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NEW$-TO-U(SE) was launched on January 2, 2009. In addition to providing readers with investment-pertinent facts, trend analysis and other expert views and opinions, NTU makes regular assessments of U.S. equity markets, offering detailed and unbiased valuation analysis and clear investment stances taking into account both risk and reward potential. Here’s the record (click on chart to enlarge in new window):


And the details if you want to do due diligence (for all Equity Valuation comments, click on green light in the sidebar):

Pointing up   On March 3, 2009, when the S&P 500 Index was below 700,  NTU explained and documented why U.S. equities were extremely cheap and offered a very attractive risk/reward ratio. NTU also introduced The Rule of 20 method of valuing equity markets. NTU’s detailed and rigorous analysis concluded that equity markets were clearly undervalued with very little downside risk. (S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years)

Pointing up   On December 8, 2009, NTU explained and documented that, at 1100, caution was now warranted given that

“This is the first time since March 2009 that the Rule of 20 gives such downside against so little upside”. (…) “Given the fragility of the economy, of the banking system (housing and CRE remain dangerous), of the US dollar and the US budget deficit, equity markets that are merely fairly valued are not particularly attractive.

In conclusion, US equities are fairly valued using annualized Q3-2009 eps and 2% inflation. They could rise another 8% to 1200 (S&P; 500) if Q4-2009 reach the expected $67 level but the risk/reward ratio has become unfavorable for the first time since March. (US EQUITIES VALUATION ANALYSIS: DUCK, YOU (HAPPY) SUCKERS!)

Pointing up   On June 2, 2010, NTU posted that U.S. equities had become undervalued again at 1090 and that, barring deflation, they could rise to between 1240 and 1320:

Equities are thus currently 9-16% undervalued depending on whether one uses current trailing EPS or “normalized trailing EPS” using Q2 2010 estimates. Using 1.0% inflation, fair value would rise another 5% but such a low inflation rate may be too low for comfort unless monthly core inflation strengthens. (US Stocks Are Cheap But Beware of Deflation).

Pointing up   On November 7, 2010, still positive at 1225:

(…) On that basis, the S&P 500 Index at 1225 sells at 15.5 times, right on the historical median, pleasing both bears and bulls. However, the more appropriate Rule of 20 says fair value is at 19x EPS (20 minus inflation of 1%), or 1500 on the Index, a big 18% undervaluation. (…) investors might have the best of all world: a very cheap equity market, rising earnings, no double dip, very low interest rates for as far as the eye can see, reduced probabilities of deflation and, just in case, the Fed unlimited QE puts in the back pocket. (SO! WASSUP? Cheap Markets)

Pointing up   On January 28, 2011, even though valuation remained reasonable, the risk/reward ratio turned less attractive at 1285. Economic trends were suggesting  muddling-through at best, right when economists were becoming more positive.  “Even notable bears have mellowed their stance” and risks of negative surprises were now pretty high.

From a valuation standpoint, the Rule of 20 continues to point to 1500 on current trailing earnings of $79-80, for a 15-20% upside potential to fair value. This remains a good target for this year. However, the risk of a technical correction towards the 200 day m.a. (1170, -10%) is not insignificant, skewing the risk/reward ratio and raising a yellow flag for the shorter term. (YELLOW FLAGS ON EQUITIES)

Pointing up   On March 29, 2011, NTU published US EQUITIES: APRIL PEAK?, realistically warning that apparent undervaluation was being threatened by rising inflation and dangerous groundhogs:

While the Rule of 20 provides a rigorous mathematical and time-tested approach to PE multiples on US equities, it does not account for external risks. While many external factors are at play at any given time, it is fair to say that the current environment has more than its fair share of known unknowns (see KNOWN AND UNKNOWN UNKNOWNS (GROUNDHOGS)), many of which are potential game changers (list followed).

Liquidity is currently flowing liberally in the US economy and into its stock market. Yet, many of the above noted groundhogs could quickly change the outlook significantly. In addition, the era of excess liquidity could well end abruptly on June 30th or, more likely, fade away gradually during the summer months.

