Connect with us


Are Stock Prices Too High?

Are stocks too expensive? … how to answer that question for yourself … the bottom-line takeaway from our technical experts

Before we jump into today’s Digest a…

Share this article:



This article was originally published by Investor Place

Are stocks too expensive? … how to answer that question for yourself … the bottom-line takeaway from our technical experts

Before we jump into today’s Digest a reminder…

Our InvestorPlace offices are closed today and Monday in honor of Labor Day.

If you need help from our Customer Service team, they will be glad to assist you on Tuesday when our offices reopen.

Given the market holiday, we’ll be taking Monday off here in the Digest.

From all of us here at InvestorPlace, have a wonderful Labor Day weekend!

Moving on to today’s Digest

***You’re going to walk away from today’s issue a wise investor

That’s a tall order, but I stand by it.

In this week’s Strategic Trader update, our technical experts, John Jagerson and Wade Hansen, tackled the question that’s weighing on investors today…

Are stock prices too high?

There are plenty of reasons to be anxious.

One, we’re at all-time highs… Two, the S&P 500 has climbed about 21% year to date, miles above the historical average annual return of about 10%… Three, in the first eight months of the year, the S&P hasn’t had a pullback of more than 5%… Four, last September, the S&P dropped nearly 10%, top to bottom.

So, are stock prices too high?

Today, we’ll find out John and Wade’s answer. But the part that will make you a wiser investor is following their methodology in arriving at the answer.

You see, John and Wade utilize a fantastic yet simple, step-by-step analysis that you’ll be able to use for the rest of your investing career. It provides a quick, logical, quantitatively-based snapshot of a stock market’s value.

So, today, let’s do our best to help you make money and make you a wiser investor.

Let’s jump in.

***The simple framework to help us price the market

For newer Digest readers, Strategic Trader is InvestorPlace’s premier trading service. It combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.

But what about when markets are at all-time highs?

Returning to the question du jour, are stocks too high? So high, in fact, that we need to hunker down and prepare for a wipeout?

Well, to answer that, we have to ask a different question…

Too high relative to what?

Stocks aren’t the only game in town. Investors have bonds, real estate, cryptos, private equity deals, foreign assets, commodities, you name it…

At the end of the day, what an investor wants is the highest risk-adjusted return, or yield. So, how do traders assess their options from this perspective?

For more on this, let’s turn to John and Wade:

The baseline yields traders typically use when assessing their investment opportunities are Treasury yields – like the 10-year Treasury Yield (TNX) – because they know that Treasuries provide a reliable yield, backed by the full faith and credit of the United States government.

Treasury yields fluctuate as inflation, monetary policy, and economic growth expectations change.

Currently, the TNX is offering a paltry yield of 1.3%

So, 1.3% is our starting point. From here, investors can evaluate other investment yields.

***Since the question is whether stock prices are too high, let’s evaluate the stock market yield

How do we do this?

Back to John and Wade:

You look at the earnings yield – which is the earnings the market generates, compared to the price you are paying for those stocks (i.e. the E/P ratio).

If you’ve never heard of the E/P ratio before, you’re not alone. But even if you haven’t, it should look at least vaguely familiar. That’s because it’s the inverse of the P/E ratio.

So, to find the S&P’s earnings yield, we start with its P/E ratio and then just flip it.

John and Wade suggest going to a site like to get the P/E. At the time of John and Wade’s update, the S&P’s P/E was 35.3.

Back to the Strategic Trader update:

Now that you know the P/E ratio, all you do is find the inverse of this number to determine the earnings yield on the S&P 500, which in this case is 2.8% (1 / 35.28 = 0.02834).

So, we have our baseline treasury yield of 1.3%. And we have the S&P’s earnings yield of 2.8%. But we’re not ready to compare them quite yet.

***Don’t forget to factor in dividends

Dividends play a huge role in the overall profitability of the stock market.

For some color on this, check out the chart below. Dating back to the 1930s, it shows stock market returns by decade.

The first number is the return from dividends. The second number is the return from price changes alone.

As you’ll see, dividends can be enormously important to overall returns.



So, what’s the dividend yield for the S&P 500 today?

