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Dr. Paul Price
Dr. Paul Price
Articles  | Author's Website |

Bubble Market? I'm Calling BullSh*t.

October 18, 2014 | About:

Ignore the Ratings Whores

We are not in a stock market bubble.

Media hosts love guests espousing extreme views. They are much more interesting than money mangers that speak of 'normalcy' and, best of all, they garner better ratings.

Understanding that simple truth will help you to ignore fear mongering and allow keeping your sanity in a sea of sensationalism.

The extreme volatility of the week just completed really brought out the big guns from the bearish camp. Monday saw a 223 point decline in the DJIA. Wednesday’s worst moment was 460 points below the previous day’s close.

When the dust settled, though, the Industrial average was off by just over 1% on the week. That is the equivilent of a $10 stock dropping by less than 10-cents, over a five-day period.

Saying that on the air wouldn’t goose Neilson ratings.

October 19th marks the 27th anniversary of 1987’s historic stock market crash. Are we really at 'Bubble Valuations' and ready for an updated version of the 1987 debacle or even a March 2000-type sell-off?

The facts unequivocally say NO.

The Standard & Poors 500 is commonly used as a proxy for the broad large-cap equity universe. As of Oct. 17, 2104, its forward looking P/E was a very ordinary 14.6x next year’s estimate. That was nowhere close to the absurd overvaluation present at the peak of the internet/tech bubble period.

The present reading appears even more reasonable when taking the Fed’s ZIRP (zero interest rate policy) into account. In the early 1980’s 10-yr. Treasury Bonds offered real competition for investor dollars at up to 15% coupon rates. Just prior to the 1987 crash 10-yr. US government bonds were still paying just above 7%.

Today’s 2.22% rate on the 10-yr notes means P/E ratios should be much higher than average due to the lack of good alternatives to stocks. Adjusted for ZIRP... equities actually look cheap.

Those who made a case for selling stocks had more credibility back in July or during mid-September. After last week’s action the DJIA was slightly negative for 2014 YTD, taking it back to a level seen in late 2013. Corporate earnings and dividends have risen nicely since then while the average stock has marked time.

That basically static index reading thus masks a lot of value creation. There is no evidence of a ‘bubbly’ excess in the DJIA.

Calculating theoretical valuations are a good exercise. Watching what company insiders are doing with their own real money investments also lends evidence that any recent excesses have been worked off.

Who knows the true worth of a company’s shares better than its officers and directors? The Thomson Reuters Insider Sell/Buy ratio has been an excellent short-term (weeks to months) indicator.

Unlike Mom and Pop, in-the-know investors like to buy bargains. They aren’t scared away by low prices. Compare the readings of this wonderful signal with market action of the previous 12-months to see just how accurate it has been.

Insiders turned bearish in mid-September. They accelerated their stock sales as the indices peaked. Last week’s pullback led them back into slightly bullish territory.

Knowing the market is not pricey will insulate you from the hype you hear on the news or are exposed to daily on CNBC.

Stocks might go up, or down, in the very short run. They remain your best chance at long-term prosperity in a world with artificially low interest rates and apparently unlimited money printing from the world’s major central banks.

About the author:

Dr. Paul Price


Visit Dr. Paul Price's Website

Rating: 3.8/5 (13 votes)



Vgm - 5 years ago    Report SPAM

As Buffett said last week, "the markets are [still] in a zone of reasonableness."

As ever, I guess the most important thing is to have an understanding of the valuations of each of our stocks.

Praveen Chawla
Praveen Chawla premium member - 5 years ago

This correction is pretty much over. The action on thursday and friday pretty much confirms it. Time to sell some puts on quality stocks as vix is still high.

GatorGuacoMole - 5 years ago    Report SPAM

Sometimes the market just goes down despite your feelings. Good luck.

Stephen Neumeier
Stephen Neumeier premium member - 5 years ago

Based on your chart the P/E to froward earnings is as high as it was in 2007. Is that really a useful metric when profit margins are at record levels? I am a little suprised you would use it.

Thank you for your response. Interest rates do make a difference but stocks are worth the present value of all future profits from here to eternity. Which interest rate should I use? If you assume interest rates will normalize sometime in the future you will get a different answer than using today's 10-year Treasury. You could disagree about which interest rate is appropriate but it seems unreasonable to base valuation on the forecast for next year's earnings when profit margins are at an all time high. Grantham and Hussman have used methods that correlate well with long term returns 7-10 years.

Hussman lays out his Pro-Bubble argument here:


My main point is using next year's earnings as a metric has not been useful in the past.

Dr. Paul Price
Dr. Paul Price - 5 years ago    Report SPAM


In 2007 fixed income was still a reasonable choice. ZIRP has eliminated CDs, bonds and money market funds as viable alternatives to stocks.