It is therefore likely that high uncertainty will keep PE ratios below what they would otherwise be in a more “normal” environment.

This is why caution is warranted here. It will be psychologically very difficult for investors to bid stocks up when PEs are no longer terribly attractive and given the number and dangerousness of the groundhogs out there.

Pointing up   On August 15, 2011 as politicians on both sides of the pond were playing Russian roulette with already sick economies, NTU pondered whether it was time tp take advantage of the significant undervaluation in U.S. equities at 1180:

Although rare and appealing from a value stand point, the current 21% undervaluation is not a guarantee of positive returns. In the last 90 years, similar undervaluation levels have not been followed by positive returns in the following circumstances:

  • Major war.
  • Deflation.
  • Rapidly rising inflation.

US inflation has been rising at a fast clip in 2011, from 0.8% in January to 3.6% in June (July CPI to be released Aug. 18). This very rapid rise in the deflating component of the Rule of 20 has been a major factor in my downgrading of equities during the early part of 2011. In effect, the S&P 500 Index went from a 21% undervaluation in November 2010 (1185) to a much less appealing 7% undervaluation last June (1320). The rise in the inflation rate cut the Rule of 20 fair PE by 2.8 points, offsetting the 14% jump in trailing earnings during the period.

(…) the way the economy is going, a total surprise to the Fed and to the economist community in general, who also used “transitory” to qualify the spring’s soft economic data. Fortunately, my readers have been repeatedly warned that the world was actually not transiting to anything pleasant (THE ECONOMIC AFTERLIFE (June 6),EQUITIES: TIME TO GO FISHING but NOT BOTTOM FISHING!(June 13), THE US ECONOMY NEEDS ANOTHER “MIRACLE” (June 17), EQUITIES: CAREFUL OUT THERE! (July 7).

I then offered 3 scenarios and took side this way:

For my part, given that we are only in mid-August (see SEASONALITY OF EQUITY MARKETS) with so little visibility and such high volatility, I remain on the sidelines for a while longer even though my fishing season is over (sigh).

Pointing up   On November 8, 2011, right in the middle of the Eurozone crisis I began my post (TIME TO INCREASE EQUITY EXPOSURE) with:

I have been very cautious on US equities since April 2011, warning that good apparent valuation would be overwhelmed by the significant macro risks. Recently, the US economy has distanced itself from recessionary risks, at least for the shorter term, and US inflation has started to recede, providing relief to consumers and a more solid background for valuation.

I then explained and documented the reasons why the Euro-scare had reached its high, concluding:

This is a binary situation and Angela Merkel will not want to go down in history as the euro sinker. The writing is on the wall and that German wall will also fall.

Then, I proceeded to explain and document the fact that the U.S. economy was not double dipping and that, in fact, it was doing surprisingly better:

Economic forecasts are more upbeat while inflation is tapering off.

US employment is slowly recovering The U.S. labor market is edging forward, with fresh data suggesting October’s modest job gains are continuing into November.

The US LEI keeps rising, gaining 0.9% in October after 0.1%in September and 0.3% in August. The October advance reflected gains in many areas that have been lagging in the recovery so far.

With the economic background more positive, highly attractive equity valuation levels became irresistible:

At 1221, the S&P 500 Index is selling at 12.9x trailing EPS. The last time the trailing PE fell below 13 was in March 2009. Prior to that, one has to go back to 1989 to find PEs below 13, a period when US inflation was in the 6% range.

The Rule of 20 takes inflation into account when assessing equity valuation. Under the Rule of 20, the appropriate PE should be 16.5 (20 – 3.5) which, using $94.75 trailing EPS gives a fair value of 1563 for the S&P 500 Index.

(…) Of course, risks remain, particularly from the political side. This is why valuation is so attractive. However, the Euro risk has entered its “terminal” phase and while US politicians continue to act … as mere politicians, the resiliency of the economy and the easing of inflation, coupled with extraordinarily low interest rates promised for “an extended period” and ample liquidity, provide a good background for US equities.

Pointing up   On March 19, 2012 (EQUITIES: IT’S SPRING AGAIN!)

