Strategist Boroudjian: Shiller's CAPE Ratio Is 'Dead Wrong'

Friday, 22 Aug 2014 07:49 AM

By Dan Weil

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Nobel laureate economist Robert Shiller of Yale University says that stocks are very expensive based on his cyclically-adjusted price-earnings (CAPE) ratio, which is based on 10 years of earnings.

Jack Boroudjian, chief investment officer at Index Financial Partners, told CNBC that Shiller's looking at the wrong measurement.

Shiller's CAPE ratio now stands at 26.2, its fourth highest level since 1881, trailing only 1929, 1987 and 1999, periods when stocks crashed. "The U.S. stock market looks very expensive right now," Shiller wrote in The New York Times.

Boroudjian's response: "He is dead wrong. This market is not too expensive."

And why is that?

"There is a significant flaw in using 10-year average earnings as the denominator in the P-E ratio," Boroudjian said.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

"Most of us in the real world calculate the fair value of the market by looking at the forward earnings. Today, forward earnings are running around $120 for the S&P 500 for 2014, so the multiple is roughly 16.2," he said.

If the market was frothy, the ratio would stand at around 20, Boroudjian said.

MarketWatch columnist Brett Arends apparently shares the bullishness. He cites three factors that "suggest" further gains for stocks. All are contrarian indicators, Arends maintains. 

1. "Absolutely everybody seems to be predicting a crash this autumn," he writes.

2. Retail investors sold stocks in a panic last month. 

3. A Bank of America Merrill Lynch survey shows that money managers have turned more bearish toward stocks.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now 

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