal Spirits.  (1) East Coast to West Coast. (2) Keynes on human nature. (3) Keynes on steroids. (4) How will Fed deal with the animals? (5) No end to the endgame and no exit for the Fed? (6) Things could get tricky. (7) Greenspan’s famous question. (8) On the lookout for irrational exuberance. (9) S&P 500 PEG is at average. (10) Are sentiment indicators relevant if corporations are biggest buyers of stock? (11) No cause for exuberance in headline news. (12) The “Cyprus Moment.” (More for subscribers.)

S&P 500, Oil, & the Dollar (Excerpt)

Since the start of the year, institutional investors seem to have stopped reacting to headline risk as quickly and intensely as they did since the start of the bull market. “Risk Off” periods now tend to last a couple of days rather than several weeks. Instead, investors seem to be focusing more on the performance of the US economy and taking comfort from its surprisingly good performance. At the same time, they have been remarkably relaxed about the bad economic performance of Europe, where stock prices are also moving higher nonetheless.

Another remarkable development is that the S&P 500, which has been very highly correlated with the price of oil and the inverse of the foreign-exchange value of the dollar, is significantly diverging from both of them. The S&P 500 has been on the rise, while the price of oil has been falling and the dollar has been strengthening. This gives me more confidence in the staying power of the bull, though I can see why others might be worried that something has to give, and it might be the S&P 500.

Today's Morning Briefing: Spring Break? (1) Will the bull take a holiday? (2) Going away is easier than coming back. (3) How to ride a bull. (4) Dearth of bears and volatility. (5) Lots of geopolitical event risks. (6) Militarism is on the rise in Asia. (7) Booming from Miami to San Francisco. (8) Market seems less headline driven these days. (9) Unusual divergence between stocks vs. oil and dollar. (10) No surprise in surprisingly strong retail sales. (11) More upside for Retailers and other Consumer Discretionary stocks. (More for subscribers.)

Valuation (Excerpt)

Stocks aren’t as cheap as they were during the summer of 2011, when the forward P/E of the S&P 500 fell to 10.4. It is now back up to 13.5. However, there is a widespread consensus among our accounts that stocks remain relatively cheap. I agree. That’s especially true now that several of the apocalyptic scenarios that weighed on valuation over the past three years seem less likely. Yet, at the same time, top Fed officials have explicitly stated that they intend to keep short-term rates near zero for a while even if the labor markets continue to improve.

What about Tobin’s q? It is a measure of the market value of an asset relative to its replacement cost. When values rise sharply relative to replacement cost that can signal a bubble as it did at the tail end of the 1990s bull market in technology stocks. For stocks, Tobin’s q peaked at a record high of 1.8 back then during Q1-2000. At the end of last year, it was just below 1.0 at 0.9.

Today's Morning Briefing: Eye of the Beholder. (1) Miami is hot again. (2) The bulldozers are working the night shift. (3) 50% down for out-of-towners. (4) Beauty and valuation contests. (5) The rise and fall of housing’s valuation multiple. (6) Affordability index has doubled. (7) Consensus is that stocks are cheap. (8) Professor Shiller disagrees. (9) Tobin’s q isn’t in bubble territory. (More for subscribers.)

On the Road Again (Excerpt)

A favorite country song of mine is Willie Nelson’s “On the Road Again.” It’s been my theme song since the beginning of the year. Today, I’ll be visiting with our accounts in Miami. Then I will be doing the same in California over the rest of the week. While I always enjoy meeting with our accounts, it’s more fun when the economic news is good and stock prices are rising, especially into record territory. Our Second Recovery scenario is on track, and so are our bullish targets of 1565 before mid-year and 1665 by the end of the year for the S&P 500.

Truckers are on the road again too. Employment in transportation and warehousing has increased 88,000 over the past 12 months. Truck tonnage rose 6.5% y/y during January, the best gain in more than a year.

The “Dow Theory” paradigm remains bullish as both the DJIT and S&P 500 Transportation Index are making new record highs. The latest earnings and valuation metrics for the S&P 500 Transportation sector show forward revenues and earnings are at record highs.

Today's Morning Briefing: On the Road Again. (1) Playing country music backwards. (2) Willie Nelson and the economy. (3) Second Recovery scenario on track. (4) Employment rebounding. (5) So are housing and construction jobs. (6) Transportation stocks are cruising to new highs. (7) Restocking, and borrowing to do so. (8) Sentiment is wildly neutral. (9) Financial press advises investors to curb their enthusiasm. (10) Shiller says: “Who Knows Why?” (11) Analysts are rationally exuberant about earnings. (12) Valuation turning more exuberant too. (13) The secular bull case. (More for subscribers.)

US Consumers (Excerpt)

Of all the numbers that are released in the payroll report, I tend to give the most weight to the ones I use to calculate our YRI Earned Income Proxy. It is simply average hourly earnings in private industry (i.e., the hourly wage rate) multiplied by aggregate hours worked in private industry. The latter variable reflects the length of the workweek and the number of people working, i.e., payroll employment. During February, our proxy rose 0.7% to another new record high. It is highly correlated with wages and salaries in personal income (excluding government payrolls) and also with retail sales.

Consumers have other reasons besides an improving labor market to accentuate the positive. The Fed’s Flow of Funds data also showed last week that household net worth has recovered since Q1-2009 by $14.7 trillion to $66.1 trillion at the end of last year, nearly back to its previous all-time high during Q3-2007. The increase has been attributable mostly to rising stock prices, which boosted the values of households’ pension fund reserves, mutual fund shares, directly owned shares, and equity in non-corporate businesses.

Today's Morning Briefing: Bull's Anniversary. (1) Raging bull. (2) New highs despite all the headline risk. (3) Billy Joel, Fred Astaire, Ginger Rogers, and the market. (4) Record high stock prices and earnings. (5) Corporate cash assets at record despite record buybacks and dividends. (6) Fed’s doves want much lower jobless rate. (7) Wealth effect or asset bubble? (8) Payroll gains push earned incomes to new highs. (9) Consumers recoup their net worth losses. (10) Will the bull market’s leaders continue to be so? (11) “Emperor” (+). (More for subscribers.)