Using again as our resource, we find that it’s 1.3%.

Now, we combine the earnings yield (2.8%) and the dividend yield (1.3%) to get a total yield of 4.1%.

So, what does this mean? Is it good or bad?

There’s one final step we have to take before we reach our conclusion…

***Factoring in the historical risk premium

Back to John and Wade:

Traders try not to be foolhardy with these investments; they demand a premium for the increased risk they are taking by putting their money into stocks instead of bonds.

This “risk premium” is calculated by finding the total yield (earnings + dividends) a trader can earn from the S&P 500 and subtracting the TNX.

The risk premium can vary quite a bit depending on market conditions, but the average during the past 20 years has been 3.1% (see Figure 6).

Figure 6 – Risk Premium Since January 2000

John and Wade point out how the risk premium wasn’t as large during the bull market recovery between 2003 and 2008 (the left half of the chart above, when the blue line is staying beneath the orange “average” line).

This is mostly due to the Fed allowing interest rates to rise during this period. This allowed the TNX to remain higher, which reduced the risk premium.

But after stocks recovered in the wake of the global financial crisis, the risk premium jumped (the right half of the chart above, when the blue line is above the orange “average” line).

This is because the Fed kept interest rates near zero, even though stocks were climbing.

John and Wade note that the risk premium looks to be normalizing today. This reflects how traders are preparing for the Fed to eventually start raising interest rates again – likely by the end of 2022.

***Putting it all together, are stocks too high?

Now that we have all the pieces to the puzzle, let’s find out what it’s telling us.

Here’s John and Wade:

If a trader can earn 1.3% on her money by buying virtually risk-free 10-year Treasuries today and were to demand the average risk premium of 3.1% to invest in stocks, then those stocks would have to yield at least 4.4% (1.3% + 3.1% = 4.4%) to remain attractive.

When you compare the 4.1% return a trader could currently get from the S&P 500 with the 4.4% return an investor would demand if she could earn 1.3% on her money by buying virtually risk-free Treasuries and demanded a risk premium of 3.13% to invest in stocks, you can see the numbers are a little below average but are pretty close to where you would expect them to be.

So, are stock prices too high?

Average historical numbers suggest no. Yes, they’re high. But as you’ve just seen, the numbers aren’t grossly out of whack.

Sure, we could see volatility. In fact, September is usually a bad month for stocks, and given the surging market so far in 2021, it should surprise no one if the market turns red for a while.

Here’s John and Wade’s bottom-line, which will take us out today:

Traders keep wondering if the S&P can climb any higher as it hits new all-time high after new all-time high. After all, haven’t stocks gotten too expensive?

Based on our analysis above, we believe the current risk premium offered by the S&P 500 is still attractive, which leave the index plenty of room to run higher so long as the economic and earnings news remains positive and the TNX doesn’t climb too aggressively.

Have a good evening,

Jeff Remsburg

The post Are Stock Prices Too High? appeared first on InvestorPlace.


Where Do Monetarists Think PCE Price Level Is Going To?

From an email from Tim Congdon, at the International Institute for Monetary Research (9/20): I suggest that a more plausible figure for end-year PCE annual…

Share this article:

From an email from Tim Congdon, at the International Institute for Monetary Research (9/20):

I suggest that a more plausible figure for end-year PCE annual inflation is between 5½% and 6%. (The consumer price index – up by 4.5% in the first seven months of 2021 – may finish the year with a rise somewhere in the 6½% – 7½% area.)

The conclusion is based on the following reasoning:

In the background here is the huge overhang of excess money balances. In the year to mid-May 2021 the M3 measure of broad money increased by 35%. The evidence over many decades is that – in the medium term – the growth rates of money, broadly-defined, and nominal gross domestic product are similar. So – unless that 35% number is now followed by a big contraction in the quantity of money – the US economy will continue to be affected by two conditions, specifically,

• ‘too much money chasing too few assets’, and
• ‘too much money chasing too few goods and services’.

Of course the two conditions are interrelated and also interact with each other. Our research emphasized last year that rapid money growth was likely to boost asset prices first, and that has been right. (Incidentally, to attribute the behaviour of the prices of US tech stocks to bottlenecks and supply shortages would be daft. Does one have to say these things?)

