Quote: (05-18-2013 01:51 PM)Kabal Wrote:
In theory, it's important.
But in practice it can be mind-numbing, the imperviousness of market sentiment to intrinsic valuations.
Imagine trying to call the top of the tulip bubble in November, 1636, only to see it double in a few months. And there is no material "E" when it comes to tulip P/Es.
An ultra-low interest rate environment is making all investments look too frothy; everything from government bonds, to investment grade corporate debt, to high yield corporate debt, to stocks look rich.
What looks cheap now is volatility on a historical basis.
But volatility... is well, volatile, so it may not make a suitable source of income, even when it's super-cheap, although it may provide a reasonable source of diversification for one's portfolio.
^ Pretty good reply here
1) There's no single good metric when looking at stocks, although I like P/E on an individual stock basis.
2) Price is always right. No matter the P/E, price action dictates what happens. Look at Amazon to realize P/E as a single indicator is worthless.
Momentum begets momentum. We're in the middle of the most hated rally/bull market, ever. This is definitely due partially to low interest rates making stocks attractive. But not just any stocks - low vol, high yielding stocks are outperforming. Everybody wants to own stocks that pay dividends and 'won't die' if our recovery actually runs out of steam. Which is why this bull market has been lead higher by the world's most boring, stable companies. Further, this is not 1999 where a flood of retail cash has come into the market to bid up stocks for a bubble - the market's been bid up by institutions and high net worth individuals that NEED to put their money SOMEWHERE. This is a good sign. Institutions have far less turnover.
Yields are at all time lows, thus bond prices are at a ridiculous highs. The smallest upticks in interest rates will crush bond holders => people are going to equities. Where else do you put your money? Gold and commodities have proven themselves to be terrible stores of value in recent history.
Are we do for a correction? Yes. probably a 10% correction at this point. Everybody knows it. But right now, the market has zero sellers and zero buyers. nobody knows what to do. IMO, I think this is a good 'hold'. Maybe wait for a dip to actually buy. I wouldn't dare short in front of the momentum though. But P/E as a forward indicator? I wouldn't bet on it.