Alohal,
I'll try to keep this brief.
The basis of the "new era" of valuations as presented several years ago was - low inflation and interest rates, double digit growth of profits, rapid economic growth, and unending rapid growth in Asia and other emerging markets. Here's what we have:
The 30 year treasury is now trading at the same interest rate it was trading at at the end of 1993 (when valuations were sane). Despite changes to the CPI that have lowered its reported level (pure statistics) it is 2.7% year over year. While this is a good performance, there is nothing new or exciting about it.
Corporate profits, when measured on the appropriate peak to peak basis, (instead of trough to peak which is misleading at best) have grown at somewhere between 6%-6.5%. This is right in line with the long term average. Nothing new here. And I must add that earnings quality has declined due to the proliferation of accounting games and stock options.
Asia came within a hair of a depression and much of the rest of the emerging markets had problems too. Some of these are still ongoing.
GDP growth is impressive, but has also been enhanced by statistical measurement changes. It is therefore not completely comparable to the past and not as impressive as other cycles anyway.
My point being, despite a performance that by most standards has been wonderful, there is simply nothing new going on that justifies the hype.
As to the clueless, I am not talking about people who are looking at companies and data and coming to different conclusions than I am. I am talking about co-workers, acquaintances, and others I have observed. I know more than a few that are fully invested, on margin, trading options etc... and they do not know what a PE ratio is. They are in this market because it is going up and Wall St. via the media keeps telling them to. They will be buried and out if it starts to go down. They have no fundamental basis for their current actions. I am talking about a significant percentage of the middle/upper middle class people I know. These are very bright people.
The economic relationships have to do with the cost of capital and its return. To believe some of the valuation hype that is presented requires that one believe that sophisticated business people will do illogical things on a continuing basis after doing logical things for 100 years. You must believe that the new valuations will not have an impact on future returns on active capital and business investment decisons - that there are NO leveling effects. I do not believe it for a minute.
Good luck!
Wayne |