What’s the implied path of the PCE deflator, relative to nowcasts and forecasts? See Figure 1, where I’ve used the mid-point of Congdon’s forecast (5.75% December y/y), shown as the red square.

Figure 1: Personal Consumption Expenditure deflator (black), Congdon midpoint forecast (red square), Cleveland Fed nowcast as of 9/23 (sky blue +), Survey of Professional Forecasters August median forecast (green line), FOMC 9/22 projections (blue square). Source: BEA, Cleveland Fed, Philadelphia Fed/SPF, Federal Reserve, and author’s calculations.

The FOMC median forecast is surprisingly similar to the Survey of Professional Forecasters’ median forecast from the preceding month (mid-August). The FOMC members then still perceive a deceleration in inflation in the last half of 2021.

Congdon’s forecast looks plausible given the August PCE deflator nowcast (and even more using the September). However, it’s far outside of the range projected by the FOMC, as shown in Figure 2, which includes the high/low inflation forecasts.

Figure 2: Personal Consumption Expenditure deflator (black), Congdon midpoint forecast (red square), Cleveland Fed nowcast as of 9/23 (sky blue +), FOMC 9/22 projections (blue square), high and low forecasts (dark blue +). Source: BEA, Cleveland Fed, Federal Reserve, and author’s calculations.

In other words, the monetarist view (if I can use Congdon’s view as a proxy) differs from both a mixed bag of mainly mainstream economists (proxied by the Survey of Professional Forecasters) and policymakers (the FOMC).

Continue Reading

Precious Metals

These Factors ‘Could Drive Gold and Silver Prices Much Higher’

Source: Crescat Capital for Streetwise Reports   09/22/2021

In a Sept. 10, 2021 Crescat Capital broadcast from the Precious Metals Summit in…

Share this article:

Source: Crescat Capital for Streetwise Reports   09/22/2021

In a Sept. 10, 2021 Crescat Capital broadcast from the Precious Metals Summit in Beaver Creek, the firm's Portfolio Manager, Tavi Costa, and its Chief Investment Officer, Kevin Smith, talked about the current macroeconomic environment and highlighted the opportunity in gold and silver mining equities.

Portfolio Manager, Tavi Costa, noted that his funds firm, Crescat Capital, believes we are in a secular bull market for gold and silver and because we are now amid a pullback, the time is right to be taking advantage of stocks in the space over time. He showed a slide of silver's weekly candles and noted that the precious metal looks technically sound for taking advantage of.

"Cryptocurrency is getting a lot of attention these days, but Crescat Capital likes precious metals."

Looking forward, Costa added, "I think there are a lot of fundamentals behind what could drive gold and silver prices much higher and perhaps really benefit the explorers and a lot of the companies we have in our portfolio," he added.

Costa purported that we could be on the cusp of a new phase of mergers and acquisitions given the high level of liquidity among the mining majors. They have generated free cash flow at a pace never seen before and have lots of net cash available.

"I truly believe that tangible assets continue to be something very important for investors to own in their portfolios," Costa said.The portfolio manager said platinum is also at a good entry point and showed a slide of the metal's quarterly candles.

"Gold, we believe, has intrinsic value."

Also in the broadcast, he presented three slides depicting how various economic metrics are trending. The first metric was the Taylor Rule to the Fed funds rate Spread, and it showed that the spread today is the largest it has been since about 1975. Costa said the spread indicates interest rates should be at around 6 percent, but obviously they are not.

"It's a good reminder of how trapped the Federal Reserve is," he added.

Second, the cost of ride sharing with Uber and Lyft increased 92 percent between January 2018 and July 2021, Costa said. However, the intercity transportation component of the Consumer Price Index (CPI) that takes into account taxi, Uber and Lyft fares is up only 5 percent during the same period.

"This is example of how the CPI is massively understated in regards to the real inflation in the system," added Costa.

Third, the Duke survey of chief financial officers showed that internal company optimism about wages and sales is at a record high.

