All posts by

Market is overvalued: John Mauldin

I encourage you to go and read the latest John Mauldin weekly newsletter: Forecast 2014: “Mark Twain!”.


The S&P 500 Index returned 32% excluding dividends from January 1, 2012, through January 17, 2014. Over that time frame, real earnings grew by less than 8%…

… while the trailing 12-month price-to-earnings multiple has expanded by nearly 30%, from 12.8x to 17.3x.

That means most of the recent gains in US equity markets have been driven by multiple expansion, in spite of sluggish real earnings growth. Despite an improvement in the real earnings trend since I dug into US stock market valuations, multiple expansion, and earnings last August, the disproportionate amount of gains attributable to multiple expansion versus gains attributable to earnings is a clear sign that sentiment, rather than fundamentals, may be the dominant force driving the markets higher.

And then:

Not only does today’s Shiller P/E of 25.4x suggest a seriously overvalued market, but the rapid multiple expansion of the last few years, coupled with sluggish earnings growth, suggests that this market is also seriously overbought. Today’s markets are just slightly less expensive than the 27x level seen at the October 2007 market peak and are only modestly below the levels seen before the stock market crash in 1929. Although we are nowhere near the all-time “stupid” peak of 43x reached in March 2000, a powerful narrative drove the markets to clearly unsustainable levels then, and a powerful narrative is driving markets today. In many ways, faith in the Federal Reserve today is roughly equivalent to faith in the words dot com in 1999.

While it may be impossible to accurately predict when this policy-driven market will break, history suggests it would be very reasonable for the secular bear to eventually bottom at a P/E multiple between 5x and 10x, opening up one of the rare wealth-creation opportunities to deploy capital at truly cheap prices.

Sometimes we have to wade through what may seem like deceptively dry technical details to sort out compelling conclusions, but I hope you’ll focus on the main idea: We are not talking about the potential for a modest 20% to 30% drawdown in the US stock market. If the historical relationship between Shiller’s P/E and consequent returns is any indication, we are talking about the potential for a 50%+ peak-to-trough drawdown and ten-year average annual returns as bad as -6.1%, according to the chart below from Cliff Asness at AQR. Such a result would fall in line with somewhat similar deleveraging periods such as the United States experienced in the 1930s and Japan has experienced since 1989. There is no way to sugarcoat it: too much equity risk can be unproductive and even destructive in this kind of economic environment.

It is my opinion that the market is overvalued.

Buffett lauds Bernanke but laments lack of investment bargains

Source: Reuters.

Warren Buffett said on Thursday he would recommend reappointing Ben Bernanke as Federal Reserve chairman, while adding that low interest rates have inflated asset values and complicated his hunt for investments at his company Berkshire Hathaway Inc.

It is another signal markets are fully/overvalued.

Related articles:

Market Is Overvalued – Laid-Back Portfolio Stands Still

Hi all,

I wrote my latest article on Mar 6, 2013. Time flies…

I was waiting for a correction before committing more funds into the stock market. The awaited correction is just not happening.

It is my opinion that the stock market is between fairly valued to overvalued. There’s no urge to put money into ever riskier stocks.

Nonetheless, I think I identified a possible investment.

I’ll write about it ASAP.

P.S. I’m waiting for NTI quarterly data.

Disclosure: I am long NTI.

Market is in a bubble: actress Mila Kunis is getting into stocks

‘I’ve just started investing in stocks, which is new for me,” actress Mila Kunis tells CNBC. Please notice the sign: “Strategic Thinking: Mila Kunis On Equity Strategy”. I found the (short) video quite funny.

This is a contrarian signal in my opinion. Quite powerful also, if you ask me. It reinforces my current view: markets are in a bubble.

On the other hand, interest rates are quite low. I think this bubble has legs.

So, um, what to do? Timing the market is a fool’s game. I’m slowly building a high-dividend yield stock portfolio. Quest for high-dividend yielding stocks has a rationale.

We are in a bubble

I think we are in a bubble.

The thought occurred to me when I saw a recent Newsweek front page screaming: Shares Are Cheap! The New Stock Market Boom! Well, just kidding.

I was perusing Investing in a Low-Growth World, by Jeremy Grantham.

Note: GMO is Grantham’s global investment management firm.


The Fed’s negative real rates regime, designed to badger us into riskier investments in order to push up equity prices and grab a short-term wealth  effect (that must be given back one day when least comfortable and least expected), has gone on for a long and, for me, boring time. This low interest rate period is serving, therefore, as a sneak preview of what a permanently lower rate regime might look like (although any permanently lower rates reflecting lower GDP growth would be by no means as low as these engineered rates that we are currently experiencing). So what are some of these effects? The artificially low T-Bill rates first work their way slowly up the curve. Next, the most obviously competitive type of equities – high yield stocks – begin to be bid up ahead of the rest of the market, as has happened. “I’ve just got to squeeze out some higher rates somewhere, anywhere,” is the pension fund plea. Then, this low rate competition begins to filter into other securities, historically sought after for their higher yields: higher-grade real estate, where the “cap rates” slowly fall; and, unfortunately, also forestry and farmland, mainly of the larger and more standard varieties that appeal to institutions, which show declines in their required yields, i.e., their prices rise.

Another quote:

In the meantime for us at GMO it means emphasizing care and maintaining a heightened sense of value discipline, not only in stock selection, as the whole world is once again bid up over fair value in a way so typical of the post 1994 era, but also in forestry and farmland. GMO has investments in those areas too and recognizes the need to sidestep overpricing by emphasizing the nooks and crannies. Fortunately there are more nooks and deeper crannies in forests and farmland than there are in almost any other area, certainly including stocks.

Another quote:

Investment Implications

Courtesy of the above Fed policy, all global assets are once again becoming overpriced. This reminds me of the idea sometimes attributed to Einstein that a workable definition of madness is constantly repeating the same actions but expecting a different outcome! But, as always, asset prices are not uniformly overpriced: emerging markets and, we believe, Japan are only moderately overpriced. European stocks are also only a little expensive, but in today’s world are substantially more risky than normal. The great global franchise companies also seem only moderately overpriced. Forestry and farmland, which is not super-prime Midwestern, is also only moderately overpriced but comes with our nook and cranny sticker attached. But much of everything else is once again brutally overpriced. Notably, U.S. stocks (ex “quality”) now sell at a negative seven-year imputed return on our numbers and most global growth stocks are close to zero expected return. As for fixed income – fugetaboutit! Most of it has negative estimated returns on our data, and longer debt, as always, carries that risk that may be slight in any period, but is horrific if it occurs – accelerating inflation.

Okay, enough quotes. Forestry and farmland, anyone? When is the average investor going to buy forestry and farmland as diversification? When prices of more readily available investments are high! This leads me to think that the stock market is in a bubble.

Nobody knows when this bubble will burst. I don’t think it will burst while the FED keeps interest rates so low, anyway.