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I’m Over-valuations
27 July 2016
War Room
HiddenLevers War Room
Open Q + A
Macro Coaching
Archived webinars
CE Credit
Idea Generation
Presentation deck
Accountabili...
Market Update
Valuation at the Zero Bound
Valuation + Future Returns
Scenario: S&P Valuation
I’m Over-valuations
UPDATED
HiddenLevers
MARKET UPDATE
Market Update
sources: HiddenLevers, Fortune, UK Express, The Hill, ZeroHedge, BLS
Election
Ironies
China Consumer
Debt
In...
HiddenLevers
VALUATION AT THE ZERO BOUND
Currencies falling against USD
Geopolitical Instability in EM / Petro states
Negative Rates In Europe + Japan
Bond Yields ...
Zero Bound: Interest Rates + P/E
sources: Federal Reserve, Hussman Funds
“Fed” Model
S&P P/E correlated to 10y
treasury yi...
Zero Bound: Bond Yields + Housing
sources: Google, Investopedia
We are here
Near zero yield
Small Yield movements =
drasti...
Zero Bound: Comparisons
sources: HiddenLevers, Hindesight, WSJ
45
20
History
1980s – touched 45 on CAPE
1990s – crashed to...
HiddenLevers
VALUATION + FUTURE RETURNS
Future Returns: Higher Multiples Justified?
sources: GMO (via Financial Sense), Michael Kitces
When starting CAPE
is above...
Future Returns: Schiller P/E Tells?
sources: HiddenLevers, HiddenLevers 2
S&P index UP 2.5%
Since Mar 2015
CAPE DOWN 3.5%
...
Future Returns: US Housing Over-valued?
sources: HiddenLevers, Economist
Real US home price
growth well below most
other O...
HiddenLevers
SCENARIO: S&P VALUATION
UPDATED
Scenario Update: Rising Earnings + Shares
S&P Valuation FLAT P/E
RISING P/E
SINKING P/E
DROWNING P/E
S&P Valuation
GOOD: CAPE at 33
source: HiddenLevers
P/E that represents upward expansion
Late 1990s
Tech Boom
1960-65
Industrial Height
...
BASELINE: CAPE at 27
source: HiddenLevers
P/E flat due to rising markets on rising earnings
mid 2000s
2013-present
early 1...
BAD: CAPE AT 21
P/E that represents typical business cycle recession
source: HiddenLevers
2001-03
1990-91
1987
UGLY: CAPE at 17
2008-09
Financial Crisis
source: HiddenLevers
P/E that represents a paradigm shift in economy
more than
j...
Scenario: S&P Valuation
Good:
CAPE 33
Rising
Baseline:
P/E 27
Flat
Bad:
P/E 21
Sinking
CAPE
21
S&P
-20%
CAPE
27
S&P
+8%
CA...
I’m Over-valuations – Take Aways
S&P yields have exceeded 10y
Treasuries since Jan 2016
ZIRP lifting Housing prices, but
v...
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Valuations webinar-slides--07-27-2016

I'm Over-valuations War Room Slides

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Valuations webinar-slides--07-27-2016

