Bernanke pretty much says stocks undervalued

[scorpioncapital]

http://www.reuters.com/article/topNews/idUSTRE51O6KR20090225

 

 

[Mungerville]

And your point is?  ....what? like Bernanke knows anything about stock market valuations.  That might be a clear sell signal actually. 

 

Sorry, I have a gripe with his predecessor Greenspan who said in 1996 there was irrational exuberance and then in 1999 and a P/E of 40 that we had entered a new economic era.  Bernanke also said in 2005/6 that housing reflected the strong economy and essentially was no in a bubble.

 

If they say go one way, I go the other.

[Parsad]

I'm not sure Bernanke said anything wrong there.  He's basically saying that the stock market is reflecting the fears of investors and their apprehension to risk, while credit markets are starting to show signs of life.  That's basically what I see from everything I'm reading.  The premium for stocks, corporate bonds, municipal bonds, etc. today is something I have never experienced before.  Never seen a market this cheap with spreads so damn wide.  I've read about them, but never actually ever been in one or seen one.  And that is completely attributable to investor fears, both retail and institutional.  Cheers!

[Santayana]

I'm not sure that stocks can be called "cheap" by any valuation measure right now.      The earnings power of the S&P is going to be hampered for a long time because of what we're in the middle of right now.   

[scorpioncapital]

Take 50 years. If the S&P500 has 10 years of zero earnings and 40 years of $100 earnings the value of the S&P500 will be roughly equal to if it had 50 years of $100 earnings.

 

$5000 in earnings versus $4000. Difference? 20%. Valuation? 50,000 vs 40,000 over 10 years. Annual compound difference? 0.40% per year.

 

My point is this depression and the earning consequences are insignificant to the value of the S&P 500, or rather to your ability to get rich.

[Santayana]

Just because stocks may provide nice returns over the next 50 years (a bit longer than my horizon), doesn't mean they are "cheap" at current prices.  That is not to say there is no reason to be buying right now. 

[Guest ericopoly]

Annual compound difference? 0.40% per year.

 

Yes, but 20% more money is 20% more money.  You could say that over 100 years it's an even more minute difference in rate of annual compounding, but it doesn't change the fact that you'd have 20% more money.

 

50 cent dollars don't have much impact on 100 year rates of compounding either, but they make a big difference on 5 year rates of compounding.

[scorpioncapital]

I wouldn't worry about 20% more or less money if in that period was one of the biggest depressions of the last 100 years. I'd take the money and run :)

 

[Parsad]

I'm not sure that stocks can be called "cheap" by any valuation measure right now.      The earnings power of the S&P is going to be hampered for a long time because of what we're in the middle of right now. 

 

Forget stocks, if you think they are still expensive...which I don't.  You can easily put together a porfolio of corporate, municipal and distressed bonds that will generate 10-12% over the next five years.  If you can read financial statements and understand the debt obligations and cash flows of corporations, you can put together a portfolio of distressed debt that will yield 20-25% annualized for the next few years.  Things are very cheap across the board except for treasuries.  Good investors can do very well going forward regardless of the long-term implications of a long recession and economic slump.  Cheers!

[Santayana]

Well the topic was the valuation of stocks specifically, and my point was that not being expensive is not synonomous with being cheap.    (Although I do think they are expensive since a typical major bottom would be P/Es into the single digits, and we aren't there yet).

 

I don't consider myself at all qualified to speak as to the value out there in debt instruments, but would say that I would definitely be very careful in considering those investments.  It's a stretch to say that one can "easily" put together a portfolio that will end up yielding 10-12%.  If you really think that, I think you are misjudging risk.

[Mungerville]

I agree with Parsad re debt if you are selective and I agree with Santayana on stocks that just because they are not expensive, it does not mean they are cheap.

 

In terms of horizon, why don't we extend it to 1000 years and say price doesn't matter at all - like Jeremy Siegel argued in 1999 in "Stocks for the Long Run".  Well, Jeremy, I guess its now "Stocks for the very very long run".

 

Stocks won't do more than 7% real or 9% nominal per year over the next 7 years in my opinion.  Sanjeev, this is NOT one of those periods you heard about for stocks in value investing circles in terms of the overall level (they are currently moderately cheap overall) of valuation.  Although I am sure that given the velocity of the fall in the overall level and the scare that the potential financial system collapse of October caused, you can find mouth-watering opportunities in individual equity securities which were affected by the reverberations consistent with these periods you have heard about.