Janet Yellen says equity market valuations are quite high

[AzCactus]

I thought it was interesting that she said this.  Effectively my impression is that unless interest rates stay artificially low for the next decade the markets are getting close to bubbly. 

 

http://www.bloomberg.com/news/articles/2015-05-06/yellen-says-equity-market-valuations-are-quite-high-

[Jurgis]

Greenspan "irrational exuberance" moment? http://en.wikipedia.org/wiki/Irrational_exuberance

[TwoCitiesCapital]

It would be nice to see price come down significantly for two reasons:

 

1) I'm currently talking my book

2) Because if they stay this high for years to come, millenials will likely find themselves in worse shape to retire than current boomers.

[Pauly]

Greenspan "irrational exuberance" moment? http://en.wikipedia.org/wiki/Irrational_exuberance

 

And of course after Greenspan's comments the dot-com bubble promptly burst...four years later.

[Jurgis]

Greenspan "irrational exuberance" moment? http://en.wikipedia.org/wiki/Irrational_exuberance

 

And of course after Greenspan's comments the dot-com bubble promptly burst...four years later.

 

That was one of the implications in my comment.  ;)

[original mungerville]

Earth to Janet: Ya, they are high because the Fed wanted them high!... create a wealth effect with QE! WTF???

[Viking]

As I believe Buffett said; it all depends on interest rates. The Fed seems to really want higher rates. And if rates do go higher then, yes, stock averages likely are high. However, if interest rates stay low then stocks likely are not too expensive.

[original mungerville]

Maybe she is retarded?

 

Or maybe she really wants to raise rates 25 basis points soon and so given she can't point to the economy or jobs, she is pointing to equities?

 

Maybe she doesn't have the courage or maybe she doesn't have any clue what is the right course of action just like everyone else?

 

 

[AzCactus]

Greenspan "irrational exuberance" moment? http://en.wikipedia.org/wiki/Irrational_exuberance

 

And of course after Greenspan's comments the dot-com bubble promptly burst...four years later.

 

That was one of the implications in my comment.  ;)

 

Then six years later the Nasdaq was actually cheaper than where it was when initially made that comment. 

[Jurgis]

Maybe she is retarded?

 

Or maybe she really wants to raise rates 25 basis points soon and so given she can't point to the economy or jobs, she is pointing to equities?

 

Maybe she doesn't have the courage or maybe she doesn't have any clue what is the right course of action just like everyone else?

 

Whoa, tell us how you really feel.  8)

 

I, for one, welcome our new Fed overlords.  :D

[wawallace]

I think what she said next was more important:

 

“They are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low. But there are potential dangers there.”

Ms Yellen also pointed to very low long-term interest rates and the risk that depressed term premiums could suddenly shoot up — something that was seen in the so-called taper tantrum of 2013.

“We need to be attentive — and are — to the possibility that when the Fed decides it is time to begin raising rates these term premiums could move up, and we could see a sharp jump in long-term rates.”

 

How you can categorize bonds as "safe" in that context is beyond me. Also, their fear is that any spark is going to set the entire theatre, the entire block and the entire county on fire.

 

[Guest 50centdollars]

http://www.businessinsider.com/mike-novogratz-salt-conference-comments-2015-5

[rpadebet]

Janet Yellen: equities are high because rates are low. rates are low because fed kept the rates low. fed kept the rates low because economy was weak. It's simple actually, equities are high because economy is weak. The risk is if economy improves then stock market will tank and economy goes into recession....so on an so forth

 

Hello chicken...there is the egg.....

To summarize we are f**kd

[wawallace]

"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees." (Keynes, General Theory of Employment, Interest and Money, 1936).

 

In this example "pretty faces" = "rate increases".

[TwoCitiesCapital]

It just really, really bothers me that we have to keep saying "equity valuations are reasonable if we consider how low rates are." Yes. I get it. As the discounting factor gets smaller, the present value of all future cash flows gets higher.

 

My problem with this is that it's another form of relative valuation and it's usefulness breaks down at extremes. What if we end up in European-moment where U.S. rates are zero-to-negative 7 years out on the curve. Does this mean we don't discount any risk to those cash flows at all and pay face value for them? As we get closer and closer to 0, the value of stocks has to be considered on more absolute measures - otherwise you'll get monkey-hammered when rates go from 0% to 3% again and your discounted DCF goes to hell.

 

Also, we'd expect that multiples in Europe would be significantly higher than multiples in the U.S. if this were the case, but that's not what has happened. This argument made sense a few years back when rates were 4%. It might still make some sense at 2%, but I'd argue it makes less sense and I don't like having to rely on it to justify current equity valuations. Relative value can be relatively dangerous.

