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.