Aug. 22 (Bloomberg) -- U.S. stocks are set for a
“significant rally” which will provide an opportunity for
investors to sell before equities resume declines, according to
economist Andrew Smithers.
Companies are cashed up and likely to buy back shares at a
time when price-to-earnings ratios are low, providing a trigger
for a short-term rally, said Smithers, who claimed stocks were
overvalued in 2000 before a near 50 percent decline over 2 1/2
years. Investors should sell shares once their holdings gain 10
percent because even after the recent rout, U.S. stocks are
about 40 percent above fair value, the president of research
company Smithers & Co. said in an email on Aug. 18.
“There is a good chance of a rally because of the cash
position of U.S. companies, their tendency to buy shares when
they have high cash ratios and the importance of company share
buying on the stock market,” Smithers said. “A 10 percent
rally would be an opportunity to sell.”
About $8.2 trillion was wiped off the value of global
equity markets from July 22 through Aug. 19 as Europe’s debt
crisis deepened and investors speculated the U.S. economy may
contract. Standard & Poor’s 500 Index companies have about $291
in cash and short-term investments per share, according to data
compiled by Bloomberg. That’s the highest since 1998, when
Bloomberg data became available.
Smithers said in a report dated Aug. 15 that the S&P 500 is
still overvalued by about 43 percent relative to earnings for
the past 10 years, a time frame endorsed by Yale University’s
Robert J. Shiller. Relative to the Q ratio, a comparison of
market value with the replacement cost of assets, the index is
about 36 percent too high, he said.
“significant rally” which will provide an opportunity for
investors to sell before equities resume declines, according to
economist Andrew Smithers.
Companies are cashed up and likely to buy back shares at a
time when price-to-earnings ratios are low, providing a trigger
for a short-term rally, said Smithers, who claimed stocks were
overvalued in 2000 before a near 50 percent decline over 2 1/2
years. Investors should sell shares once their holdings gain 10
percent because even after the recent rout, U.S. stocks are
about 40 percent above fair value, the president of research
company Smithers & Co. said in an email on Aug. 18.
“There is a good chance of a rally because of the cash
position of U.S. companies, their tendency to buy shares when
they have high cash ratios and the importance of company share
buying on the stock market,” Smithers said. “A 10 percent
rally would be an opportunity to sell.”
About $8.2 trillion was wiped off the value of global
equity markets from July 22 through Aug. 19 as Europe’s debt
crisis deepened and investors speculated the U.S. economy may
contract. Standard & Poor’s 500 Index companies have about $291
in cash and short-term investments per share, according to data
compiled by Bloomberg. That’s the highest since 1998, when
Bloomberg data became available.
Smithers said in a report dated Aug. 15 that the S&P 500 is
still overvalued by about 43 percent relative to earnings for
the past 10 years, a time frame endorsed by Yale University’s
Robert J. Shiller. Relative to the Q ratio, a comparison of
market value with the replacement cost of assets, the index is
about 36 percent too high, he said.
‘Hold Cash’
“Investors should not, in general, buy stocks at this
level, as the stock market is likely to become cheap at some
time during the next 10 years and there is therefore a high risk
that anyone buying today will lose money before they start to
get a positive return,” Smithers said. “In these
circumstances, they are likely to be better off by holding cash
until the market has fallen.”
Smithers uses Equity Q, a variant of a ratio made famous by
Nobel Laureate James Tobin, as an indicator of whether the
market is overvaluing or undervaluing company assets. He uses
estimates of market value published by the Federal Reserve.
Investors are “foolish” to use price ratios based on
current earnings as a yardstick of whether the market is
attractive, Smithers argues. The S&P 500 lost 16 percent from
this year’s high on April 29 through Aug. 19 and trades at 12.3
times trailing earnings, close to the level in March 2009, when
stocks bottomed after Lehman Brothers Holdings Inc. collapsed.
level, as the stock market is likely to become cheap at some
time during the next 10 years and there is therefore a high risk
that anyone buying today will lose money before they start to
get a positive return,” Smithers said. “In these
circumstances, they are likely to be better off by holding cash
until the market has fallen.”
Smithers uses Equity Q, a variant of a ratio made famous by
Nobel Laureate James Tobin, as an indicator of whether the
market is overvaluing or undervaluing company assets. He uses
estimates of market value published by the Federal Reserve.
Investors are “foolish” to use price ratios based on
current earnings as a yardstick of whether the market is
attractive, Smithers argues. The S&P 500 lost 16 percent from
this year’s high on April 29 through Aug. 19 and trades at 12.3
times trailing earnings, close to the level in March 2009, when
stocks bottomed after Lehman Brothers Holdings Inc. collapsed.
