Comments on: BILL GROSS: “ALMOST ALL ASSETS APPEAR TO BE OVERVALUED” http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued Fri, 19 Mar 2010 00:21:30 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Rob http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8197 Rob Thu, 29 Oct 2009 14:29:50 +0000 http://pragcap.com/?p=11636#comment-8197 I don't believe the foward P/E estimates. But I do believe that the market is projecting the most recent quarters results into the future in a similar manner as in the past (coming out of recession / bear market). Once things stabalize the PE drops quite bit. I don’t believe the foward P/E estimates. But I do believe that the market is projecting the most recent quarters results into the future in a similar manner as in the past (coming out of recession / bear market). Once things stabalize the PE drops quite bit.

]]> By: Otter http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8181 Otter Thu, 29 Oct 2009 02:36:52 +0000 http://pragcap.com/?p=11636#comment-8181 Rob - very good fair value analysis however, i'm not convinced the forward look P/E of S&P analysts' models are geared appropriately for continued contraction in consumer credit (this is still the underlying problem and primary driver), in the giant eco-web organism of the consumer economy, credit is the energy for the market's photosynthesis, w/out it growth becomes anemic. The credit contraction pressures continue. Rob – very good fair value analysis however, i’m not convinced the forward look P/E of S&P analysts’ models are geared appropriately for continued contraction in consumer credit (this is still the underlying problem and primary driver), in the giant eco-web organism of the consumer economy, credit is the energy for the market’s photosynthesis, w/out it growth becomes anemic. The credit contraction pressures continue.

]]> By: Rob http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8101 Rob Wed, 28 Oct 2009 05:48:35 +0000 http://pragcap.com/?p=11636#comment-8101 S&P 500 earnings and valuation. Overall earnings fell slightly short of expectations in Q2 (despite all the beating expectations). The bottom up analyst forecast on the first day of earnings season was $14.06. Actual earnings were $13.81. But GAAP earnings did blow away the top down estimates. They came in at $13.51 versus an estimate of $7.27. Once again in the third quarter the bottom up earnings estimates were dropped a bit. In July, the estimate as $15.05. The current estimate for Q3 is $14.78. I noticed in the S&P data that coming off both the 1990-91 recession and the 2002-2003 bottom that the market ended each quarter at a valuation of close the 19x the previous quarter's earnings. The Q2 earnings were $13.81 or $55.24 annualized. 19x$54.24=1050. The S&P 500 stood at 1057 on 9/30. Coincidence or following historical precidence? If earnings come in at the currently expected $14.78 in Q3 then it would follow that the year-end target for the S&P 500 would be $14.78*4=59.12 x 19 = 1124. But one should probably expect overall earnings to come in a bit under estimates as usual (say -2% like in Q2) which would be about 58 annualized. Apply a 19 multiple and the year-end target is 1,100. Much simpler than the bull crap 74 forward earnings estimates trying to justify a lower multiple. No one knows the future so they project on the recent past. So that gets us to year-end at 1,100. Just over the GS 1060 target. The street finally has the free money to exactly hit their YE targets. What about next year? The current bottom up estimate for Q4 is $16.29 (top down in $12.31 so divergence between bottom up and top down is starting again). The expectation of a S&P 500 level in Q1 would be 19X $16.29x4 = 1,238. But the $16.29 estimate will surely come down before the end of Q4. Probably to about $15.90 so the S&P 500 target for the end of Q1 would be 1,208. Q4 earnings will massively beat prior year (which were negative for the first time), but ultimately they just might dissapoint and come in under estimates. If earnings are closer to top down estimates then 19x 12.31x4 = 935 which is close many estimates of fair value. Real disappointment at earings dropping versus the previous quarter (unthinkable!) might take the market back below fair value. If Bill Gross is right and interest rates will remain low, then all asset classes will probably remain overvalued for a while. If the bond market balks and demands higher yields, then assets will no longer be able to levitate. S&P 500 earnings and valuation.

Overall earnings fell slightly short of expectations in Q2 (despite all the beating expectations). The bottom up analyst forecast on the first day of earnings season was $14.06. Actual earnings were $13.81. But GAAP earnings did blow away the top down estimates. They came in at $13.51 versus an estimate of $7.27.

Once again in the third quarter the bottom up earnings estimates were dropped a bit. In July, the estimate as $15.05. The current estimate for Q3 is $14.78.

