Wednesday, December 10, 2008

The Q Ratio

Bloomberg has an article, Q Ratio Signals ‘Horrific’ Market Bottom, CLSA Says, that's worth reading. The Q ratio, "compares the market value of companies to the cost of their constituent parts,". This ratio was developed my Nobel Prize winning economist James Tobin. At the bottom of bear markets, this ratio is .3. We are currently at .7. That does not point to anything good.

Nevertheless, the article suggests that before the 2014 trough, we could rally in a bear market. Why? The central banker's measures will work (read: deferring deflation), but they will have bankrupted the country and the currency will crash.

Tobin is also the author of Anatomy of a Bear. I've a B&N gift card, and I'm going to get this book.

Admittedly, I'm having some trouble calibrating my own sense of risk in this market. Having been careful to preserve my capital, I don't want to head willy-nilly forward. I'm mindful that if we are to get a rally (even of the bear market kind) there will be time to catch it.


Anonymous said...

Hi Leisa - you may recall that our investing peer par excellence, "MarkM", on Bill's blog 8/1/07, advised using Tobin's as a key macro indicator, as here: "I know that many of you see traders dashing in and out of short and long positions here and haven't the experience (or pain tolerance!) for that. So here is an idea for you to work on. In overvalued markets I park my wife's LT money in a conservative Equity/Income fund. Most of these have a 60/40 blend of stocks and bonds. Returns are solid in both up and down markets. Never spectacular (unless we are coming off a low like 2002 where these funds were all up 20%). It stays there until the next bear market resolves valuations. Then it will be switched into a more aggressive Capital Appreciation fund.It is a very simple timing method that appeals to my value bent.

You will have to decide how you define overvalued/undervalued on your own but I can suggest Tobin's q, Shiller's PE10 or Hussman's peak to peak PE are on the right track. And if you research these funds I would stay away from any that have loaded up on financials on the equity side or have taken on EM or HY risk on the fixed income side.

Just an idea."

So you have a strong endorsement to pursue Tobin's. I have the same book on my Xmas list, along with Terry Burnham's "Mean Markets and Lizard Brains"


Anonymous said...

ah, disclosure: long Hussman's HSTRX, and a little HSGFX

Anonymous said...

My goodness! Someone was actually listening!

OAKBX is my preferred 60/40 vehicle for this trade. Stayed far, far from the financials. Stayed even farther from junky debt. Any number of capital appreciation vehicles will do.

It is okay to have started SCALING IN to this trade. 35% is the max here I'd say. No more.

I believe that was pretty much my parting gift to the readers there. Looks like I was two months early on the peak. :)



Leisa said...

MarkM--So nice to see you. Did you run the Boston Marathon? My book has not come yet, but I worry over my ability to discern it!

Anonymous said...

The Half Marathon. 9 min miles. Was doing in the 8s til the last 4 miles. Too damn hilly! And these 50 year old knees were screamin'.

Napier's book is good but DENSE. OMG.

Read M. Alexander's Stock Cycles if you want to torture yourself. A lot there but the guy writes like an engineer! BTW, he bought the 750low just recently.

I am planning on selling this rally in my trading account. 70% long and happy today at least. Target is 1025 on the Spoo.

Good luck all.


Anonymous said...

Sleepless again, following the twist that this thread took...

As a former Boston Marathoner, I recall that at about mile 20, you'll 1)"hit the wall" at about the same time that 2) you pass by Wellesley College, an all-womens school, and 3) hit the hilly section. You'll have girls screaming at you at the same time that you're trying to concentrate on holding your form together. I did Boston 3x, and had earplugs for the 2nd and 3rd run, and a buddy to struggle with, and was much younger....and won't do it again... at least not the full course!

Flat courses, like "flat" returns (my YTD), are sometimes preferred


Anonymous said...


That's BC you are passing by on Commonwealth Avenue. Heartbreak Hill starts about 9 blocks from my house.

Thanks for the kind words about my post at Cara's.

If you are flat you are doing more than fine.

All posts between Leisa and I take odd twists. That is why there was a shed built for the likes of me.

Looks like this rally is running straight into some tax loss selling.

Good luck.