[peter1234]

+1

Relative value can be relatively absolutely dangerous.

;)

[Jurgis]

OT?

 

None of my stock positions are held because the rates are at 2% and therefore I discount at 4% or something. I have zero stock positions that are cheap just relative to rates. All my stock positions are there because they are cheap(ish) absolutely period.

 

Of course, the above limits stock selection hugely right now: there are only few areas that are still cheap(ish). And even the stocks that are still cheap(ish) are not as cheap as they were in 2009, 2010, 2011, 2012. E.g. FRFHF or BRK.

[merkhet]

Combining Jurgis & TwoCitiesCapital together, I think the relevant question is whether a broader stock market drop from elevated levels will have a correlation of 1 across all equity sectors and/or asset classes or whether there will be certain pockets that will maintain or even increase their value.

[wawallace]

What makes matters worse is that the asset floor no longer exists for most companies because they trade at multiples of manipulated book value, or don't really use capital in any meaningful way at all. At least if we could see that there were $1,000,000,000 in assets backing a $500,000,000 market cap, a margin of safety would exist... and the second level is that the assets themselves are extremely distorted due to interest rates.

 

[Jurgis]

Combining Jurgis & TwoCitiesCapital together, I think the relevant question is whether a broader stock market drop from elevated levels will have a correlation of 1 across all equity sectors and/or asset classes or whether there will be certain pockets that will maintain or even increase their value.

 

There might be. However, I doubt that many of my positions won't drop in a downdraft. My dry powder for a downdraft is cash and positive non-investment cash flow(s). Unexpected inheritance at market bottom is the key. ;)

[TwoCitiesCapital]

OT?

 

None of my stock positions are held because the rates are at 2% and therefore I discount at 4% or something. I have zero stock positions that are cheap just relative to rates. All my stock positions are there because they are cheap(ish) absolutely period.

 

Of course, the above limits stock selection hugely right now: there are only few areas that are still cheap(ish). And even the stocks that are still cheap(ish) are not as cheap as they were in 2009, 2010, 2011, 2012. E.g. FRFHF or BRK.

 

Sure, but in my opinion, even 4% is far too low of a discount rate for uncertain cash flows in a competitive environment. Maybe if you owned a royalty with no price exposure and a some-what certain life, but not an equity.

 

My other issue that I've been trying to continuously remind myself of is that we're likely at peak earnings for a lot of companies in the mid-term - not just cyclicals. Do we really want to be paying peak multiples on peak earnings? This is what has kept me from pulling the trigger on companies like AmEx - sure the current multiple looks good, but what if margins fell by 25% to their normalized average? Now it doesn't look nearly as attractive.

 

Combining Jurgis & TwoCitiesCapital together, I think the relevant question is whether a broader stock market drop from elevated levels will have a correlation of 1 across all equity sectors and/or asset classes or whether there will be certain pockets that will maintain or even increase their value.

 

Impossible for me to know. I doubt everything will fall in tandem 1:1, but I have a hard time believing that most things won't fall a good bit in a general market compression of multiples (not to mention things generally get more correlated in down markets). Low P/B stocks have underperformed for the last 4 years so there could be a good argument for finding a good shelter in those - but then you consider that a large n# of them are overleveraged oil companies and it's hard to imagine an economic slowdown being good for that type of portfolio either.

 

I've generally been avoiding U.S. stocks except for very select opportunities just because i'm concerned about historically high multiples on top of historically high margins and low rates being used to justify it.

 

 

 

 

 

[adesigar]

Personally I have felt for a while that equity market valuation are high. I went from almost 100%+ in stocks to around 70% + 30% Cash around S&P 1950-2000. Been sitting and waiting because I cant find stuff to buy. I don't care about current interest rates. Im not paying crazy prices because of some dumb formula using interest rates.

[Jurgis]

Sure, but in my opinion, even 4% is far too low of a discount rate for uncertain cash flows in a competitive environment.

 

I believe you misread what I wrote. I don't use 4% discount rate.

[investor-man]

Unexpected inheritance at market bottom is the key. ;)

 

Comedy gold right there  ::)

[wisdom]

Chances of higher rates in the US are low until europeans, Japanese and the chinese are easing. Even then there should be a lag - when the rates are raised and by the time the impact is truly felt in the markets.

 

This is why I believe while it is good to be conservative it may be a bit premature to totally pull away.

 

This is just one of the many possible scenarios for no one knows how things will actually play out.