Happy Birthday ETS! Ed’s Daily Notes for July 24th   14 comments

Birthday cat2

On July 24, 2010, I put up the first post for this blog. 4 years later, it is still moving along nicely. As always, I thank all of you for making this a worthwhile endeavor. Happy birthday folks!

Bloomberg: Buffett’s Stock Gauge Seen Outdoing Shiller’s

Market Value

Warren Buffett’s favorite stock-market ratio is a more telling indicator of the outlook for share prices than one developed by Yale University’s Robert Shiller, according to a newly revised study.

The CHART OF THE DAY shows the market value of U.S. companies as a percentage of gross national product before inflation, using data compiled by the Federal Reserve and the Commerce Department. In a 2001 article for Fortune magazine, Buffett wrote that the ratio was “the best single measure of where valuations stand.”

A similar indicator, based on non-financial companies and gross domestic product, was cited in the study. The barometer was compared with Shiller’s cyclically adjusted price-earnings ratio, or CAPE, calculated by dividing the Standard & Poor’s 500 Index by average annual profit for the previous 10 years.

…The market value-GDP ratio works even better to forecast stock returns after adjustments for demographics and household income and spending, according to the study.

In my opinion, the market value-GDP ratio works because it reflects Fed rates. (It is nearly an inverse of this Effective Federal Funds Rate chart.) Yet more reason for the old adage, “Don’t fight the Fed.”

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14 responses to “Happy Birthday ETS! Ed’s Daily Notes for July 24th

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  1. Happy birthday blog! It takes discipline to maintain a blog for four years Ed. Good job giving us an active forum and thought provoking articles to start our day.

  2. I have to say that the market value to GDP is a very self defining measure. Of course when the market is high the ratio is high and when it is low the ratio is low. Using total market value as numerator is self defining as a predictor of market value of when market value is too high. GDP does not change that quickly, so denominator is not that meaningful from year to year.

    That is like when academics studyed the performance of mutual funds since the beginning of time and found they under performed the broader market. It does not take a study to figure that out. Every mutual fund ever created and rolled together is almost a perfect proxy for the entire market. Then subtract out the mutual fund expenses and voila, you have the under performance.

    • I totally agree Marshall, what’s more the graph given doesn’t tell people what they think it does (or would hope it does), when to get in or out of the market.
      There is no “threshold” for that point. Sure you can look at a graph like this and say, I should have got out here, and I should have got in here.
      But that is only because you are looking at the graph from the past. There is nothing in it that predicts the future.

  3. Thank you Ed for taking the effect to maintain the blog everyday. I have enjoyed my time spent here everyday for the last four year.

  4. Happy anniversary Ed! and thanks to all the poster’s as well. Great Blog.

  5. Thank you Ed, and everyone for a very useful blog.

  6. Thanks Ed

  7. Hard to believe it has already been 4 years! Congrats Ed and everyone else.

  8. Ed. it takes a lot of dedication to post everyday for four years. Heck, if I post to my blog every week I feel I am doing a good job of keeping up. Many thanks for taking the initiative to set up, start, and continue to offer a forum for all.

  9. Thanks Ed, Happy Birthday Blog I don’t know how you do it, great work.

  10. Thanks everyone! Your kind words, as well as your devotion to this blog, make it all worthwhile. 🙂

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