Thursday, April 1, 2010

Are Stocks Expensive Today?

Investors determine how cheap or expensive a stock is by using a metric called a P/E ratio.  P/E means Price to Earnings, and it is simply the price you pay for a company in relation to how much money that company makes.

Robert Shiller, the Yale economist, has recently put together a long term chart showing how "expensive" the stock market is going back to 1881.

He divides the market into 5 sections with the 5th being the cheapest and the 1st being the most expensive.  As you can see by the chart, stock prices have just crossed back into the most expensive sector:


Does this mean that stocks will not continue to go up?  Of course not.  As you can see by the chart, other than a brief period last year stocks have been very expensive since 1995, and the market has the ability to stay irrational for much longer than people expect.

However, the following chart shows the average 10 year performance for investors, depending on which section they chose to enter the market in. 


The average return for an investor entering in the red? 1.7%

The average return for an investor entering in the grey?  11%

I prefer to buy things when they are cheap, and this chart shows the market as extremely expensive.

Home Price Declines Continue

The Case Shiller home price index has fallen again month over month.  Four cities; Charlotte, Seattle, Tampa, and Las Vegas have hit new crisis lows in price.

The following chart shows the most recent "housing recovery," which may end up looking like a speed bump down the side of a mountain:


Let's just hope the Federal Reserve does not stop buying mortgages....

Fed Purchase Programs End

Over the past 12 months the Federal Reserve has purchased $1.25 trillion in mortgages.  They have, in essence, been the market for new loans.

Wednesday marked the last day of this year long program, meaning that they have removed themselves from the market.

Everyone is expecting major problems to come from the market with their absence, but I look at it as only handing the baton.  The passing will go to the Government Sponsored Entities (GSE's) Fannie Mae, Freddie Mac, and Ginnie Mae.

This was a pre-planned event and the foundation for this passing was poured on Christmas Eve last year when our leaders removed the loss ceiling from these entities.  (This means they can now lose an infinite amount of tax payer money with endless bail outs as we move forward)

And that is exactly what has happened.  They have become an endless black hole for money, and we continue to send them money every quarter to keep them solvent.

This week we found out that the seriously delinquent percentage of loans at Fannie Mae has climbed to 5.52%, double where it was a year ago.

With the Fed out of the way these monsters will become the entire mortgage market.  The losses they incur will be beyond any current estimates.  The government will continue to bail them out, and the Fed will continue to bail out the government with freshly printed bills.  It is all one beautiful circle of destruction.

Commercial Mortgage Delinquency Update

The two largest companies that show the current health of the commercial real estate industry have released their data for March.

Real Point shows the Commercial Mortgage Backed Securities (CMBS) delinquency for the month of March crossing 6%.  TREPP now has the delinquency at over 8%.


After a slowing month over month percentage increase in February, which increased the hopes for many that the worst was over, the month of March clocked in at the highest month over month delinquency rise ever.

Elizabeth Warren this week on CNBC said that by the end of 2010 half of all commercial real estate loans will be under water.

This is all frightening news for a market that needs to refinance $1.4 trillion in debt over the next 3 years.

The following chart shows the month over month delinquency rate for each type of property.  As you can see the rise in the month of March for the multi-family (apartment) sector was tremendous: