Friday, November 1, 2013

More reading for you

Some more reading for a boring Friday.

Reformed Borker (Bork Bork Bork!) - a reasonable explanation for the upward tilt in PEs. It has to do with changes to the tax regime. I guess, when you realize the market in sum is an exercise in simply trying to beat the aggregate return, this makes sense. Quote:
We can't look at long term historical valuations because the tax code has changed dramatically.  Prior to 2003 dividends were taxed at ordinary income levels, so for the highest two or three brackets fixed income was as valuable as the dividend at the same yield. Today, at the same yield, dividends are far more attractive since fixed income is taxed at a higher rate for the upper brackets. Additionally, prior to 1982, capital gains taxes were generally higher (as were the dividend tax rates because marginal tax rates were much higher).

Ergo, because of the tax code there should be a rerating higher of p/e levels over the past 30 years relative to prior to that time. And a further upward boost in 2003  - especially for dividend paying stocks.  Whether the level for the S&P 500 should be 17, 18 or more versus the long term historical average of 15 is something for the statisticians to debate.

Unfortunately there are other factors, such as earnings  growth and interest rates that also influence the multiple and pinpointing what the exact level should be is probably impossible. But 15 looks too cheap when taxes and current returns from fixed income are considered.
Point being, your market analyst is an idiot if he's doing long-term analysis on the market without compensating for the fact that the thing he's analyzing has changed its character over time. You have to keep your apples and oranges properly organized.

Calculated Risk - how much risk to homebuilding? Jan Hatzius doesn't think the recent data is indicative of a new downward trend.
Second, the fundamental supply-demand picture for housing still looks positive. If the population grows at the rates projected by the Census Bureau and the size of the average household trends sideways to slightly lower--in line with historical trends--we estimate that household formation should climb to 1-1.3 million and steady-state housing demand to 1.3-1.6 million. This implies significant upside for housing starts from the current 900,000 level once the remaining excess supply has been eliminated.
Don't thumb your nose at demographics.

Ritholtz - corporate profits after tax. Chart says they've tripled since 2000. So why would you expect the secular bear market to continue?

Bespoke - October sales of F-series trucks highest since 2004. And yet Ford is going down today. Because blah blah taper blah blah manufacturing is good.

Michael Shaoul - on EM carry currencies. I guess he's warning of a new bear move in EMs around the corner.

FT beyond brics - India and gold, the story in charts. One seems to suggest that household asset allocation in gold is 18% in India.

1 comment:

  1. If you're bored, look at this. 17 minute Eric Coffin video from his subscriber summit: "Who dares wins?":

    Nice look back at the past few years.