Are Stocks Cheap or Expensive?

I’ve been thinking about both the Cult of the Bear comment and the accusations of pouting pessimism. The name calling — amusing tho it was — misses the bigger picture:

1) Capital Preservation is every bit as important (if not more) as generating gains. Calling someone a Bear misses the point of risk management;

2) There are greater potential gains at (this moment) away from US equities. The Japan ETF (EWJ) (rec’d well over a year ago at $6-7); Korea (EWY) is attractive — and I’m warming to Malaysia (EWM) (but it needs some technical improvement first).

In December 2002, we suggested Gold and U.S. equities due to the Fed’s rabid reflation campaign. The present stance is merely the logical extension of that call. (We reiterated GLD this past Spring). And our December 2003 call — repeated many times since — suggested investors buy Energy, Oil and Oil firms. 

Why are these money making investments considered pessimistic? I cannot figure that out. 


But since our Wednesday eve discussion, I’ve been puzzling over this. So I asked chart wizard Michael Panzner (of Rabo Securities) to help with some Global number crunching. Mike is a technician, a quant, and more, as his work below reveals.

Taking various world markets, we looked at both absolute and relative values of P/E and Dividend Yield. There were two measures used: prices relative to their 10 year median, and absolute values. Again, the point isn’t to be "pessimistic," but rather, its to be creative and smart when looking at other potential investment opportunities globally.

The results may surprise you:

click for larger graph


click for larger graph


The Nikkei 225 looks relatively cheap (historically), but isn’t in absolute terms.
The Nasdaq is cheaper than its been in the past, but is still expensive in absolute terms.
And the Brazilian Bovespa is cheap anyway you look at it — both historically and absolutely.
I was surprised to learn the German Dax, is also relatively inexpensive by both measures . . .


Would someone explain to me how this is pessimism? I just don’t get that . . .

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. B commented on Dec 9

    You know Barry, I’ve had this explained to me using an analogy before. There are perma bulls, there are perma bears and there are those who are from Missouri.

    Perma bulls and bears have a hard time making money over the long term because trends never last forever. Whether that is cheap oil, cheap gold, trending markets, range bound markets, expensive oil, expensive gold, low interest rates or whatever. They are steadfast in their opinion and are very rigid in their logic, refusing to legitimize a view alternative to their own. Hence, they miss the big moves contrary to their opinion.

    Perma bull is Joe Battipaglia. He’s like a professional coach. Recycled time and again at different teams regardless of his win/loss record. Ranting about Pax Americana in 2000. Frankly, the rant has never ended. Same pablum regardless of the team. Perma bear is Robert Pretcher. Got one call right, made a name for himself and missed the entire bull run for fifteen years with a compounded -30% return. How in God’s name do they both still make boatloads of money? Because the herd is always willing to believe someone’s garbage AND because economics is voodoo. Or at least that is what George Bush senior told me. lol.

    Anyway, I think most people who make money in any markets are flexible thinkers, logical thinkers and students of history. Because, as Mark Twain said, “History doesn’t repeat itself, but it does tend to rhyme.”. It ain’t too difficult to know when their is risk. Reduced liquidity, higher taxes, free money for a period of years, whatever. We always giggled that perma bulls were business majors. Typically the puppy dog that will believe anything they are told because they weren’t capable of intellectually drawing their own conclusions. Awfully cruel and not very fair. A Joke.

    If we are going to rely on anecdotal information, and that is really all economics are because of the constant turmoil in their work, we all know now is a time of elevated risk. But, how will that play out in the financial markets? 3 month-Ten year Treasury spreads are the best determinant of possible slow downs. That is reflecting a less than 20% chance of a recession in the next year. Copper is at an all time high and typically rolls before the economy does. The Fed is jawboning housing while running the printing presses in overdrive. On the other hand, significant commodity rises usually shock the economy in time, the Fed has raised rates for 18 months and that is usually when the problems start to rear their heads, Gold is rising, high risk yield spreads are tightening, etc.

    So, what does all of this mean? Be defensive and careful, I guess. There seems to be no consensus on one side or the other.

  2. Chad K commented on Dec 9

    Is there an ETF focused on just Brazil? I’ve seen plenty of latin ones (ILF, etc).

  3. Joe Rotger commented on Dec 9

    I’ve never understood why a guy had to come up with P/E, instead of E/P; which in % is the return for your money, of course you have to add the yield from the dividends.

    So, there you could compare apples with apples; stock x gives me 5.5% return, stock y 7%, 10 year bond 4%, and so on…

    OK, but we’re just starting… the car is cheap (it has good value), but is it a lemon?

    Once we learn the DAX is cheap, we have to ask ourselves why?

    Maybe it has to do with the double problem of Chinese competition and the risk of an overvalued currency…

    Then we also have to consider if our good value and non lemon item, will increase in price with time. I’m thinking here of a utility (stock) which has no growth, you’re always going to get that 3% return… Is that what you want? Or, would you rather buy a google?

    The attractiveness of the item (google has sex appeal, -which increases value), the buffet toll product (coca-cola can demand higher prices to the supermarket, b/c it has to carry coke), management issues, political issues, inventory levels, debt ratios, warrants, competition, patents, check if sector is doing well….

    Well, maybe I drifted a little…
    In regards to indices, I guess the question would be why are they so cheap compared to 10 years ago, do the same conditions prevail nowadays?

    DAX vs
    Chinese competition…
    European competition…
    US competition…
    Germany’s new taxes, political stability…
    Europe’s political unrest, aging population…

    It’s always a long list.
    Take these items to a spread sheet, ponder them, and then determine a return/ risk ratio for each.

    Look at the charts, and see if there is a trend in place…
    If not, put aside for future revision…
    You don’t want to park your money with no return waiting for years for something to happen.

    Learn about its past behavior.

    How is the overall market behaving?
    Here’s where being an economist comes handy -or not.

    I wouldn’t have a portfolio larger than 4 items.
    Invest less in riskier items.
    Buy 1/3 when decided, put your stop order in place close by.
    Buy 2/3 after you see it move in your direction, move your stop to break even.
    Revise your stop to either a 5, 13, 20, 50, 200 day average, depending on your preferences.

    So, you see there’s a lot to do…

Posted Under