CHART OF THE DAY: TOBIN’S Q
The stock market is undervalued according to Tobin’s Q:
‘Q’ is defined as the ratio of the market value of a firm to the replacement cost of its assets – in this case, we are estimating those figures for the entire industry. According to Nobel Laureate James Tobin, the ratio of total stock market value to the stock market’s net worth (corporate net worth) is a reliable indicator of market valuation. When the stock market trades at a ‘discount’ to the replacement cost of its assets, the market is inexpensive. This discount possesses ‘q’ ratios that are less than 1.0. Conversely, when ‘q’ exceeds 1.0, the market trades at a premium to its replacement cost. The run-up from 1996-2000 had ‘q’ approaching the unthinkable value of 2.0. Encouragingly, the most recent (QI 09) level of 0.64 is the lowest since QII 91 – quite discounted. The long-term average (since 1952) for Tobin’s ‘q’ is 0.75.
Source: http://www.argusresearch.com/
a couple of obvious points
one, in a deflationary environment, replacement costs go down….way down…as factories are worthless etc (opens up topic of XXflation), but you have to weigh $2-3T of stimulus versus $30T of deleveraging…. can you write a piece about the velocity of money??
two, mkts bottom on low low tobin Q’s
three, things are not getting better, there are no green shoots….
four, the problem is that you (any many but not all) see everything so clearly, but the market sees only what is wants to see. And, of course, in the short term (or medium term) anything can happen.
This is where Soros is so perceptive. But he can afford to be against the trend.
Pay attention, that was as of 3/31. Market is up hugely since then. Market is fairly valued….look at the Shiller P/E
E said: “you see everything so clearly, but the market sees only what is wants to see.”
sorry, bud. you got that exactly backwards.
gneralissimo….i guess you are loading on at these levels….
enjoy
Guys,
I am not posting this because I think the market is cheap. Regular readers know I care very little about these valuation metrics. But, in an attempt to provide readers with a somewhat broad and unbiased look at the markets, it’s nice to post things like this every once in a while. I don’t have an agenda like 99% of financial websites.
Anonymous, even Hussman agrees that the long-term returns of the market are likely to be better than average after the steep declines. Even the case shiller PE is flawed. In my opinion, these metrics are mostly useless, but people follow them nonetheless….
I think the greatest flaw of Q as a valuation metric is that it fails to take into account a firm’s liabilities. A slightly better metric might be market value to shareholders’ book equity.
Here’s how we rank and weight the Q in our market valuation process. It’s currently slightly above neutral (positive) in IMHO>
Current Value 0.621
PFCF Range Percent Range Key Score
0.37 0.33 95% 100% 10.00 –
0.39 0.37 90% 95% 9.00 –
0.41 0.39 85% 90% 8.00 –
0.43 0.41 80% 85% 7.00 –
0.48 0.43 75% 80% 6.00 –
0.51 0.48 70% 75% 5.00 –
0.54 0.51 65% 70% 4.00 –
0.59 0.54 60% 65% 3.00 –
0.62 0.59 55% 60% 2.00 2.00
0.69 0.62 50% 55% 1.00 –
0.78 0.69 45% 50% (1.00) –
0.81 0.78 40% 45% (2.00) –
0.87 0.81 35% 40% (3.00) –
0.91 0.87 30% 35% (4.00) –
0.94 0.91 25% 30% (5.00) –
0.96 0.94 20% 25% (6.00) –
0.99 0.96 15% 20% (7.00) –
1.06 0.99 10% 15% (8.00) –
1.37 1.06 5% 10% (9.00) –
1.76 1.37 0% 5% (10.00) –
Points 2.00
TPC, wondering if you on your site disclose positions?
also, can i ask you to post more cramer bashing items, he is the biggest fool in the world
E,
I always disclose a position if I write about something I own. You can see some of my prior calls here:
http://pragcap.com/how-are-we-doing
http://pragcap.com/the-trade-of-the-day-being-prudent
Not to toot my own horn, but my risk adjusted returns (and relative and absolute returns) over the last 4 years (since I started independent audits of my returns) have been very very good. Up 19% last year which is the crowning achievement of my investing career….
As for Cramer, I firmly believe he is doing investors a great disservice and abusing what could be a very useful and educational platform. I will continue to call him out for that. I try to tell things like they are….
It appears that ‘Q’ went below .50, and _stayed_ there, for over a decade (’75 to ’87).
The relevant question would appear to be: what might cause this syndrome to repeat – or not – and why?