Tech Stock Bubble a la '99 - '00? Not according to Forward P/E

With the NASDAQ recently hitting 4000, a number not seen since the year 2000, the tech bubble hoopla is again center stage. However, as it was so eloquently put on CNBC, there is more to the story. Looking at the NASDAQ's forward P/E ratio, we are nowhere near the exorbitant and unjustifiable multiples we saw during the last bubble:

As you can see, even looking at the low end of the Forward P/E range in '99 and '00 and the high end of this year, we are significantly below undisputed trouble. However, as I have said before, we cannot use any one metric alone to judge this complex market. Be that as it may, at least we are not judging the viability of tech companies by "eyeballs" anymore...

[Motley Fool] Be Careful With Forward P/E And PEG Ratios

http://beta.fool.com/thebargainbin/2013/03/05/be-careful-forward-pe-and-peg-ratios/26033/

[Zero Hedge] "Everyone Was Talking About A Stock Bubble... Just Before The Last Bubble Burst"

http://www.zerohedge.com/news/2013-11-27/everyone-was-talking-about-stock-bubble-just-last-bubble-burst

Consumer Confidence

A super interesting article on Zero Hedge breaking down the latest disappointment:

http://www.zerohedge.com/news/2013-11-26/consumer-confidence-misses-again-tumbles-lowest-7-months

View The Conference Board's release here:

http://www.conference-board.org/data/consumerconfidence.cfm

Bubble Discussion (cont.): Volume

Continuing from my last post, I had another thought on the definition and subsequent analysis of an equity bubble. One calling card of a bubble I forgot to mention yesterday is increased volume. Many site higher than average trading volume in conjunction with unjustifiably high prices in diagnosing a bubble. So, with that in mind, I took a look at market volume (YTD, since I'm not made of time here) to see what trading volume has to say about this supposed bubble.

In short, trade volumes do not seem to be supporting the bubble theory. In fact, volume has actually been a little light in the past few weeks, comparatively speaking. Since October, only 1/3 of trading days had S&P 500 volumes above the 2013 annual average, and both the 200 day and 50 day moving averages have edged below the annual average as well. These results could be less than telling due to a number of factors, including seasonality, holidays, fund rotation, and my overly simplistic analysis. This is further evidenced by NASDAQ volumes showing nearly the exact opposite: days since October with volumes above the YTD average are a whopping 70%, with the 50 day simple moving average crossing above the 200 day and the YTD marks. Could this be due to sector rotation? Rebalancing? Hard to say.

While far from conclusive, I do feel fairly comfortable stating that the volume data do not support defining the current domestic equity market as a bubble. Needless to say, we will keep an eye out for any changes, however I do not expect volumes to pick up dramatically through the end of the year due to the holidays.

The Dreaded "B" Word

Hello readers! It has been a while (2+ years) since my last post; life somehow has a way of getting in the way of our daily rituals. In any event, my goal is to resume writing regularly again, so here it goes:

 So, the "B" word. Bubble. There seems to be an increased volume of the B-word lately, particularly with regards to equities. While some talking heads have a vested interest in stirring the pot, increasing volatility, and drumming up more short interest, it is difficult to ascertain how Main Street Joe feels about current stock prices and (more importantly) valuations. In any event, to properly judge weather or not we are "actually" in "bubble" territory, we must first define (or at least set some parameters) bubble. Even here at this most basic phase of our analysis we see some inconsistencies. I heard one pundit on CNBC attempt to define an equity bubble as a market environment where the financial news is playing at her dry cleaner's, or when her doorman asks her how much she is up today. While these decidedly unacademic measures are (at best) difficult to quantify, this person's analysis was that we were not anywhere near an equity bubble. Others begin to feel gaseous when equity indices are trading at historic highs, or at least above their averages. According to this S&P 500 P/E Ratio, we are currently kissing 20x earnings, with the 100+ year mean and median at 15.5 and 14.5x, respectively. While this is nowhere near the record high, we are also not anywhere near value territory. Being that we are not in value land, let us venture to world of growth analysis. Looking at one of my favorite statistics, the PEG ratio, we are currently looking at anywhere from 4.4x to 5.5x earnings on the S&P (depending on who's numbers you use for P/E and EPS growth). The author of this Seeking Alpha article seems to think that is too high compared to the widely accepted multiple of 2.5x. I was taught (as a value guy, admittedly) to look for a number closer to 1. This is to say, the P/E ratios we are seeing don't seem to be justified by current, or even projected growth rates.

 But bubble? That's a fighting word, to be sure. Truth be told, most economists seem to think bubbles can only truly be diagnosed in hindsight, and I (unfortunately) tend to agree. Trying to define the current market as a bubble or anything else is all but impossible. We are up more than 20% YTD. Make no mistake, that is a huge and largely unprecedented gain. But we can't really say for sure if this is a bubble until it is too late... 

Currently I am long equities with put options as a hedge.