agreed some sectors are overpriced. home builders' multiples are definitely one area you and I agree on.
kbh, homebuilder forward pe for 2007 of 14.5, assuming they hit good numbers. assuming a growth rate of 10% thats a PEG of 1.5... still 50% expensive. Even more considering there is likely no growth for the next few years.
Where the market differs with you (and I) is that there is assumption that 2005 -> 2007 hit will not continue.
regardless homebuilders should have 4-5 PEs if avg growth rates are 5-10% (historically). obviously the market is having trouble ascertaining 2007-2008, assuming there may be a bounce (10-15%) from this steep drop. And yes, the multiple may contract once again.
But you forget - Dow's average forward PE for 2007 is 14 or so, and 5 yr earnings growth rate is 7% right now. Considering 10 yr bonds are paying a under a real dismal 2% [inflation priced in], what choice does the investor have? the dow is shooting off dividends in that range alone.
Once the good old days of long term risk premium return, and you can make 10% in long AAA bonds, pressure on PE contraction will occur (and risk premium of stock earnings growth will drive multiples down), since earnings growth will be under pressure (from high cost of debt) and investors will find easier returns for low risk elsewhere.
Did you see the article in the other thread how Japanese retired investors are desperate for return, buying up US securities and bonds, short their jpy ?? This search for return is why we are here. Indicated by that article, and even looking at CFTC COT, you'll see likely the majority of the yen strengthening that occured was caused by our own returns-deprived hedge fund industry, considering short jpy contracts dropped by 35%.
From this, I perceive a japanese *investor* pullout of our bonds and securities the biggest threat. Sure, it'll normalize our yield curve, but suddenly it will precipitate a giant increase of risk premium on lower quality bonds. After all, if you could make 6-9% on US treasuries, suddenly junk money will be in the 9% range, even without spreads changing. Why take such risks for a significantly smaller percentage of total returns. (4.5% Tnote vs 7% junk debt = 35% risk premium versus 8% Tnote vs 10.5% junk becomes a much smaller 23% risk premium). I'm defining risk premium to buy junk debt as spread as a total percentage of return. Lets find some historical data on credit quality spreads mapped versus 'spreads divided by total yield' ... i'm assuming there is a constant here, just as markets tend to normalize on PEG of lets say 1...
Investors will see the spread between short term and longer term debt (regardless of quality) change significantly, and won't buy junk. Then LBO money disappears.
See you and I agree it may eventually happen. But the market doesn't, and it has NOT happened (in fact japanese / foreign money is tempted to buy more of our crap), so why short now? for the sake of inflation and compounding earnings growth alone, markets are biased upwards. It never pays to be a bear unless your timing is impeccable.
kbh, homebuilder forward pe for 2007 of 14.5, assuming they hit good numbers. assuming a growth rate of 10% thats a PEG of 1.5... still 50% expensive. Even more considering there is likely no growth for the next few years.
Where the market differs with you (and I) is that there is assumption that 2005 -> 2007 hit will not continue.
regardless homebuilders should have 4-5 PEs if avg growth rates are 5-10% (historically). obviously the market is having trouble ascertaining 2007-2008, assuming there may be a bounce (10-15%) from this steep drop. And yes, the multiple may contract once again.
But you forget - Dow's average forward PE for 2007 is 14 or so, and 5 yr earnings growth rate is 7% right now. Considering 10 yr bonds are paying a under a real dismal 2% [inflation priced in], what choice does the investor have? the dow is shooting off dividends in that range alone.
Once the good old days of long term risk premium return, and you can make 10% in long AAA bonds, pressure on PE contraction will occur (and risk premium of stock earnings growth will drive multiples down), since earnings growth will be under pressure (from high cost of debt) and investors will find easier returns for low risk elsewhere.
Did you see the article in the other thread how Japanese retired investors are desperate for return, buying up US securities and bonds, short their jpy ?? This search for return is why we are here. Indicated by that article, and even looking at CFTC COT, you'll see likely the majority of the yen strengthening that occured was caused by our own returns-deprived hedge fund industry, considering short jpy contracts dropped by 35%.
From this, I perceive a japanese *investor* pullout of our bonds and securities the biggest threat. Sure, it'll normalize our yield curve, but suddenly it will precipitate a giant increase of risk premium on lower quality bonds. After all, if you could make 6-9% on US treasuries, suddenly junk money will be in the 9% range, even without spreads changing. Why take such risks for a significantly smaller percentage of total returns. (4.5% Tnote vs 7% junk debt = 35% risk premium versus 8% Tnote vs 10.5% junk becomes a much smaller 23% risk premium). I'm defining risk premium to buy junk debt as spread as a total percentage of return. Lets find some historical data on credit quality spreads mapped versus 'spreads divided by total yield' ... i'm assuming there is a constant here, just as markets tend to normalize on PEG of lets say 1...
Investors will see the spread between short term and longer term debt (regardless of quality) change significantly, and won't buy junk. Then LBO money disappears.
See you and I agree it may eventually happen. But the market doesn't, and it has NOT happened (in fact japanese / foreign money is tempted to buy more of our crap), so why short now? for the sake of inflation and compounding earnings growth alone, markets are biased upwards. It never pays to be a bear unless your timing is impeccable.
