Friday, January 22, 2016

Dow Could Fall By Another 5,000 Points And Still Not Be ‘Cheap’........

Dow Could Fall By Another 5,000 Points And Still Not Be 'Cheap'

The Dow Jones Industrial Average could fall by another 5,000 points and still not be "cheap" compared with long-term stock-valuation measures.

That's the stark conclusion from an analysis comparing current stock prices to underlying measures such as per-share revenue, earnings and corporate net worth.

And it suggests that even if we are now overdue for a short-term bounce or rally of some kind, buying heavily into the latest sell-off isn't the kind of one-way bet that value investors crave.

Stocks are certainly much cheaper than they were a few weeks ago. After the worst start to a new year in Wall Street history, the Dow Jones Industrial Average is down about 10% since Jan. 1. Small-company stocks are now deep in a bear market after falling more than 20% from last spring's highs.

But cheaper doesn't necessarily mean cheap!

Even after the sell-off, U.S. stocks are valued at around 1.4 times annual per-share revenue. FactSet says the average since 2001, when it began tracking the data, is 1.3 times revenue. So the Dow could fall another 7%, or over 1,000 points, and still be no lower than its modern-day average.

And the picture looks even worse when you also add in those companies' soaring debts. According to the Federal Reserve, nonfinancial corporations have increased their total debts since 2007 from $6.3 trillion to over $8 trillion. As FactSet says, total shares plus total debts — the so-called "enterprise value" — of U.S. public companies are now 2.4 times annual per-share revenue, compared with an average of 2.1 times since 2001.

Data from the U.S. Federal Reserve, meanwhile, say U.S. nonfinancial corporate stocks are now valued at about 90% of the replacement cost of company assets, a metric known as "Tobin's Q." But the historic average, going back a century, is in the region of 60% of replacement costs. By this measure, stocks could fall by another third, taking the Dow all the way down toward 10,000. (On Wednesday it closed at 15,767.) Similar calculations could be reached by comparing share prices to average per-share earnings, a measure known as the cyclically adjusted price-to-earnings ratio, commonly known as CAPE.

Even when you compare stocks to the earnings of the past 12 months, it's hard to say they are in any kind of bargain territory.

This analysis certainly casts a cloud over any bargain hunting. And these numbers only measure how far the market would have to fall to reach average levels. They do not reflect what would happen if the market did what it has done frequently in the past, and plunged back down to very cheap levels. When you factor in those numbers, it's a long way down.

Sometimes you win by not losing.

In downtrends you either short or you stand aside.

The real test of a market's weakness is not on the decline, but on the advance following the decline. 

"In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of." 


No comments:

Post a Comment