"The cost of living rising started to create a demand for higher wages and salaries, and we're seeing this in a lot of fronts," Costa said.

Next, Kevin Smith briefly summarized today's economic macroenvironment and with that as the backdrop today, what parts of the market Crescat Capital favors.

Smith reiterated that inflation is rising, growth is slowing and the stock market is in a bubble. Real interest rates are negative, and money printing continues. Deficits are the highest they have ever been.

Thus, cryptocurrency is getting a lot of attention these days, Smith said, but Crescat Capital likes precious metals.

"Cryptocurrencies, they're faith-based currencies," he said. "Gold, we believe, has intrinsic value, and the junior mining industry has been through essentially a 10-year bear market."

Read more about the companies Quinton Hennigh, Crescat's Geologic and Technical Director, discusses in part two of the Sept. 10 briefing.

Sign up for our FREE newsletter at:

Streetwise Reports Disclosures:

1) This is contributed content from Crescat Capital compiled by Doresa Banning for Streetwise Reports LLC. Doresa Banning provides services to Streetwise Reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None. Her company has a financial relationship with the following companies referred to in this article: None.

2) The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.

3) The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.

4) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in any securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. 

Important Crescat Disclosures Provided by Crescat Capital 

Please read Crescat’s important disclosures.

Nothing herein should be construed as personalized investment advice or a recommendation that you buy, sell, or hold any security or other investment or that you pursue any investment style or strategy.

Case studies are included for informational purposes only and are provided as a general overview of Crescat’s general investment process, and not as indicative of any investment experience. There is no guarantee that the case studies discussed here are completely representative of Crescat’s strategies or of the entirety of its investments.

Crescat has compiled its research in good faith and while it uses reasonable efforts to include accurate and up-to-date information, it is provided on an “as is” basis with no warranties of any kind. Crescat does not warrant that the information on this site is accurate, reliable, up to date or correct. In no event will Crescat be responsible or liable for the correctness of any such research or for any damage or lost opportunities resulting from use of its data.

You should assume that as of the publication date, Crescat has a position in the securities discussed and therefore stands to realize significant gains in the event the price of security moves. Following the publication date, Crescat intends to continue transacting in the securities, and may be long, short, or neutral at any time.


Continue Reading


Household Net Worth Hits Record $142 Trillion, Up $31 Trillion Since COVID, But There Is A Catch…

Household Net Worth Hits Record $142 Trillion, Up $31 Trillion Since COVID, But There Is A Catch…

Another quarter, another record high in…

Share this article:

Household Net Worth Hits Record $142 Trillion, Up $31 Trillion Since COVID, But There Is A Catch...

Another quarter, another record high in (1%er) household net worth.

The Fed's latest Flow of Funds report released at noon today showed the latest snapshot of the US "household" sector as of June 30 2021, which confirmed that one year after the biggest drop in household net worth on record when $8 trillion was wiped out in Q1, 2020, in the 2nd quarter of 2021 the net worth of US households soared by another $5.85 trillion, or 4.3%, rising to a new all time high of $141.7 trillion.

As has traditionally been the case, real estate ($34.9 trillion) and directly and indirectly held corporate equities ($47.0 trillion) were the largest components of household net worth. Meanwhile, household debt (seasonally adjusted) was $17.3 trillion.

This means that over the past 12 months, US household net worth has increased by:

  • Q2 2020: $7.92TN
  • Q3 2020: $4.26TN
  • Q4 2020: $7.9TN
  • Q1 2021: $5.1TN
  • Q2 2021: $5.85TN

... a grand total of $31 trillion. And since the bulk of this wealth goes to a fraction of the wealthiest 1% (see chart at the bottom), it means that the covid pandemic has been the biggest wealth transfer in history, making America's richest even richer.

Looking at the composition of the wealth change, $3.54 trillion came from a gain in stocks, $1.2 trillion was from an increase in real estate values - the biggest quarterly increase in housing values on record -  and another $1.1 trillion coming from "other sources."

