I agree. Everyone knows the market is overvalued. So I compiled
some numbers:
I compared the current economic situation with the one as close
to 3 years ago as I could get. First take a look at changes in the
US basic numbers. (All numbers that should be are annualized
percentage increases or decreases.)
Between 9/94 and 9/97 or 2Q94 and 2Q97:
GDP +2.67%
Pers. Consumption +2.59%
Private Investment +6.28%
M1 - 2.65%
Exports +10.17% (Very healthy, but now bulls say it isn't important)
Imports + 8.83%
Trade (im)balance - 1.43% (i.e becoming more balanced)
Manuf. shipped +5.50%
New orders +5.40%
Unfilled orders +4.18%
Inventories + 4.02%
Durable goods shipped +6.39%
New orders +6.20%
Unfilled orders +4.30%
Inventory +4.04%
Nondurable goods shipped +4.46%
New orders +4.46%
Unfilled orders +1.97%
Inventory +3.98%
Loans at Commercial Banks +6.67%
Consumer Loans +5.80%
Basically, if the US economy were a corporation, we would
put a growth rate of 4 or 5 percent on it, and it would carry
about the same PE as GM, say 8 or at most 10. But the
SPX sells at a PE much larger.
The bulls have some reasons for this. The one that is of the
greatest importance is the decrease in interest rates. So I
looked up those numbers too, along with the CPI figures:
CPI
9/93 to 9/94 +2.96%
9/96 to 9/97 +2.15% (A little less inflation now.)
10-year treasury
9/94 7.46%
9/97 6.21% (A decrease in yearly interest cost of 6.3% per year.)
The above is important, as it shows how to capitalize future
earnings, more or less. But again, it hasn't been changing
real fast.
Besides, we really ought to compute the real cost of money,
by subtracting off the approximate inflation.
9/94 4.50%
9/97 4.06% (A decrease in yearly interest cost of 3.5% per year.)
The above gives a better estimate of the change in money
costs over the past three years.
I always try to avoid analyzing earnings, as they bounce around
so much, but I don't have any scruples about looking at cash
flows:
Corporate Cash Flow +5.33% (annualized)
Part of the above is presumably the reduced interest costs.
Now. What has the SPX done over the last three years?
SPX +27.74%
I think this is out of whack.
So how about it bulls? Show me where all this new fundamental
value for the economy and the SPX is coming from? If you argue
stock prices are going to increase because they have increased
so far, I will ignore you. I just want to see where the economic
numbers suggest paying so much more for stocks now than in
1994.
-- Carl |
