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Stock Market Valuation Exceeds Its Components' Actual Value
An anonymous reader writes: James Tobin, a Nobel Prize-winning economist, developed a concept called "Q-value" — it's the ratio between two numbers: 1) the sum of all publicly-traded companies' stock valuations and 2) the value of all these companies' actual assets, if they were sold. Bloomberg reports that the continued strength of the stock market has now caused that ratio to go over 1 — in other words, the market values companies about 10% higher than the sum of their actual assets. The Q value is now at its highest point since the Dot-com bubble. Similar peaks in the past hundred years have all been quickly followed by crashes.
Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability. One said, "the ratio's doubling since 2009 to 1.10 is a symptom of companies diverting money from their businesses to the stock market, choosing buybacks over capital spending. Six years of zero-percent interest rates have similarly driven investors into riskier things like equities, elevating the paper value of assets over their tangible worth." Others point out that as the digital economy grows, a greater portion of publicly traded companies lack the tangible assets that were the hallmark of the manufacturing boom.
Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability. One said, "the ratio's doubling since 2009 to 1.10 is a symptom of companies diverting money from their businesses to the stock market, choosing buybacks over capital spending. Six years of zero-percent interest rates have similarly driven investors into riskier things like equities, elevating the paper value of assets over their tangible worth." Others point out that as the digital economy grows, a greater portion of publicly traded companies lack the tangible assets that were the hallmark of the manufacturing boom.
Stock valuations are based not only on actual assets, but future growth and earnings potential. If I buy company X, it's because I think company X has a good product, business plan, and management and is going to be able to grow faster than inflation and faster than their competitors. I certainly don't want them to liquidate their current assets and give me my money back.
a sandwich is more valuable than two slices of bread.. and it's ingredients: it's component assets.
Surely* this is not a surprise? Am I missing something here?
*Don't call me Shirley
Intellectual property, trademarks, goodwill and copyrights are propping up stock prices like you wouldn't believe.
The small investors are sitting on the sidelines, keeping their cash from inflating and popping a bubble. Stock buybacks are keeping the market afloat, as many corporations want to keep Wall Street happy than reinvest the money back into the economy to keep Main Street happy.
The excess above the ratio is the percent of Hope called Ph not to be be confused with PhD or pH. This value of Ph represents optimism for the future and is directly correlated with the height of skirts above women's knees based on historical data related to how well the economy is performing.
Similar peaks in the past hundred years have all been quickly followed by crashes.
statistical historical trends, the bedrock of science rears its ugly head oncemore...
Now, that's not to say a crash is imminent experts disagree on the Q-value's reliability.
s/experts/investors/. Laszlo Birinyi is an investor, but for all intents and purposes economics shouldn't be misconstrued as a science. most of it is, at best, premised on laughably distorted statistics designed to reduce uncertainty among investors and promote open trading on stock exchanges. The employment of utterly bullshit mathematics in the art of economics is the reason high speed trading systems have the ability to "undo" sales or purchases with impunity. Large firms also have this ability because without such a control feature markets could be plunged into a dark age from which no amount of bailout would save the cloistered elite. Economics is the sack of magic chicken bones that investors wave over the market and quickly dismiss once wrack and ruin occur as "events that could not have been foreseen."
Good people go to bed earlier.
How is Q different than the usual Price-to-Book ratio, which formally has the same english definition of the share price to the per-share Asset value of the company? The price-to-book value doesn't go below 1 usually because a leveraged buyout of the company could fund it self by selling off the pieces. The Q-value seems to define assets as replacement value which is unclear. Is replacement value to be taken as what the assets would trade for in their used shape, or what they would cost to buy new.
Some drink at the fountain of knowledge. Others just gargle.
Now, that's not to say a crash is imminent — experts disagree on the Q-value's reliability.
Economics is a weird and wonderful science.
Always looking backwards, always telling us *why* something happened, never making future predictions.
In the days since Adam Smith penned his first thoughts on economics, engineers have taken us to the moon, physicists have split the atom, doctors invented antibiotics, philosophers invented human rights, chemists invented plastics, farmers quadrupled the per-acre food yield, programmers invented the internet, and much *much* more.
And economists, always backwards looking, now think that the Q-value might explain past crashes.
What a world we live in!
amazing how often that phrased is used after a crash by the same people who said anyone questioning market valuations on way up "does not understand the market"...
I keep telling everybody the stock market operates in la-la land. Here's the proof!
No it's not..
Where "book value" is an important component of a company's stock value, so is Price to Earnings. "How much money are they making?" is a more important question. You can have nearly zero book value, but if you are raking in the cash with a low cost of sales your company is worth a lot, even if it has no real assets.
