zerohedge.com / Tyler Durden / March 15, 2013, 16:50 -0400
Despite the all-knowing Alan Greenspan confirming there is no irrational exuberance currently, Oaktree Capital’s Howard Marks is less convinced. Though he is not bearish, he lays out rather succinctly the current pros and cons for equities – based on the various ‘valuation’ arguments, discusses the folly of the equity risk premia, and highlights the dangers of extrapolation and what history can teach us… “appreciation at a rate in excess of the cash flow growth accelerates into the present some appreciation that otherwise might have happened in the future… it isn’t just a windfall but also a warning sign.”
Via Oaktree Capital’s Howard Marks,
The problem with basing a pro-equities argument on the yield comparison is that most of equities’ current attraction on that basis comes from the lowness of interest rates. Just about everyone knows (a) interest rates are artificially low because of central banks’ efforts at stimulus and (b) rates will be considerably higher at some point in the intermediate term. In that case, rising rates would render stocks less attractive.
The Other Pros and Cons of Equities
There are many ways to view valuation, and many elements in the current debate over equities. Here are a few of them (I?ll start by reiterating the above for the sake of completeness):
- The differential between the S&P earnings yield and the risk-free rate or the yields on bonds – and their ratio – makes stocks look extremely cheap. PRO
- The attractiveness of these relative valuation parameters is highly dependent on interest rates staying low. CON (or LESS PRO)
- Relative to normal post-WWII p/e ratios, stock prices are average to slightly low as a multiple of projected earnings for the year ahead. PRO
- Robert Schiller?s cycle-adjusted p/e ratios are gaining increased attention, and they suggest full rather than fair valuations. CON
