Tags: Hussman | Stocks | Overvalued | shares

Hussman: Stocks Are Ridiculously Overvalued

Tuesday, 03 Apr 2012 08:20 AM

Economist and fund manager John Hussman says stocks look fine because margins are overvalued, but investors have little reason to buy, let alone to “lock in” the prospective returns implied by current prices of stocks or long-term bonds.

“… elevated profit margins are associated with unusually weak earnings growth over the following 5-year period, and depressed profit margins are associated with unusually strong earnings growth over that horizon,” Hussman writes in a note to investors.

"The ratio of corporate profits to GDP is presently nearly 70 percent above its historical norm."

Editor's Note: Wall Street Insider: The System Is Rigged

Moreover, the most common valuation methods used by Wall Street analysts rely almost exclusively on estimates of year ahead earnings, Hussman notes.

"Embedded in these toy models is the quiet assumption that current profit margins will be sustained indefinitely," he says. "By contrast, a wide range of measures that use "normalized" fundamentals of one form or another are extraordinarily stretched."

At 1,400 on the S&P 500, says Hussman, the market's overvaluation has now reached 70 percent on these measures, which have a far stronger correlation with subsequent market returns than the Fed model or other unadjusted methods using forward operating earnings. “This is particularly true over horizons of 4 years or longer,” he says.

Hussman points out that, in 1982, stocks had a reasonable 10-year prospective risk-premium versus bonds, but both were priced to achieve extraordinarily strong returns.

“Presently, stocks have a weak 10-year prospective risk-premium versus bonds, but both are priced to achieve unsatisfactory returns,” he says.

Fun manager Jim Jubak says the strength of the "risk-off trend" will get a test in the upcoming week when the U.S. Treasury is scheduled to auction $99 billion in two-year to seven-year maturities.

“If yields still drop even in the face of that jump in supply, it means that investors are looking for safety again and are willing to pay a big premium for it in the Treasury market,” Jubak writes at MSN.com.

“If that’s the case then I'd say risk-off is likely to last for a while.”

Editor's Note: Wall Street Insider: The System Is Rigged

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