Cullen Roche vs Andrew Smithers on Tobin’s Q

I love this debate between the idea of Tobin’s Q-Ratio as th be all for valuation analysis. It is embodied between Smithers & Co. quoted in this scary BBRG article and Pragmatic Capitalism’s Cullen Roche.

Here is PragCap:

“Better yet, look at the number of times this ratio has been cited during the most recent bull market as a reason to exit stocks:

At least he is consistent!

Let me remind readers of the folly of Single Variable Analysis . . .



Single vs. Multiple Variable Analysis in Market Forecasts (TBP, May 4th, 2005)

When Correlations Lie (Bloomberg View June 27, 2014)



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  1. Willy2 commented on May 20

    But Tobin’s Q is not a market timing tool. It’s a valuation tool.

    • Concerned Neighbour commented on May 20

      Indeed. I also continue to be amazed and amused that people still believe valuation matters when you have central banks openly supporting “markets”.

  2. supercorm commented on May 20

    … and it also doesn’t matter how many times it has been cited.

    The Tobin’s Q was 1 standard deviation above its mean in 1929 (level was 1.35), a little in 1936 and 1968, from 1997 to 1999 (peak in 1999 -at 1.55, way above 1929… but shows again how the Tobin’s Q is not a market timing tool, but with some hindsight it kind of warned you about overvaluatioN), and since mid 2013, it is only at 1.15 (below the level seen in 1929, but this could change when mkt correct, which could catapult the Tobin’s Q much higher (same with the P/E … when earnings collapse, the P/E rises !).

  3. RW commented on May 20

    I’m a bit confused: AFAIK Tobin’s Q is, or at least was, a tool for judging when a business might find it advantageous to invest more capital in itself, not for an external investor to buy or sell its stock.

  4. btowers commented on May 20

    @RW yes, but it’s been argued that it’s a good valuation technique. The idea being pretty intuitive… that if the market value is significantly higher than the replacement value of all businesses, then the market is overvalued.

    Consider, for example, if I looked to buy a house, and I found one for 1M that I loved. But then I discovered that I could build that same exact house, all-in, for 250k. It would make zero sense to purchase the existing house from “the market.” That’s really all that Tobin’s Q is saying.

    And I guess my quibble with Barry’s post is that yes, certainly use all available data to improve your analysis. But we shouldn’t ignore Q just because we’re in a bull market. It’s a long-term valuation metric, and really has nothing to say about sort term cycles.

    Look, for example, at the value of Q over the 90s and 00s:

    Certainly in 1994 you could have said Q showed the market as overvalued. And it would have stayed overvalued all the way to 2000. But that was, in fact, exactly correct.

    Look at the lowest Q values over the past 20 years. March 2009 and March 2003. Both of those were almost perfect times to enter the market.

    It doesn’t seem that far-fetched that we’ll see a 40-50% market correction at this point, does it?

  5. intlacct commented on May 20

    Nice comebacks readers.

    Looks like 70% is a pretty good marker when I squint. 70% in late 2010. Wasn’t 2011 a tough year?

    I could see 40%-50% down. Sure.

  6. Willy2 commented on May 26

    Cullen Roche has a number of VERY weird ideas. And he has been drinking too much Kool-Aid called “American Exceptionalism”. Was able to kill a number of these weird ideas that were occupying his braincells.

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