The big difference with the current situation compared with last year’s is that the risk is currently centered on earnings while in both 2010 and 2011 rising inflation was the reason for valuations getting less attractive. Changes in inflation rates are more gradual than earnings movements which can, at times, be sudden and violent. Thus, risk is more significant at this point than last year, something which we must integrate into the risk/reward analysis.

The 18% upside to fair value remains superior to the downside but not much. A more balanced risk/reward equation would be reached near the 1450 level, only 3.3% above current the current level.

Many commentators are reminding investors of the fact that equities peaked in the spring of both 2010 and 2011. So the next 8 weeks will be challenging because everyone, all mindful of left tail risk and knowing everyone might want to “sell in May and go away”, might want to get ahead of the pack and sell in April.

In 8 weeks, Q1 earnings season will be almost over. Let’s see how it goes. Meanwhile, assess your equity exposure, manage your risk and watch the technicals.

Pointing up  On April 5, 2012 (EQUITIES: MIND THE GAP!)

Given the state of the Eurozone, the continued weak trend in China and my relatively pessimistic analysis on the U.S. consumer (FACTS & TRENDS: The U.S. Consumer About to Retrench), I expect economic news to err on the negative side during the next several months, prompting investors to remain cautious, even more so with the U.S. elections approaching, and the U.S. fiscal cliff just on the other side.

For these reasons, I sense that it is unlikely that markets will reach “fair valuation” (1650) within this complicated context. A repeat of last spring is more likely: in April 2011, the S&P 500 came within 10% of the Rule of 20 fair value before correcting (18%!). If 90% of fair value is all we can hope for, that’s 1485, less than 10% above the current level.

Given the “technical gap” which might get aggravated by disappointing earnings, 10% upside does not provide a good risk/reward ratio.

The yellow flag if raised.

Pointing up  On April 30, 2012 (EQUITIES: YELLOW FLAG WAVED HIGH)

Given the 9% “technical gap” which might get aggravated by disappointing earnings, 10% upside does not provide a good risk/reward ratio.

Pointing up  On June 6, 2012 (BANKING (BETTING) ON BANKERS?)

The S&P 500 closed at 1278 last week, down 8.7% from 1400 when I raised the yellow flag on April 5 (EQUITIES: MIND THE GAP!) and again on April 30 (EQUITIES: YELLOW FLAG WAVED HIGH). We are now right on the 200 day m.a. (1286) which is still rising. More importantly, equities are now 27% below fair value (1765) under the Rule of 20, slightly worse than in the summers of 2010 and 2011.

(…) fair value has continued to rise along with trailing earnings and declining inflation rates. Seems like perfect timing. (…)

We could well be about to get a big equity rally. Fear is extreme and visibility is very low, explaining the very attractive valuation. Normally, this is the time to close your eyes, pinch your nose, take a deep breadth and buy stocks.

It may be my age, or the fact that the salmon fishing season begins shortly but, for now, I’d rather be safe than sorry. I am sticking with an income and return of principal theme, not increasing equities overall.

Here’s why:

  • The game of chickens being played in Europe is too complicated with stakes and repercussions beyond understanding.
  • There is clearly a general bank run in Europe, not only from South to North but now from Europe to Switzerland and the U.S. Where and how that ends up is impossible to forecast.
  • The Eurozone economy is shrinking at an accelerating pace and complicated politics is in the way of most solutions.
  • This eventually has to impact corporate America which derives 45% of its revenues (S&P 500) from abroad.
  • American politicians are playing their own game of chickens. Based on recent experience, investors are unlikely to enjoy the spectacle of these headless hens fighting their ways towards stupidity supremacy before taking everybody down the fiscal cliff they have created.
  • All this while the U.S. economy is weakening, never having recovered from the previous downturn.
  • China has its own political intricacies while its economy is “surprisingly” weaker than expected.

Central bankers are watching the games of chickens, shouting advices in ways never heard before, warning the chicks that the Banks are running out of tricks to meet the swelling challenges. Should we bet on Bankers being heard, and listened too?

