S&P 500 Analysis & ETF Trading

[kiy]

Buffett Wary If Ratio Market Value Of Stocks Greater Than 100% Of GDP

...Note date 02/22/14
The nation’s preeminent investor, Berkshire Hathaway's Warren Buffett, has often said that probably the best single measure of where valuations stand at any given moment is the ratio of the total market capitalization to the total dollar value of the GDP. And any time that valuation stands at more than 100% of the total goods and services in the economy means it is time to be wary about common stocks. It’s a logical conclusion that the economic output of a country and the earnings of its companies, and so their valuation, should bear some relationship to the attraction of investing or not investing.


The ratio today is 115.1% of the $16 trillion GDP. In the year 2000, just before the market cracked in the dot-com bubble, the market capitalization was 183% times the GDP, according to a chart published recently.

And in 2007, just as the housing credit bubble was bursting, the ratio was 135% times the GDP. These are all times when the stock market looks overvalued.

Then, the buying point for stocks was reached in March 2009 when the ratio of market cap to GDP was only 73%. The numbers were somewhat different in 1929 when the market cap already was in decline and amounted to 81% of GDP, but fell precipitously to 25% of a ruinous GDP in 1933.
By comparison, in the bear market of 1975 the ratio of stock valuation to GDP was 75%, definitely a buy signal if you were Berkshire Hathaway. Even a better opportunity was 2009 when the ratio of stock valuation to the economy fell to 50%. It was shooting ducks in a barrel and Buffett said so publicly several times.

Then there’s the perhaps misplaced optimism in the market. Margin buying of stocks using borrowed money rose to $445 billion last month, an all-time record. And this is after the market rose 30% plus during 2013 despite the scarcity of excessive profitability in most household name multinational corporations. Rather, earnings are expected to revert to the mean, which should run parallel to the low single digit growth of many companies.

Example: Procter & Gamble, one of the most esteemed household product companies, is giving advance notice its top-line revenue growth should fall by 2% from 3% to 5% to 2% to 4%. Don’t expect excessive profitability. Don’t expect another run in the stock. Same predicament for Coca Cola and the grocery and restaurant chains that serve the middle class.
Most stock market peaks have coincided with an elevated level for the stock market to GDP ratio. It was the way to see the dot-com bubble arriving as well as the approaching storm of the housing and credit bubble in 2008, which severely damaged the infrastructure of Wall Street. As Buffett has said, “The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.”
Next...March 2014...good read...
http://advisorperspectives.com/dshort/updates/Market-Cap-to-GDP.php

Chart isn't showing dates... so go to their link...
http://www.vectorgrader.com/
...this page is outstanding...
http://www.vectorgrader.com/indicators/indicator#value
...and this page on currencies; which may prove the more important as Russia and China start trading commodities in their currencies and not the all emcompassing U.S. dollar(followed by India and Iran=so should we let Israel start a war in the middle east...?...especially the oil pricing...the dollar crashes...the recent currency wars are uncalled for and may end badly..
http://www.vectorgrader.com/indicators/purchasing-power-parity
Achieve high returns while hedging against a dollar decline by investing in developed market currency ETFs...
http://investorshub.advfn.com/boards/post_new.aspx?board_id=25187
http://www.vectorgrader.com/strats/currency

www.vectorgrader.com