Home › Forums › Financial Markets/Economics › A Look at Market Fundamentals: the rebuttal
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February 13, 2011 at 5:40 AM #665586February 13, 2011 at 4:48 PM #665999
davelj
ParticipantI defer to Jeremy Grantham on issues of macro-market valuation issues because his logic is always impeccable on these matters. If you normalize profit margins (“if profits don’t mean-revert then capitalism is broken”) and mean-revert valuations (along with interest rates), the S&P’s fair value is about 900 right now. A certain group of folks will always try to come up with justifications for higher valuations during a bull market but these justifications will prove faulty… eventually. Doug Short does a lot of Grantham-like mean reversion work on his website: dshort.com.
February 13, 2011 at 4:48 PM #665939davelj
ParticipantI defer to Jeremy Grantham on issues of macro-market valuation issues because his logic is always impeccable on these matters. If you normalize profit margins (“if profits don’t mean-revert then capitalism is broken”) and mean-revert valuations (along with interest rates), the S&P’s fair value is about 900 right now. A certain group of folks will always try to come up with justifications for higher valuations during a bull market but these justifications will prove faulty… eventually. Doug Short does a lot of Grantham-like mean reversion work on his website: dshort.com.
February 13, 2011 at 4:48 PM #666598davelj
ParticipantI defer to Jeremy Grantham on issues of macro-market valuation issues because his logic is always impeccable on these matters. If you normalize profit margins (“if profits don’t mean-revert then capitalism is broken”) and mean-revert valuations (along with interest rates), the S&P’s fair value is about 900 right now. A certain group of folks will always try to come up with justifications for higher valuations during a bull market but these justifications will prove faulty… eventually. Doug Short does a lot of Grantham-like mean reversion work on his website: dshort.com.
February 13, 2011 at 4:48 PM #666738davelj
ParticipantI defer to Jeremy Grantham on issues of macro-market valuation issues because his logic is always impeccable on these matters. If you normalize profit margins (“if profits don’t mean-revert then capitalism is broken”) and mean-revert valuations (along with interest rates), the S&P’s fair value is about 900 right now. A certain group of folks will always try to come up with justifications for higher valuations during a bull market but these justifications will prove faulty… eventually. Doug Short does a lot of Grantham-like mean reversion work on his website: dshort.com.
February 13, 2011 at 4:48 PM #667075davelj
ParticipantI defer to Jeremy Grantham on issues of macro-market valuation issues because his logic is always impeccable on these matters. If you normalize profit margins (“if profits don’t mean-revert then capitalism is broken”) and mean-revert valuations (along with interest rates), the S&P’s fair value is about 900 right now. A certain group of folks will always try to come up with justifications for higher valuations during a bull market but these justifications will prove faulty… eventually. Doug Short does a lot of Grantham-like mean reversion work on his website: dshort.com.
February 14, 2011 at 6:15 AM #666074Anonymous
GuestHere’s an article describing some of the possible issues with the CAPE ratio:
http://money.cnn.com/2011/02/09/pf/shiller_cape_ratio.fortune/?section=magazines_fortune
Some of the items mentioned in the article are similar to Eugene’s points.
It is difficult to know how to treat the recent swings in the market (the big peaks and valleys in the past 10 years.) Since they are somewhat unusual, it might be reasonable to treat the extremes as some sort of outliers. But the extremes are real data, and don’t really fit the definition of statistical outlier.
So I’m not sure the smoothing is the right thing to do.
CAPE is not a perfect model – no model is. Perhaps it could be improved by tweaking, but the tweaking would need to be applied consistently (e.g. weighting results by age instead of weighting all ten years the same.)
It would definitely be folly to dismiss the CAPE numbers completely.
February 14, 2011 at 6:15 AM #666012Anonymous
GuestHere’s an article describing some of the possible issues with the CAPE ratio:
http://money.cnn.com/2011/02/09/pf/shiller_cape_ratio.fortune/?section=magazines_fortune
Some of the items mentioned in the article are similar to Eugene’s points.
It is difficult to know how to treat the recent swings in the market (the big peaks and valleys in the past 10 years.) Since they are somewhat unusual, it might be reasonable to treat the extremes as some sort of outliers. But the extremes are real data, and don’t really fit the definition of statistical outlier.
So I’m not sure the smoothing is the right thing to do.
CAPE is not a perfect model – no model is. Perhaps it could be improved by tweaking, but the tweaking would need to be applied consistently (e.g. weighting results by age instead of weighting all ten years the same.)
It would definitely be folly to dismiss the CAPE numbers completely.
February 14, 2011 at 6:15 AM #666673Anonymous
GuestHere’s an article describing some of the possible issues with the CAPE ratio:
http://money.cnn.com/2011/02/09/pf/shiller_cape_ratio.fortune/?section=magazines_fortune
Some of the items mentioned in the article are similar to Eugene’s points.
It is difficult to know how to treat the recent swings in the market (the big peaks and valleys in the past 10 years.) Since they are somewhat unusual, it might be reasonable to treat the extremes as some sort of outliers. But the extremes are real data, and don’t really fit the definition of statistical outlier.
So I’m not sure the smoothing is the right thing to do.
CAPE is not a perfect model – no model is. Perhaps it could be improved by tweaking, but the tweaking would need to be applied consistently (e.g. weighting results by age instead of weighting all ten years the same.)
It would definitely be folly to dismiss the CAPE numbers completely.
February 14, 2011 at 6:15 AM #666813Anonymous
GuestHere’s an article describing some of the possible issues with the CAPE ratio:
http://money.cnn.com/2011/02/09/pf/shiller_cape_ratio.fortune/?section=magazines_fortune
Some of the items mentioned in the article are similar to Eugene’s points.
It is difficult to know how to treat the recent swings in the market (the big peaks and valleys in the past 10 years.) Since they are somewhat unusual, it might be reasonable to treat the extremes as some sort of outliers. But the extremes are real data, and don’t really fit the definition of statistical outlier.
So I’m not sure the smoothing is the right thing to do.
CAPE is not a perfect model – no model is. Perhaps it could be improved by tweaking, but the tweaking would need to be applied consistently (e.g. weighting results by age instead of weighting all ten years the same.)
It would definitely be folly to dismiss the CAPE numbers completely.
February 14, 2011 at 6:15 AM #667149Anonymous
GuestHere’s an article describing some of the possible issues with the CAPE ratio:
http://money.cnn.com/2011/02/09/pf/shiller_cape_ratio.fortune/?section=magazines_fortune
Some of the items mentioned in the article are similar to Eugene’s points.
It is difficult to know how to treat the recent swings in the market (the big peaks and valleys in the past 10 years.) Since they are somewhat unusual, it might be reasonable to treat the extremes as some sort of outliers. But the extremes are real data, and don’t really fit the definition of statistical outlier.
So I’m not sure the smoothing is the right thing to do.
CAPE is not a perfect model – no model is. Perhaps it could be improved by tweaking, but the tweaking would need to be applied consistently (e.g. weighting results by age instead of weighting all ten years the same.)
It would definitely be folly to dismiss the CAPE numbers completely.
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