I noticed in the S&P data that coming off both the 1990-91 recession and the 2002-2003 bottom that the market ended each quarter at a valuation of close the 19x the previous quarter’s earnings.

The Q2 earnings were $13.81 or $55.24 annualized. 19x$54.24=1050. The S&P 500 stood at 1057 on 9/30. Coincidence or following historical precidence? If earnings come in at the currently expected $14.78 in Q3 then it would follow that the year-end target for the S&P 500 would be $14.78*4=59.12 x 19 = 1124. But one should probably expect overall earnings to come in a bit under estimates as usual (say -2% like in Q2) which would be about 58 annualized. Apply a 19 multiple and the year-end target is 1,100.

Much simpler than the bull crap 74 forward earnings estimates trying to justify a lower multiple. No one knows the future so they project on the recent past.

So that gets us to year-end at 1,100. Just over the GS 1060 target. The street finally has the free money to exactly hit their YE targets.

What about next year? The current bottom up estimate for Q4 is $16.29 (top down in $12.31 so divergence between bottom up and top down is starting again). The expectation of a S&P 500 level in Q1 would be 19X $16.29×4 = 1,238. But the $16.29 estimate will surely come down before the end of Q4. Probably to about $15.90 so the S&P 500 target for the end of Q1 would be 1,208.

Q4 earnings will massively beat prior year (which were negative for the first time), but ultimately they just might dissapoint and come in under estimates. If earnings are closer to top down estimates then 19x 12.31×4 = 935 which is close many estimates of fair value. Real disappointment at earings dropping versus the previous quarter (unthinkable!) might take the market back below fair value.

If Bill Gross is right and interest rates will remain low, then all asset classes will probably remain overvalued for a while. If the bond market balks and demands higher yields, then assets will no longer be able to levitate.

]]> By: prescient11 http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8095 prescient11 Wed, 28 Oct 2009 04:02:30 +0000 http://pragcap.com/?p=11636#comment-8095 Gross is a POS talking his book. He and Mohammed and Greenspan can all burn for all I care. He should be bk, we should HAVE WIPED HIM OUT ON HIS FNM/FRE DEBT. The fact that this guy manages so much money is reflective of how screwed up the system is. Gross is a POS talking his book. He and Mohammed and Greenspan can all burn for all I care. He should be bk, we should HAVE WIPED HIM OUT ON HIS FNM/FRE DEBT.

The fact that this guy manages so much money is reflective of how screwed up the system is.

]]> By: Sherman McCoy http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8087 Sherman McCoy Wed, 28 Oct 2009 01:11:12 +0000 http://pragcap.com/?p=11636#comment-8087 Since when did Billy G become the expert dujour on Global macro investing? Is this the same Bill Gross who recommended going long GM bonds 18 months ago in Barrons? Granted he's almost as good as Dan Fuss at Loomis Sayles,, but he never shares his real views, preferring to talk his book. as far as big picture calls, you're as fool if you aren't paying attention to Steve leuthold - a guy who just made a fortune for his clients being short. Remind me again, when did Grantham and Gross last make a timely short call? I thought so. Since when did Billy G become the expert dujour on Global macro investing? Is this the same Bill Gross who recommended going long GM bonds 18 months ago in Barrons? Granted he’s almost as good as Dan Fuss at Loomis Sayles,, but he never shares his real views, preferring to talk his book. as far as big picture calls, you’re as fool if you aren’t paying attention to Steve leuthold – a guy who just made a fortune for his clients being short.

Remind me again, when did Grantham and Gross last make a timely short call? I thought so.

]]> By: jt26 http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8083 jt26 Tue, 27 Oct 2009 23:03:22 +0000 http://pragcap.com/?p=11636#comment-8083 The current bubble is occuring because one asset is more overvalued then the rest ... cash. If all assets are overvalued, why would Cisco pay $3B cash or 10X P/S for a company? Also, re:Thiel's comment on innovation. I think he also means productivity. India/Korea/China have done a lot with very little innovation. PC makers 30 years ago did great innovation which enabled certain kinds of productivity increases. Productivity can also be increased by decreasing salaries. Thus, the US is capable of greater productivity increases. I don't think we've even begun to tap the power of electronics, wireless and networks. Unfortunately, the gap between upper and middle classes will increase, rejoining a trend that was interrupted in 1995-2007. Thiel's implications are correct for the broad market, but not for the subsectors. If you look at the market cap of computer companies from 1965 to 1985, it was a nice rise, but not spectacular. The real investing greatness was to know when to switch from Control Data to Digital Equipment to MSFT. Don't just buy the S&P. One thing that is true, related to the overvaluation of assets, is the investment competition. There are probably 1000 "solar" companies, backed by 500 VCs, 100 governments, 100 strategic investors, etc. This leads to overvaluation ... why? ... because cash is overvalued. Cash will become valuable again when there is a shortage ... so, do you believe the government will create a shortage? The current bubble is occuring because one asset is more overvalued then the rest … cash.