  1. 1. I’m Over-valuations 27 July 2016 War Room
  2. 2. HiddenLevers War Room Open Q + A Macro Coaching Archived webinars CE Credit Idea Generation Presentation deck AccountabilityScenario Updates
  3. 3. Market Update Valuation at the Zero Bound Valuation + Future Returns Scenario: S&P Valuation I’m Over-valuations UPDATED
  4. 4. HiddenLevers MARKET UPDATE
  5. 5. Market Update sources: HiddenLevers, Fortune, UK Express, The Hill, ZeroHedge, BLS Election Ironies China Consumer Debt Inflation up - Both parties want Glass Steagall back - Trump now candidate of anti-corporate fringe - Hillary now candidate of big business / oligarchs IMF botches brexit
  6. 6. HiddenLevers VALUATION AT THE ZERO BOUND
  7. 7. Currencies falling against USD Geopolitical Instability in EM / Petro states Negative Rates In Europe + Japan Bond Yields suffering in Low Rates regime Lower Fed Rate = Bank Account Earns Zero Investors looking for yield Zero Bound: Big Picture sources: HiddenLevers US Equities Attractive
  8. 8. Zero Bound: Interest Rates + P/E sources: Federal Reserve, Hussman Funds “Fed” Model S&P P/E correlated to 10y treasury yields Current falling rates push market higher Periods of high P/E ratios occur when CPI < 3%, when rates are also moderate
  9. 9. Zero Bound: Bond Yields + Housing sources: Google, Investopedia We are here Near zero yield Small Yield movements = drastic price change BONDS: Price vs Yield Mortgage Rates Have fallen from 6%  3.5% Average Buyer Can get 33% more house
  10. 10. Zero Bound: Comparisons sources: HiddenLevers, Hindesight, WSJ 45 20 History 1980s – touched 45 on CAPE 1990s – crashed to low 20s 2000s – 20-30 P/E range Now Negative rates Yen at 18m high against USD P/E sinking to 23
  11. 11. HiddenLevers VALUATION + FUTURE RETURNS
  12. 12. Future Returns: Higher Multiples Justified? sources: GMO (via Financial Sense), Michael Kitces When starting CAPE is above 22, 15-year avg return is only 1.9% Fed Model? Turns out it’s a statistical anomaly
  13. 13. Future Returns: Schiller P/E Tells? sources: HiddenLevers, HiddenLevers 2 S&P index UP 2.5% Since Mar 2015 CAPE DOWN 3.5% Since Mar 2015 Long-term CAPE Mean: 16.7 Only pierced once in last 30 years versus regularly before Why divergent? Earnings UP
  14. 14. Future Returns: US Housing Over-valued? sources: HiddenLevers, Economist Real US home price growth well below most other OECD countries. Price to Income Ratio: US below 40-year average. This is slightly skewed by income inequality. Home Prices in Real Terms Prices against average income
  15. 15. HiddenLevers SCENARIO: S&P VALUATION UPDATED
  16. 16. Scenario Update: Rising Earnings + Shares S&P Valuation FLAT P/E RISING P/E SINKING P/E DROWNING P/E S&P Valuation
  17. 17. GOOD: CAPE at 33 source: HiddenLevers P/E that represents upward expansion Late 1990s Tech Boom 1960-65 Industrial Height Late 1920s Roaring Twenties
  18. 18. BASELINE: CAPE at 27 source: HiddenLevers P/E flat due to rising markets on rising earnings mid 2000s 2013-present early 1990s
  19. 19. BAD: CAPE AT 21 P/E that represents typical business cycle recession source: HiddenLevers 2001-03 1990-91 1987
  20. 20. UGLY: CAPE at 17 2008-09 Financial Crisis source: HiddenLevers P/E that represents a paradigm shift in economy more than just a correction Late 1970s Stagflation
  21. 21. Scenario: S&P Valuation Good: CAPE 33 Rising Baseline: P/E 27 Flat Bad: P/E 21 Sinking CAPE 21 S&P -20% CAPE 27 S&P +8% CAPE 33 The average CAPE from Dec ‘94 to Sep ‘01 was 33 – this scenario presumes that level is attained again as a result of low rates and sustained growth. From early 2015 to mid-2016 earnings growth enabled the S&P to return 4.5% while CAPE fell 3.6%. If valuation stays flat, EPS growth can lead to solid returns. Recessions in 1990 and 2003 led to an average drop of 20% in valuation terms, which is reflected in this mild recession scenario. S&P +25%
  22. 22. I’m Over-valuations – Take Aways S&P yields have exceeded 10y Treasuries since Jan 2016 ZIRP lifting Housing prices, but valuation metrics not excessive (yet) Earnings improved valuations picture P/E down from 28 peak Start at high valuations = subpar returns let’s take all the credit 10yS&P

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