ZIRP makes the same P/E a much bigger bargain than 7 years ago.

All asset classes compete for investor dollars. Fixed income is now a guaranteed loser after inflation and taxes.

Shaved_head_and_balls - 5 years ago    Report SPAM

The market's forward P/E and current treasury rates have no useful correlation with future stock market returns. Yet that doesn't stop an army of bloggers and professional asset gatherers from trotting the data out to support their poorly researched opinion.

Dr. Paul Price
Dr. Paul Price - 5 years ago    Report SPAM

Mr. Balls,

If you think interest rates have no effect on stock prices... it is you who is clueless.

Sapporosteve premium member - 5 years ago

Dr Price,

You should read Andrew Smithers - Wall Street Revalued - specifically Chapter 4 "Interest Rate Changes and Share Price Changes". It's only 4 pages but let me save you the trouble.

Page 40 - "That is, over longer horizons the (joint) probability that interest rates affect share prices, and that this effect is helpful to share prices is low.

As interest rates affect short term changes in share prices, but their levels are not associated, it is clear that other factors must be the dominant influences on share prices over the longer term".

Of course we would welcome any serious research that shows there is a correlation.


Dr. Paul Price
Dr. Paul Price - 5 years ago    Report SPAM


Look no further than in the early 1980's. Short-term T-bills and money moneys were apying 12% - 15%. P/E ratios on most stocks ran from 4x - 8x due to the competitinm from government guaranteed fixed income rates.

When cash earns more, stocks are worth less, in terms of valuation-based multiples, and vice versa. It has always been that way any always will be.

There are always other factors at work simultaneously which makes it impossible to say that any one influenec is the one-and-only reason for stock movement. That will always be true as well.

QE and ZIRP have definitely goosed overall P/E levels by removing meaningful competition for investors' dollars. Pension plans have no jope of achieving neccessary returns when purchasing bonds or holding cash at today's artificially low interest rates.

They have been forced to allocate more money to equities and/or equity-like, junk rated paper.

ZIRP has also encouraged/allowed corporations to borrow huge sums at low rates to buy back shares in order to bump up EPS by reducing their share float. That added further to the demand side for stocks which, of course, moved the needle towards higher share prices in a supply/demand auction market.

Xxxlexlex - 5 years ago    Report SPAM

People need to look further out into the future. It was easy to predict that we would have our present oil glut . Now the oil market is re-defining the parameters of what is economic feasilibity for production with new lower prices and possibly the bottom not being reached yet for prices. It is not just prices for oil but prices for oil concerns and even the cost of transporting oil because some ships actually burn diesel to transport oil far distances. consolidation is now likely and the most efficent companies have the best chances of survival. There could always be another major long distance war. Possibly Obama is waiting till after the election to send the 40-120 troops needed back to Iraq that type of logistics problem drains world oil supplies fast and then flips over to using middle east oil that can hurt europe faster than it will hurt the north americas with our total energy supplies completely dwarfing the middle east including Saudi Arabia. And with cheap coal too with companies selling what ever they can at very low prices the US will probabably never run out of conventional non alternative energy. Don't think that the narative of climate change and global warming makes it real. To be real it has to show a change in atmospheric pressure not sea level. It is hard to gage sea level because gps metric are too new and continents rise and fall verses sea level . as we know northern japan dropped 8 ft on average along the coast line after the big tsunami quake and as norway rises sweden falls verses sea level. Peak oil was also a lie ...It is an old lie that has mutated and still people keep it going. It has as much validity as chemtrails if you want to believe that nonsense. the only reason anyone would create chemtrails it to increase lift for airplanes at high altitudes by intruducing particles to the thin air up between 30 and 60 thousand feet because you reduce drag and gain energy ef ficency flying high in thin air but you lose lift...flying faster can make up for that. maybe only some military planes would require the extra particles for improved operation but i doubt it. Right now the future of the US with the almost infinite looking energy resources and with the best efficent low energy devices including an array of new LED lights that cost less and less and save up to 70 percent of past energy requirements means the US will export energy though maybe not to Canada and expect fracking to spread to the rest of the world too . I am willing to bet poland will be come a major energy producer too....and china will be fracking too . North american steel production gets cheaper and cheaper. Agricultural prices fall when energy is cheap too. Cheap energy grows productivity . It can make and keep the dollar strong with oil priced in US dollars and if exporting oil even higher. In expensive coal fuels all sorts of new industries. so called alternative energy fails with real energy so cheap as it cannot really compete at all with out stupid subsidies. The idiot politicians and ruling class will keep telling us to do stupid things but they will fail one by one and maybe voters will learn they are being duped.

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