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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.
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.
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"...
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.