September 13, 2024
By Steve Blumenthal

“We are here, we’d be better off here.”
— Steve Blumenthal, CMG, On My Radar

 

We talked about valuations last week and received many thoughtful responses. I want to share one particularly excellent one from Dan S: “Hi Steve, I have loved reading your weekly letters for a number of years now. When speaking of and addressing current equity valuations relative to history and the various valuation metrics that you share with us, I believe there is one aspect of market valuation that is being overlooked right now. I believe the equity market understands that the debasement of currency will be the only way out of our current debt situation. I also think that the markets are discounting this prospect.  

“Since equities can be used as a currency debasement and inflation hedge to some degree, the market is discounting future equity prices because of the likelihood of currency debasement. Historically speaking, current valuations may be stretched, but looking forward, they may be fairly priced given the probable currency debasement and inflation outlook. In the past, we have never been this stretched in terms of debt load, except maybe back in the 40s. Your thoughts? Much appreciated!  Thank you for all of the hard work!”  

First, Dan, thank you for your kind words and perspective. Your argument is sound, and I believe you are in the right direction. Though, like most things in our business, the answer is nuanced.    

The answer, I think, falls somewhere between historical fair value and an upward bias. If the 60-year historical average for Median PE is 17.7, perhaps a Median PE of 20 is the currency debasement-adjusted number. A Median PE of 20 sits slightly above the “We’d be better off here” green arrow in the following chart. We can debate the point, but Dan presents an interesting perspective. 

Take another look at the above chart.  

Based on current earnings, a 20 PE would bring the market down to approximately 4,200. The S&P 500 Index closed at 5,595 yesterday. It will take a market decline of 25% to reach 4,200. That seems logical to me. 

Felix Zulauf shared the following chart in a recent research piece. (I liked the organized data, so I’m sharing it with you today with NDR’s permission.) The chart creates a long-term trend line, showing the market at points that neared or exceeded the upper trend line as well as where it neared the bottom trend line. We can all agree that markets move from periods of undervaluation to overvaluation over time. We can also agree that when we buy an asset at a good price, we do better than overpaying for an asset. There is a reason one of the greatest value investors of all time, Warren Buffett, is sitting on $276.9 billion in cash. 

Before your eyes roll to the back of your head, here’s how to read the chart: 

• First, note the red ‘we are here’ arrow.  

• P/B = Price to Book 

• P/D = Price to Dividend 

• P/E = Price to Earnings (actual trailing 12-months) 

• The green ‘we’d be better off here’ arrow gives us a sense of the valuation attributes on average.  

• If Dan’s currency debasement argument is correct, we likely won’t hit the bottom dotted trend line. We may even decline back towards the middle. Looking at the right scale in the chart, which plots the S&P 500 index level, see where 4200 sits between the dotted trend lines and median PE 3733 sits slightly north of the middle—both reasonable targets in my view. 

• The idea here is to gain a historical perspective to understand where past extremes existed.  

• Lastly, compare the CURRENT (red “we are here” arrow) to the average in the yellow, highlighted top section. The Price to Book is 4.7 vs. 2.9. The Price to Dividend is 78.5 to 49.6. The Price to Earnings is 25.7 to 20.1.  

• Bottom line: Compared to past market peaks shown near the upper end of the dotted trend line, only the March 2000 valuation high (letter L in the data box bottom right) was higher. The word bubble is appropriate. 

One last valuation chart, and we’ll call it a day. The following looks at the total stock market cap vs. Nominal Gross Domestic Income. It then plots a long-term trend line (dotted, up-sloping, blue line). Again, the dotted line could be shifted higher using Dan’s logic.   

I have trouble moving too far from historical average valuations, so I’d use the work to help set investment entry targets. And if you believe inflation is due to continued currency debasement, as Dan and I do, then perhaps shift your entry targets slightly higher. Bottom line: It’s hard not to see how overvalued our current situation is.  

Source: NDR

Grab a coffee and find your favorite chair. We’ll take a quick look at the long-term trend in interest rates and the current direction in yields. 

On My Radar: 

• Assets in Inflationary Regimes – Louis Vincent Gave
• Trade Signals – The Long-term Trend in Interest Rates 
• Random Tweets 
• Personal Note: Bikes and Boston

 

Finally, note the “Sell: Long-term bonds” in the Inflationary Boom quadrant. Agreed.

To that end, I wrote a paper titled Understanding Private Credit. You can sign up to read the paper here. You’ll learn more about the space, and if you are interested and qualified per regulatory requirements, we will be happy to share select ideas with you. 

Please see the important disclosures in the disclosures section below.

Two more:

Source @spomboy

Source: @gave_vincent

I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep On My Radar.

You can follow me on X (formerly Twitter) @SBlumenthalCMG.

You can also listen to my podcasts on Spotify, and find me on LinkedIn.

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Personal Note: Bikes and Boston 

Coach Sue’s Malvern Prep Friers soccer team was behind. With just three minutes left in the game, they took the lead. Lawrenceville then countered and tied the game with less than 60 seconds left. The game finished 3-3.  

The coach huddled the team and said, “This one feels like a loss, doesn’t it?” It did. She went on to focus on the positives. 

The team has three wins and one tie in the season so far. This was the first time the boys had to come from behind. All good things. Next up is a 6 pm game tomorrow night. It’s going to be a good one. Go Friers! 

The weather in the Northeast has been and looks to continue to be spectacular through Monday. The leaves are just starting to change. A wonderful time of year.

Golf is on the agenda for tomorrow and again next week, as I’m flying to Boston for meetings next Wednesday, which includes gold with a good friend (hat tip and thank you to John L). We’ll be playing Cohasset Golf Club, a Donald Ross-designed course and one of John’s home courses.  

I was in NYC for meetings last Monday. I needed to get downtown, and my daughter Brianna suggested I take a CitiBike with a boost. This was a first for me, and biking down the West Side Highway, the boost was tremendous! Start peddling, and the bike speeds up for you. As Brianna put it, “The boost is a life-changing experience.” I concur.

Brie and Steve (dad w computer in front basket)

But before going to Boston, golf at Stonewall is on this weekend’s plate. I thought I’d share a picture of Stonewall taken by my good friend Michael Gale. He walks the course almost every morning, and I’m always happy when he sends a photo my way. If you’ve joined me as a guest at Stonewall, shoot me a note with your guess as to which hole this is. 

Stonewall Golf Course, Elverson PA (photo by Michael Gale)

Hope you have fun plans in your immediate future. Thanks for reading!

Steve

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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
TAMP Advisor Client Webiste – www.cmgwealth.com

Forbes Book – On My Radar, Navigating Stock Market Cycles.  Stephen Blumenthal gives investors a game plan and the advice they need to develop a risk-minded and opportunity-based investment approach. It is about how to grow and defend your wealth. You can learn more here.

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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

Follow Steve on Twitter @SBlumenthalCMG and LinkedIn.

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Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.Please take note of the following text:

 

“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”Please take note of the following text:

 

“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”