Market Valuations and CAPE

Interesting articles I’ve read this morning:

Why is the Shiller CAPE So High?

The piece has five parts:

  • In the first part, I’m going to explain why valuations in general are higher than they have been historically. It’s not just the CAPE that’s historically elevated; the simple trailing twelve month (TTM) P/E ratio is also historically elevated, by a reasonably large amount.

  • In the second part, I’m going to highlight the main reason that the Shiller CAPE has risen relative to the simple TTM P/E over the last two decades: high real EPS growth. I’m going to introduce a schematic that intuitively illustrates why high real EPS growth produces a high Shiller CAPE.

  • In the third part, I’m going to explain how reductions in the dividend payout ratio have contributed to high real EPS growth. In discussing the dividend payout ratio, I’m going to present a different, potentially more accurate formulation of the Shiller CAPE, a formulation that conducts the valuation calculation based on total return instead of price. On this formulation, the Shiller CAPE falls by around 10%, from 26.0 to 23.5.

  • In the fourth part, I’m going to explain how a secular uptrend in profit margins has contributed to high real EPS growth over the last two decades. This effect is the most powerful of all, and is the main reason why the Shiller CAPE and the TTM P/E have diverged in their valuation signals.

  • In the fifth part, I’m going to outline a set of possible future return scenarios that investors at current valuations can reasonably expect going forward. I’m then going to identify the future return scenario that I find most credible.

http://www.philosophicaleconomics.com/2014/08/capehigh/

Francis Chou Semi Annual Letter: Long BBRY, Intralot, Eurobank

Bargains are Hard to Find

We believe that the market is currently fairly valued. The P/E ratios and price-to-book values are still high and dividend yields are low relative to historic valuations, but the number of companies that are underpriced is at an all-time low. We sincerely doubt the overall returns from equities in general over the next five to 10 years will be compelling. On the contrary, we believe the returns may be far more modest than those hoped for by investors. In light of this scenario, and with its obvious lack of bargains, we would not hesitate to sell our investments and be 100% or 50% cash — or whatever the number may be.

http://www.valuewalk.com/2014/08/francis-chou-letters/

Riddle me this: how long can real EPS exceed real GDP growth and by how much?

Perhaps the author addresses this… I’m going to read this one later today.