Here’s a brutal quote from Charles Allmon of the Growth Stock Outlook. I haven’t fisked the numbers, but my gut reaction is they appear sound.
“Market capitalization as a percentage of GDP is one of the few reliable measures of over- or undervaluation. We saw gross overvaluations in 1929 at 87 percent and in 2000 at 172 percent. Today? We’re looking at 106 percent — far higher than the 57 percent norm of the past 75 years and exceeded only by the absurd valuation of 2000. These data cannot be fudged to make the current bullish case. As I have stated repeatedly, this market is not cheap. Momentum was the name of the game in 2003. Forget value. Unfortunately, this is the type of market which crucifies investors.”
Note that this method of valuation does not run into the same issue that a simple P/E analysis does: High P/Es at an early stage of recovery are not necessarily bad (especially given ultra low inerest rates). With companies running so lean — little debt, tight inventory and no excess staff — it doesn’t take much of an increase in revenues to see a big increase in earnings. In a genuine recovery cycle, you can have high P/Es, and grow into them. Think of Nokia’s recent numbers as an example — raising guidance lowers PE — sometimes dramaitically.
But Allmon’s methodology isn’t reliant on P/Es. That’s what maks it so scary . . .
QUOTH THE MAVENS
Sunday, January 11, 2004; Page F10