Cheat Sheet Q&A: What really matters when you're evaluating stocks:
I was listening – as usual – on my ride in this morning and heard your segment on “historical fundamentals” of stock pricing and how QE may affect it. Thank you.
I was wondering if you could explain why PE is so important and what the other fundamentals of a stable market are. What should a “normal” PE ration look like? You said that once QE dries up (or even with minimum QE) we could be looking at a 10% or more correction this year.
Also can you give some kind of analysis of where the market fundamentals would be without QE? Maybe what the fundamentals were for the five years leading up to the “great recession” (which I think for most Americans we are still in).
Bottom Line: Great questions and a lot of ground to cover so I’ll take these one piece at a time. First how the stock market is currently valued vs. its historical average. The best barometer to broadly evaluate P\E ratios is the S&P 500. So…
The historical average P\E ratio of the S&P 500 is 15.5 as of right now it’s 19.9. That means that stocks are trading at a level 28% higher than their historic average right now.
With regard to what the average P\E ratio was leading up to the Great Recession… The range for the two years prior was 16-20 – so yes we were trading at above average territory leading up to the financial crisis.
With regard to why the P\E ratio is perhaps the best barometer for measuring valuations… The P\E ratio is the multiple of earnings to share price. For example if a company earns $1 per share per year and trades at $10 per share its P\E ratio is 10. In other words with no growth in earnings it would take ten years for earnings to equal share price. Many investors will pay higher ratios for companies if there is strong growth projected – that’s the justification for what’s called “multiple expansion” which is what we see with the elevated valuations right now.
As for the risk of a correction… We’ve gone the longest period of time in modern stock market history without a correction (3.5+ years). A correction by definition of 10% or more. Additionally the Federal Reserve has been pumping Q\E (money printing) for all but five months since December of 2008. That is set to end in October. Much of the monthly created new money flowed into stocks. Without that artificial stimulus after October stocks will only be able to move higher if investors decide to continue to put new money to work in the stock market based on fundamentals of investment choices.
I hope that’s an understandable explanation of a complicated situation.
Who would be Governor if the election were held today:
Bottom Line: Now that we’re past the primaries we’re getting regular polling data on the Governors race. That enables me to apply my methodology to the numbers. Here’s how it works. I take an average of all polling data in a race. I then evaluate how undecided voters have historically voted on Election Day in that given race and apply those figures to the averages. So if today were Election Day in Florida...
Current polling averages show the following:
And once I apply the undecided voters along history lines here’s the outcome if held today:
Ric Scott: 45.5%
Charlie Crist: 43.7%
3rd Party (Adrian Wyllie): 10.8%
So you see two storylines as it stands now. Ric wins narrowly (1.8%) but that’s actually a bigger margin than the less than 1% margin he won by in 2010. Adrian Wyllie’s Libertarian candidacy is once of the strongest 3rd party showings in modern Florida history pulling votes from both parties.
How many actually earn minimum wage and who they are:
Bottom Line: After yesterday’s nationwide fast food worker protest over wages I felt compelled to share the information that the rest of the media seems not to disseminate. According to the most recent data from the Bureau of Labor Statistics:
3.6 million Workers were paid either at or below minimum wage – that calculates to be 2.6% of those in the US workforce
78% of those who earn minimum wage are white
64% of those who earn minimum wage are part-timers
24% are teens
50.6% are under 24
You can infer from those numbers what you will based on your view and compare it to what’s taking place. My question(s) to the 97.4% of Americans who earn more than minimum wage is why you do? Clearly no law had to be passed for your employer to pay more than is mandated. Additionally it’s clear that overwhelmingly those who do earn minimum wage are young people just entering the workforce. So let me ask you… Where is the unemployment rate the highest? Younger people right? If the minimum wage for entry level work goes higher without in increase in sales to offset it what will happen? Fewer opportunities and more productivity will be required. This means that the group most hurt by an increase in minimum wage are those who are youngest trying to enter the workforce and gain skills to be able to advance.
Here’s one other little factoid. When the BLS first started monitoring this information 13.4% of all employees earned minimum wage. So with only 2.6% at that level today, it’s clear that the free market has more than taken the bull by the horns on this issue.
Does your personality fit your job? There's a way for you to figure it out:
Bottom Line: Most large companies are now using personality type surveys as part of the job interviewing process. Research has demonstrated that those who have a personality that jives with their job are far more productive and less likely to turn over. Makes sense right? Here’s the thing… What you think you are and who you really are may well be two different things…
Here are some different categories for you to consider. Are you:
Extraverted or Introverted?
Are you sensitive or intuitive?
Are you a thinker or feeler?
Do you judge or perceive?
Now that you’ve answered those questions here’s a direct link to a free personality profile test: http://www.personalitytype.com/career_quiz_2
Read the characteristics of each… See which you most closely identify with & answer honestly. You’ll likely be surprised by the outcome. Then compare your personality to your work and see how well matched you are. It’s pretty interesting.
Yikes... Looks like a little more attention to our health care plan options would be a good idea:
Bottom Line: Be honest… How long did you actually review your health care plan options before picking one last year?
According to Aflac, 41% of all Americans spent 15 minutes or less evaluating healthcare plans before signing up last year. We know that you can even read through a single plan effectively in 15 minutes. That’s stunning considering that for the average American the second biggest ongoing expense aside from food and housing is healthcare. By comparison the average American spends 2 hours evaluating TV’s before buying one, four hours looking for a computer, five hours vacation planning and ten hours research a car purchase.
It’s clear that the categories used for comparison are generally fun to evaluate and a healthcare plan isn’t but again… When you consider that next to housing and food, healthcare is your biggest ongoing expense (never mind the health implications to you and your family) it’s clear that we should be more responsible in understanding the options and choosing wisely.