And visually:

It wasn't just housing and real-estate: net private savings grew at an annualized pace of almost $2.9 trillion in the second quarter after a $4.8 trillion surge in the prior quarter -- which while still a high number, suggests that almost $2 trillion in excess savings have already been spent. Excess savings have been a key driver of consumer spending, including last quarter, where consumer outlays jumped at one of the fastest paces on record.

Of course, in addition to assets, liabilities also grew, and in Q2 2021 household debt grew at a 7.9% SAAR, a more rapid pace than in previous quarters as home mortgages surged by 8.0%, spurred by rising home prices and sale activity as well as by the Fed keeping borrowing costs near zero. That’s led to record-low mortgage rates, which have bolstered demand for homes. The median selling price for previously owned homes is at a record high. Homeowners’ real estate holdings minus the change in mortgage debt rose $879.7 billion (a positive value indicates that the value of real estate is growing at a faster pace than household mortgage debt).

Meanwhile, nonmortgage consumer credit increased by 8.6%, as credit cards, auto loans, and student debt all increased.

Nonfinancial business debt grew at a rate of 1.4%, reflecting continuing growth in commercial mortagages, nonbank loans, and corporate bonds and a decline in nonmortgage depository loans. Federal debt rose 9.6%. State and local debt increased 3.1%. As GDP continued to grow, the ratio of nonfinancial debt to GDP edged down a bit further. In the second quarter of 2020, the ratio had spiked, driven by the drop in GDP and the expansion in federal debt related to the fiscal stimulus.

Looking at the various components of nonfinancial business debt, nonmortgage depository loans to nonfinancial business decreased $143 billion in the first quarter. Contributing to the decline was the forgiveness of many loans extended under the Paycheck Protection Program (PPP), which more than offset the extension of new PPP loans. However, nonmortgage depository loans declined even excluding PPP loans. More than 400 billion of PPP loans were on the lenders’ balance sheet at the end of the second quarter and thus are still included in our measure of nonfinancial business debt. However, a large fraction of them is expected to be forgiven.

In contrast to nonmortgage depository loans, commercial mortgages and nonbank loans continued to increase. Corporate bonds also increased, though at a slower pace than in the first quarter.

Overall, outstanding nonfinancial corporate debt was $11.2 trillion. Corporate bonds, at roughly $6.6 trillion, accounted for 59% of the total. Nonmortgage depository loans were about $1.0 trillion. Other types of debt include loans from nonbank institutions, loans from the federal government, and commercial paper.

The nonfinancial noncorporate business sector consists mostly of smaller businesses, which are typically not incorporated. Nonfinancial noncorporate business debt was $6.7 trillion, of which $4.7 trillion were mortgage loans and $1.6 trillion were nonmortgage depository loans.

And while it would be great if this wealth increase was spread across most Americans, there is - as usual - a catch as unfortunately, most Americans aren’t benefiting from recent gains in wealth, and while the pandemic has led to a surge in savings and opportunities for many to buy a home or invest while pushing up the financial assets of the "top 10%" to record highs, the downturn has disproportionately impacted low-income workers, many of whom rent and don’t participate in the stock market.

Indeed, the latest data as of Q1 shows that the top 1% accounts for over $41.5 trillion of total household net worth, with the number rising to over $90 trillion for just the top 10%. Meanwhile, the bottom half of the US population has virtually no assets at all. On a percentage basis, just the Top 1% now own a record 32.1% share of total US net worth, or $45.6 trillion. In other words, the richest Americans have never owned a greater share of US household income than they do, largely thanks to the Fed. Meanwhile, the bottom 50% own just 2% of all net worth, or a paltry $2.8 trillion. They do own most of the debt though...

A closer look at the percentile breakdown:

And the saddest chart of all: the wealth of the bottom 50% is virtually unchanged since 2006, while the net worth of the Top 1% has risen by 132% from $17.9 trillion to $41.5 trillion.

Bottom line: the data underscore how the government's fiscal scramble to speed up the "economic recovery" paired with the Fed's continued ultra easy monetary policy have helped to protect and grow the wealth of the richest Americans: those who own assets, and who have seen their net worth hit an all time high... unlike the bottom 50% of Americans who mostly "own" debt. 

Tyler Durden Thu, 09/23/2021 - 13:13
Continue Reading