If all assets are overvalued, why would Cisco pay $3B cash or 10X P/S for a company?

Also, re:Thiel’s comment on innovation. I think he also means productivity. India/Korea/China have done a lot with very little innovation. PC makers 30 years ago did great innovation which enabled certain kinds of productivity increases. Productivity can also be increased by decreasing salaries.

Thus, the US is capable of greater productivity increases. I don’t think we’ve even begun to tap the power of electronics, wireless and networks. Unfortunately, the gap between upper and middle classes will increase, rejoining a trend that was interrupted in 1995-2007.

Thiel’s implications are correct for the broad market, but not for the subsectors. If you look at the market cap of computer companies from 1965 to 1985, it was a nice rise, but not spectacular. The real investing greatness was to know when to switch from Control Data to Digital Equipment to MSFT. Don’t just buy the S&P.

One thing that is true, related to the overvaluation of assets, is the investment competition. There are probably 1000 “solar” companies, backed by 500 VCs, 100 governments, 100 strategic investors, etc. This leads to overvaluation … why? … because cash is overvalued. Cash will become valuable again when there is a shortage … so, do you believe the government will create a shortage?

]]> By: TPC http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8081 TPC Tue, 27 Oct 2009 22:01:16 +0000 http://pragcap.com/?p=11636#comment-8081 Gross has a long time horizon. I think the main takeaway from his outlook is that you are unlikely to do well over the next few years if you're buying into the market at these levels.... Gross has a long time horizon. I think the main takeaway from his outlook is that you are unlikely to do well over the next few years if you’re buying into the market at these levels….

]]> By: Henry http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8079 Henry Tue, 27 Oct 2009 21:51:47 +0000 http://pragcap.com/?p=11636#comment-8079 With Buffett though, you already know he talks about long term. I find it amusing when some pundits was pointing out that Buffett was so bad to get the option to buy GS shares @ $115...Where are those critics now? Still a bunch of NOT BILLIONAIRe losers. The main deal Buffett made with GS was the 10% interest on the loan. The OPTION to purchase shares @ $115 was just icing on the cake. I admit though, these so-called experts comment, you need to see their bets. Watch what they bet not what they say. Some was talking up gold while shorting it... With Buffett though, you already know he talks about long term. I find it amusing when some pundits was pointing out that Buffett was so bad to get the option to buy GS shares @ $115…Where are those critics now? Still a bunch of NOT BILLIONAIRe losers. The main deal Buffett made with GS was the 10% interest on the loan. The OPTION to purchase shares @ $115 was just icing on the cake.

I admit though, these so-called experts comment, you need to see their bets. Watch what they bet not what they say. Some was talking up gold while shorting it…

]]> By: James http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8078 James Tue, 27 Oct 2009 21:49:25 +0000 http://pragcap.com/?p=11636#comment-8078 Exactly, the question isn't if someone is right, it is when the markets will recognize it! Exactly, the question isn’t if someone is right, it is when the markets will recognize it!

]]> By: DH http://pragcap.com/bill-gross-almost-all-assets-appear-to-be-overvalued#comment-8077 DH Tue, 27 Oct 2009 21:38:49 +0000 http://pragcap.com/?p=11636#comment-8077 Buffett told us all to buy stocks in October and they fell 25%+ over the next five months. Allied Capital plummeted the day after Einhorn's speech in 2002 only to rise above the pre-speech price - and stay there for almost six years. Talking your book does absolutely nothing in the long-term. Buffett told us all to buy stocks in October and they fell 25%+ over the next five months. Allied Capital plummeted the day after Einhorn’s speech in 2002 only to rise above the pre-speech price – and stay there for almost six years. Talking your book does absolutely nothing in the long-term.

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