That's not to say P/E ratios are not at pretty high levels too, but some academic's statistics isn't proof of anything.
"File to fit, pound to insert, paint to match" - Aircraft Maintenance 101
I have never met a rich stock analyst. Just like I've never met a psychic who won the lottery. All these little theories and formulas are swell, but let's see them put their money where their mouth is.
Seven puppies were harmed during the making of this post.
NO OTHER PLACE, other than real estate, precious metals, art, education for yourself, a private business you start, etc.
Economics is a science with predictive capabilities. The problem is knowing when this science leaves the world of economics and into the unpredictable world of human choice.
You're obviously more familiar with economics than I am - I've got a question, help me out.
What's the best value for inflation?
Meaning, what's the numerical value that we should be shooting for, for best results?
If it's complicated, then what's the formula for the complicated value? If you have time, how "flat" is that calculation? (Meaning: is it a spike or a gently rising/falling mesa? How important is it to hit the best value exactly?)
The calculation of inflation doesn't depend on human behaviour, does it?
So tell me - what's the best value for inflation?
"it is probably the best single measure of where valuations stand at any given moment." - Warren Buffett
http://www.advisorperspectives...
Both Buffett Indicator And Shiller P/E Continue To Imply Long Term Negative Market Returns; 2015 Market Valuation
http://www.forbes.com/sites/gu...
Yes, the market is looking a bit frothy. Locally here in NYC, assets such as real estate are looking pretty high...
You're right. Let me rephrase that. I've never met a rich stock analyst who made his money by doing exactly what he told everyone else to do.
Seven puppies were harmed during the making of this post.
Effectively, they have been. The Federal Reserve has been keeping interest rates at levels that should be causing significant inflation. The goal is to prevent a deflationary spiral by pumping up the money supply: when you can borrow lower than inflation, people should borrow and pay it back with tomorrow's less-valuable dollars.
They've been doing that for nearly a decade now, and it has successfully prevented the deflation, but it's a little baffling that it hasn't touched off more inflation than it has. The consumer confidence is hovering around 100, which should be a decent level for a stable economy. Unemployment is still higher than we'd like but it's well off the bust years.
My hypothesis is that people have gotten too used to boom economies. If people aren't getting triple-digit returns they don't want to invest. What we've got is a very stable economy, exactly the kind that people should be able to take risks in, but without a real estate boom or dotcom boom or other scheme to get people to dump their whole life savings and then borrow on margin, they just don't bother.
Stability means that those who have been left behind continue to be left behind. That's the worst thing that can be said about the economy. There just isn't an engine of growth.
There are a lot of other factors, I'm sure. Europe went mostly for less aggressive measures, and their economies haven't come out as well, meaning fewer markets there. China's growth has ceased to be ridiculous. Oil prices should have sparked some kind of boom, and I've got a nasty cynical feeling that Wall Street is ideologically predisposed not to invest in the emerging energies as much as they should.
But a lot of it is the catch-22 you mentioned. Consumers and investors each seem to be waiting for the other to go first. We've been technically out of recession for more than five years, and it's gotten past the point where the recovery could be called mere accounting. It's real. But America just hasn't gotten its feet back under it in the way that it usually does.
Precious metals are only worth something because other people want them. Because they think the metals are worth something because other people want the metals because they think they're worth something because... They're pretty, they're partly lasting and they're rare. Until they're not: aluminum used to be a valuable metal. Now I coat my armpits with it every morning, and half the metal objects I own are aluminum.
If you're expecting a big crash, you're better off purchasing items of utility or improving your land for raising food.
All those things used to be "the conventional wisdom", but nowadays all of those things have been proven to be quite volatile.
I never believed in "making money from money"... I guess that's called "financial engineering" nowadays? That kinda insults me as an engineer, since we generally abide by physical laws. With financial laws, you're pretty much playing games using other people's rules. Other people who profess to love money above all else, and play the game to generate more money out of "nothing", and if you would just give them some of your money to play with, they'll help you "grow" your money too for a cut of the "take". But they don't add any value to the economy... they "multiply" it. And then they can just take "a little bit off the top", because no one will notice.
I'd love to invest in actual production... you know, things that add value and subtract costs instead of just "multiply" monopoly money. What options are there for that kind of thing?
Compare for instance the prices for platinum and gold, two precious metals with very similar properties: Same frequency of occurrence in the Earth crust, same properties (density between 19-20 g per cubic centimeter, does not oxydate easily, can be cast and cold formed), same usages (mainly jewelry, some industrial usage, some coined or cast into bars to be stored as assets). Their prices have been so volatile recently, that platinum was about twice the price of gold, and vice versa within just a decade. Compared with that, the dollar/euro exchange rate is an example of long time stability.
