Tags: Tobin | Q ratio | bubble | stock

James Tobin's Q Ratio Signals Stock Market Overvalued

By    |   Wednesday, 20 May 2015 07:00 AM

Robert Shiller isn't the only Nobel laureate from Yale University who devised a measurement of stock-market value indicating the six-year bull run is well overdone.

Deceased Yale economist James Tobin fits the bill too, according to John Kimelman of Barron's.

As for Shiller, his cyclically adjusted price-earnings ratio, which includes 10 years of earnings, shows the market is more expensive than any time except the pre-crash periods of 1929, 2000 and 2007.

Then there's Tobin's Q Ratio, which divides the total price of the U.S. stock market by the replacement costs of all companies' assets.

The ratio now stands at 1.1, according to Bloomberg. That means stocks are trading at a level 10 percent above the value of companies' assets. The reading is higher than any time except the 2000 dot-com bubble and 1929.

"Readings above 1 are considered by some to be too high and the ratio has exceeded that threshold only 12 percent of the time, mostly between 1995 and 2001," Bloomberg notes.

Meanwhile, corporate profits are falling, yet major stock indices hit record highs again this week. So what gives?

Turn to two legends of stock analysis, Benjamin Graham and David Dodd for the answer, says Charlie Bilello, director of research at Pension Partners.

"The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly, but only as they affect the decisions of buyers and sellers," Graham and Dodd wrote in the book "Security Analysis."

With 92 percent of S&P 500 companies having released first-quarter earnings, profits per share are down 13 percent for the quarter, according to Bilello.

So why are stocks up?

"Buyers and sellers have become fixated on one fact and one fact alone: easy monetary policy," he writes in his blog. "While earnings and economic data have been weak in 2015, the Federal Reserve has responded by becoming increasingly dovish."

The conundrum won't disappear until "investors choose to respond to other data beyond monetary policy or when the Fed chooses to finally raise interest rates," Bilello says.

The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008. Economists don't expect it to increase rates until at least September.

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Robert Shiller isn't the only Nobel laureate from Yale University who devised a measurement of stock-market value indicating the six-year bull run is well overdone.
Tobin, Q ratio, bubble, stock
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2015-00-20
Wednesday, 20 May 2015 07:00 AM
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