AI
Monday, April 03, 2023 9:12:42 AM
Hi Ken and John, Re: W$W................
It was just before the crash of '87 when Elaine Garzarelli was a W$W guest and brought to my attention her "Magic Number" of 20 as the long average value of P/E + ST Interest Rates. I tested it and then added it to my weekly data collection for market risk. I still call it "Relative Valuation" and here's what it looks like currently:
With its color coordinated border, it's not hard to see that Elaine is probably a bit worried at this time. However, please note that my Relative Valuation Index is slightly different from Elaine's. She used just the 13 Week Treasury in her assessment. Starting early in the New Millennium and the FED's crazy easy money policies I added an "either/or" statement to my spreadsheet. It was to compensate for the FED insanity. I put in "the larger of either Interest Rates or CPI Inflation" as the adder to Price / Earnings instead of just ST interest rates. Historically ST rates have almost always been above CPI Inflation. So, when the FED pushed ST rates below inflation it felt 'unholy' to me. So, the histogram shown above is using the larger of the two, CPI Inflation, for this period since it was a higher value than ST rates.
21.75 is the "Caution" level for my Rel Val index. The current value is 23.77 with my modification. 20 is still the median and below 18 is the classic "Proactive" value. We're a long way beyond that right now.
Elaine's method would put her index at 21.51 or on the high side of its neutral range. (16.7 P/E from Value Line plus 4.81%/yr for the 13 Week Treasury) Mine is higher since CPI Inflation is a greater number than current interest rates.
My modified version of Elaine's excellent work now takes into account the lack of real world thinking by the FED. If short term interest rates were still more market driven I wouldn't have to do this. I'll have to remember to post a note when interest rates return to being something above the inflation rate. It's been a very long time.
Thanks for the Memories about LR and W$W in Review,
OAG Tom
It was just before the crash of '87 when Elaine Garzarelli was a W$W guest and brought to my attention her "Magic Number" of 20 as the long average value of P/E + ST Interest Rates. I tested it and then added it to my weekly data collection for market risk. I still call it "Relative Valuation" and here's what it looks like currently:
With its color coordinated border, it's not hard to see that Elaine is probably a bit worried at this time. However, please note that my Relative Valuation Index is slightly different from Elaine's. She used just the 13 Week Treasury in her assessment. Starting early in the New Millennium and the FED's crazy easy money policies I added an "either/or" statement to my spreadsheet. It was to compensate for the FED insanity. I put in "the larger of either Interest Rates or CPI Inflation" as the adder to Price / Earnings instead of just ST interest rates. Historically ST rates have almost always been above CPI Inflation. So, when the FED pushed ST rates below inflation it felt 'unholy' to me. So, the histogram shown above is using the larger of the two, CPI Inflation, for this period since it was a higher value than ST rates.
21.75 is the "Caution" level for my Rel Val index. The current value is 23.77 with my modification. 20 is still the median and below 18 is the classic "Proactive" value. We're a long way beyond that right now.
Elaine's method would put her index at 21.51 or on the high side of its neutral range. (16.7 P/E from Value Line plus 4.81%/yr for the 13 Week Treasury) Mine is higher since CPI Inflation is a greater number than current interest rates.
My modified version of Elaine's excellent work now takes into account the lack of real world thinking by the FED. If short term interest rates were still more market driven I wouldn't have to do this. I'll have to remember to post a note when interest rates return to being something above the inflation rate. It's been a very long time.
Thanks for the Memories about LR and W$W in Review,
OAG Tom
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