Poor Performance ‘Amplified’
“There are widespread claims that the U.S. stock market is
attractive,” Smithers wrote on Aug. 15. “While foolish, these
views are common. The risk that I see for those who have to take
a short-term view is that their relative performance will suffer
in a rally and that this will drive them to buy if the market
does rally which, given the bad medium-term outlook, would
amplify their poor performance.”
More U.S. companies are buying back stock than at any time
since October 2008, according to data compiled by Birinyi
Associates Inc.
“Corporate buying has moved with the stock market in
recent years,” Smithers wrote. “Companies are likely to use
their cash resources to buy shares.”
Cash holdings for the S&P 500 companies have been boosted
by the highest profit margins since 2006, according to data
compiled by Bloomberg. Interpreting wider profit margins as an
indicator for economic expansion is a mistake, said Smithers,
because such margins imply companies are either paying their
employees too little, employing too few people or keeping their
prices too high, all of which damp demand.
attractive,” Smithers wrote on Aug. 15. “While foolish, these
views are common. The risk that I see for those who have to take
a short-term view is that their relative performance will suffer
in a rally and that this will drive them to buy if the market
does rally which, given the bad medium-term outlook, would
amplify their poor performance.”
More U.S. companies are buying back stock than at any time
since October 2008, according to data compiled by Birinyi
Associates Inc.
“Corporate buying has moved with the stock market in
recent years,” Smithers wrote. “Companies are likely to use
their cash resources to buy shares.”
Cash holdings for the S&P 500 companies have been boosted
by the highest profit margins since 2006, according to data
compiled by Bloomberg. Interpreting wider profit margins as an
indicator for economic expansion is a mistake, said Smithers,
because such margins imply companies are either paying their
employees too little, employing too few people or keeping their
prices too high, all of which damp demand.
‘Very Foolish’
“It is common to find that investors, often supported by
ill-judged comments by investment bankers and financial
journalists, try to value shares on the basis of current
profits,” he wrote. “This is, of course, very foolish as it
means that they undervalue companies when profits are low and
overvalue them when profits are high -- as they are today.”
This isn’t the first time Smithers said the market is
expensive. In October 2009, he said the S&P 500 was about 40
percent overvalued and would drop as central banks were likely
to wind up programs to stimulate the economy during the global
financial crisis.
The S&P 500 gained about 23 percent from Oct. 2009 through
June 30 this year as the U.S. Federal Reserve kept interest
rates near record lows and embarked on a second program of asset
purchases. The asset-purchase program finished at the end of
June. The S&P500 has fallen 15 percent since then.
ill-judged comments by investment bankers and financial
journalists, try to value shares on the basis of current
profits,” he wrote. “This is, of course, very foolish as it
means that they undervalue companies when profits are low and
overvalue them when profits are high -- as they are today.”
This isn’t the first time Smithers said the market is
expensive. In October 2009, he said the S&P 500 was about 40
percent overvalued and would drop as central banks were likely
to wind up programs to stimulate the economy during the global
financial crisis.
The S&P 500 gained about 23 percent from Oct. 2009 through
June 30 this year as the U.S. Federal Reserve kept interest
rates near record lows and embarked on a second program of asset
purchases. The asset-purchase program finished at the end of
June. The S&P500 has fallen 15 percent since then.
S&P Decline Predicted
Smithers, who worked for 27 years at S.G. Warburg & Co.,
where he ran the investment management business before founding
his own London-based research company, argued that U.S. equities
were overvalued in a March 2000 book co-authored with fellow
economist Stephen Wright entitled “Valuing Wall Street.” The
S&P 500 Index plunged 49 percent over 2 1/2 years from a record
high reached that month.
“The U.S. market was more overvalued in 2000 than ever
before,” said Smithers in the report on Aug. 15. “It has yet
to become undervalued and will naturally do so at some stage.
The bear market which started in 2000 is likely to be a long
one.”
where he ran the investment management business before founding
his own London-based research company, argued that U.S. equities
were overvalued in a March 2000 book co-authored with fellow
economist Stephen Wright entitled “Valuing Wall Street.” The
S&P 500 Index plunged 49 percent over 2 1/2 years from a record
high reached that month.
“The U.S. market was more overvalued in 2000 than ever
before,” said Smithers in the report on Aug. 15. “It has yet
to become undervalued and will naturally do so at some stage.
The bear market which started in 2000 is likely to be a long
one.”
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