GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 12

[Saras]

Hey, corpfin talk!

Depending on what you mean in the aggregate, P/E is as bad a metric as one can get, barring P/S. If you wanna go static, go EV/EBITDA, otherwise - DCF all the way.

Oh, and I won't be in Vienna next week apparently, but will go there end of Jan - beginning of Feb. See ya then.

[HershOstropoler]

"P/E is as bad a metric as one can get"

Depends on why you think it is a bad metric.

Also, I almost forgot to warn you about Vienna. It sucks.

[Saras]

Hey, it's not like I'm going there for pleasure - bar the pleasure of drinking beer with a prominent Austrian scholar

[Adam Smith]

Originally posted by HershOstropoler
Good enough for me in the aggregate.

Macroweenie


(All in good fun of course )

[Sten Sture]

Let's all go to Vilnius while Shares is away! (can you imagine going to Austia for fun??)


Ost-land - here is an example of why market capitalization weighting an Index P/E ratio can be distorting to the valuation level of the broad market:

Lets look at two components of the S&P500 at the end of Q1 2000, roughly the market peak. The S&P500 was around 32x forcast earnings at the time.

GE was trading at 52x estimates, at ~$52 and had a market cap of ~$500 billion, and revenues of a little more than $110 billion.

Ford was trading at 4x estimates, at ~$25 and had a market cap of $44 billion, and revenues of $160 billion.

If you cap weight an index of F and GE, you get an index P/E of 48x since the index is 92% GE.

However, if you GDP/revenue weight the index you get a P/E of 23x, since the index is now 59% F.


Effectively what happened to the Indecies in the late 90s was the largest cap became the most expensive as investors tracking historical price performance took money out of the Fords of the world and bought the GEs. The cap weight bias got so bad that the 40 biggest market caps in the S&P500 accounted for more than 50% of the index, while accounting for less than 10% of the 'GDP' value. The average stock was actually getting cheaper while the top quintile was getting more and more expensive. Classic steal from the poor and give to the rich.

Has it been brought up on these boards that CNBC is owned by GE?? There's a conspiracy theory that has plenty of validity!!

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The markets were certainly out of whack, and the Fed, SEC, Treasury, or at least AIMR , or god help us the News! should have been more vocal about the potential problems.


Hedonic deflators are a good theoretical idea, nice new stuff can be better than old crappy stuff, but I doubt seriously if they will ever be properly implemented.


The consumer debt problem is a longer term issue that will certainly slow future growth rates, but I have no idea if it has run its course, or if it still has a long way to go. I have been thinking it is a problem since in the mid 80s...


I think you are correct on existing home medians at 160 vs 140, my bad. Out here everything is 800k, so 20k is just a rounding error! Existing outsells new production 10-1 iirc. Perhaps what we should be looking at for afordability is the 20th or 25th percentile. I can't buy a house or I'll screw-up the numbers!

[Saras]

One can ski in Austria, right? Right?

[el freako]

Just thought I'd throw in a bit of analysis I did today:

Trend adjusted GDP per head at current PPPs (trend adjustment made using the D-P function).

data for 1991 and 2001, EU average=100%

Canada: 118%, 113%
United States: 147%, 138%

Australia: 110%, 104%
Japan: 117%, 104%
New Zealand: 87%, 83%

Austria: 106%, 111%
Belgium: 106%, 109%
Denmark: 112%, 114%
Finland: 102%, 104%
France: 113%, 101%
Germany: 105%, 104%
Greece: 61%, 64%
Iceland: 112%, 111%
Ireland: 77%, 111%
Italy: 105%, 102%
Netherlands: 103%, 114%
Norway: 121%, 123%
Portugal: 63%, 70%
Spain: 80%, 84%
Sweden: 107%, 102%
Switzerland: 133%, 118%
United Kingdom: 100%, 103%

What is striking is that the only country not in the EU to gain on the EU average was Norway - every other country saw slower income growth.

(source: OECD)

[TCO]

Could you explain that a little more? (what is PPS, what is the trending. What is D-P? What does the number mean (1 year gain?) And give more "so what?"

[Sten Sture]

Here's a prelim until e f is around...

PPP is purchasing power parity. So I am assuming that GDP per capita divided by PPP would be some thing like I make $10 bucks, and a burger costs $5, you make $12 bucks and a burger costs $4 -> I am 100% you are 150%. Something along those lines.


CO you have the con, sir.

[DanS]

This doesn't include the four tigers. I would be interested in seeing how they stack up.

[TCO]

Originally posted by Sten Sture
Here's a prelim until e f is around...

PPP is purchasing power parity. So I am assuming that GDP per capita divided by PPP would be some thing like I make $10 bucks, and a burger costs $5, you make $12 bucks and a burger costs $4 -> I am 100% you are 150%. Something along those lines.


CO you have the con, sir.

Should that be how you look at it? Or should you just equate things using currency rates.

[DanS]

I've been curious about this question a lot lately, but not in any systematic, educated manner.

I assume that the currency rates are only relevant on tradeable goods and services, such as 12% of GDP imports, 8% of GDP exports for the US, and those products which those imports/exports impact. We mostly import goods and manufacturing is only 17% of our GDP in addition. So for goods, it's seems quite important in context.

But for everything else, its importance seems quite minimal. Services as they're currently configured don't seem very tradeable, but you can see some trading in things like call centers and back-room operations. I wonder whether trading in services will increase like they have for goods.

I would be interested in hearing more about this.

[TCO]

But currency is the medium of exchange.

[DanS]

Right, but if you are only capable of exchanging 10% of your economy, wouldn't currency be irrelevant for most of the economy?

[TCO]

no. Not as long as there are currency markets. The dollars still get traded.

I guess what scale you use depends on what question you are answering. If you want to know how much wealth each person creates, I would use a scale with currency. If you want to know how good it is to live there, than maybe some scale that uses productivity versus what you can buy in the local country is useful.