Real Estate will always be worth something. Even if we decide that precious metals are worthless (maybe someone invents a Star Trek replicator), land will always have value. At the very least you can farm it and feed yourself and your family.
I read the internet for the articles.
If everyone put their portfolios up for sale, prices would drop fast and far.
Have gnu, will travel.
Obama has been printing almost a Trillion dollars per year for the past several years; that's what Quantitative Easing is - adding to the quantity of dollars in the economy.
The reason it hasn't pushed up inflation is because there's still no demand, and there's no demand because so many employable people are either on Unemployment or out of the labor market. Changes to SSI Disability that were made a few years ago took over a million people who would otherwise have to work for a living off of the welfare and unemployment roles (and is trashing Social Security in the process). But SSSI and Disability are a bare minimum on which people can live so they can't consume much. Same with all the extensions to Unemployment Compensation, for a while people could collect for almost two years.
...which won't matter in the least if the "big crash" is big enough. People won't want gold or silver, they'll want guns and canned food.
30 ounces of silver... pah. I bought a shotgun and lots of ammo. In the situation you describe, I won't be buying anything off you ;-)
So were rocks and salt. Your point?
My point is that Apple created demand by putting money into developing new products that people didn't know that they wanted yet. Most companies that hoard cash aren't doing much of anything while waiting for the public to start spending money again.
Never mind that gold and silver were used as money for thousands of years before the printing press made it possible to issue fiat currency.
Nonsense. Gold and silver can be "fiat" currency just as paper money can be. Fiat currency just means that a currency derives part of its value from the government's declaration that it shall function as a currency.
For example, the U.S. government says that the "dollar" must be used to pay taxes. It could equally say that "gold" must be used to pay taxes, in which case gold's price would probably go up, since it would be more useful to pay for things with. That addition in value due to the government's endorsement is what produces "fiat" money.
People who don't understand what the term "fiat" means assume that "fiat" currency is always based on something that they consider "valueless" while whatever alternative "non-fiat" currency has some sort of "inherent value."
Except who determines that "inherent value"? Where does it come from? Food and water will always have some inherent value for humans, since they need it to survive. Other goods that fulfill basic needs (shelter, protection, etc.) also generally have a pretty basic value.
But gold only has value because it's rare and shiny, but there are many things in the world that are rare and shiny. Under sufficiently dire circumstances (e.g., being lost in the desert), your gold brick might be worthless compared to a canteen of water.
In sum, other than basic human needs, things only have value because as a society we agree that they have value. If a society starts valuing other things, the old "inherent value" items will lose value. Do I think it's likely that gold will become worthless anytime soon? No -- but its price in relation to other goods has and will fluctuate the same way a supposed "fiat currency" does. It's true that in sufficiently dire circumstances (e.g., hyperinflation) "fiat currencies" may lose significant value.
But in sufficiently dire circumstances, "all bets are off," i.e., what people may want is to trade for food or water or weapons or whatever -- they won't want gold unless they know that someone else will be willing to take it in exchange for food or water or weapons (and that's not always guaranteed in sufficiently dire circumstances).
I'm an engineer too. I used to think as you did. After getting an MBA it widened my perspective. I'm still an engineer, but now I understand how modern finance benefits society. Allocating capital efficiently is valuable. Decreasing interest rates is valuable. Deconstructing a debt it various risk components and selling those risks to person who are best equipped to understand those risks is also valuable. I encourage you to learn about finance. No, it is not as cool as engineering, or is it as useful, but you are mis-characterizing it.
--AC
If things really go to hell, it'll be whomever has water/shelter/food, so don't bother hoarding precious metals as they won't be so precious if you can't get clean water.
If things really go to hell it will be whomever has bullets and a gun to use them in.
You're right. Let me rephrase that. I've never met a rich stock analyst who made his money by doing exactly what he told everyone else to do.
I've only ever found 1 who seems to do that. This guy. One of his rules is that he discloses what he is currently investing in. He also revisits his predictions later, identifies how he was wrong , and offers some commentary, as in the last table of this article.
I have not actually subscribed to his services, but have read his (Free!) newsletters for many years.
Even those who arrange and design shrubberies are under considerable economic stress at this period in history.
Not every gain is someone else's loss. If we each need a widget and a sprocket, I have two widgets and no sprockets, and you have no widgets and two sprockets, we can both gain by trading each other one widget for one sprocket.
But a large class of gains, namely rents, certainly are at someone else's loss, and those, not merely free trade as above, are the defining characteristics of capitalism and the finance industry.
-Forrest Cameranesi, Geek of all Trades
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