Tuesday, 26 November 2013

Jeremy "Stocks for the Long Run" Siegel says US Stocks Not Over-Priced

Professor and author Siegel lays out a reasonable case in this hour long video lecture that his thesis still holds that stocks provide the best returns in the long run compared to bonds or T-Bills. Apparently the 5th edition of his famous book is to be out soon with updated data contained in the lecture. In the lecture he argues that there is a flaw in the earnings calculation by S&P which biases earnings down and thus inflates the current P/E calculation in Robert Shiller's well-known CAPE (Cyclically Adjusted Price Earnings, which uses an average of earnings for the past ten years instead of only the past year). Siegel says the gigantic writedowns by a handful of financial companies in 2009 following the financial crisis created a huge earnings hole that overwhelmed the continuing profits of most of the S&P 500. The earnings hit overall just wasn't as bad as the S&P calculation portrays. That 2009 hole will persist in the CAPE average for another five years. He says that as a result the oft-cited over-valuation of the S&P 500 based on current CAPE around 25 is wrong and CAPE is actually below the long term average. He blames the messing up of CAPE on 1993 and 2001 FASB accounting rule changes forcing earnings recognition of writedowns (see around minute 43 of the video).

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