If this is the only hope, I’d rather go fishing peacefully. Bankers often also require visions of Armageddon before acting.

I have bought equities in March 2009, and in the summer of 2010 and again in August 2011 when undervaluation was also extreme due to the difficult economic and financial environments. This time, the economic challenges around the world are amplified by the complex (Europe), self-centered (U.S.) and intricate (China) political complications.

Stocks are very attractive, but the environment is too toxic. This chicken is willing to leave money on the table until he feels safer. Better be safe than sorry.

Pointing up  On November 27, 2012 (The Shiller P/E: Alas, A Useless Friend)

U.S. equities are very cheap currently. While Q3 earnings were down somewhat (-4.2% Q/Q, -3.6% Y/Y), they are not in free fall like in 2007 when they dropped 13.2% in Q3 2007 from their Q2 peak level. Also, inflation remains contained in the 2% range and oil prices, a big driver of inflation, are behaving reasonably well currently. Inflation was rising rapidly in the U.S. between August 2007 and July 2008 which, combined with declining earnings, caused a sharp 18% decline in the Rule of 20 fair value (yellow line in the Barometer chart above) between August and November 2007.

The U.S. economy has been showing encouraging signs lately. The Fed is printing money like there is no tomorrow (literally) and is actively keeping interest rates to the floor, the ECB is taking care of the Eurozone fat tail risk and China seems to have stabilized its economy and could be about to re-stimulate more aggressively. Normally, such an environment is quite enough to unlock a cheap equity market and justify a green light on equities.

Yet, I am keeping a yellow light for now, essentially because of the looming fiscal cliff which, with odds no better than 50-50, would cause a U.S. recession as early as Q1 2013. This would most likely axe 2013 earnings by 10-20%, eliminating most if not all of the current 25% undervaluation. Betting one’s own money on politicians is generally not without peril. The current undervaluation is so large that I would rather wait to see if politicians deliver or not. This has been a wise approach in Europe.

On December 18, 2012 (GREEN LIGHT ON EQUITIES)

I am partly re-committing to equities after having been cautious since April 2012.

  • The S&P 500 Index is 25% undervalued based on the Rule of 20.
  • Earnings have peaked but are not collapsing like in 2007.
  • Inflation has slowed and seems unlikely to re-accelerate soon.
  • The U.S. economy remains ok. Avoiding the fiscal cliff removes a big short term threat. Christmas sales look ok.
  • Oil prices are not a big threat although Middle East tensions remain.
  • The Fed keeps pumping.
  • China is not hard landing, actually showing signs of re-acceleration.
  • Europe remains in poor shape but the ECB will act as a backstop if things get worse.
  • Technically, U.S. equities look good with stocks above the rising 100-day and the 200-day moving averages. Technical downside is 1390 on the S&P 500, -3.3% from the current 1438 level.
  • Not a slam dunk but, all in all, the risk/reward ratio is very favorable and many catalysts are turning positive.


Tracking all pertinent news and stats, NTU is often among the first to detect trend changes. A few examples:

  • On June 6, 2011, NTU posted THE ECONOMIC AFTERLIFE which argued that Bernanke and most economists’ reassuring comments that recent poor economic stats were merely a “soft patch” and “transitory” were only wishful thinking and that the transition would in fact be toward a tougher life. By mid-summer, most economists got worried of a double-dip.
  • NTU was among the first in the fall of 2011 to document that the double dip risk was declining as the U.S. economy was in fact reaccelerating.
  • NTU was among the first to warn, late in 2011, of a significant slowdown in China.
  • NTU was among the first to warn that U.S. inflation was peaking in mid-2011.
  • NTU was among the first, in November 2011, to post about THE AMERICAN MANUFACTURING REVIVAL
  • NTU was among the first to spot GREEN SHOOTS IN US HOUSING? in mid-October 2011, following on January 3, 2012 by FACTS & TRENDS: U.S. Housing Mending
  • NTU was among the first, on October 18, 2012, to post about Facts & Trends: The U.S. Energy Game Changer

This is what New$-to-U(se) is all about:

  • NTU publishes (and archives) all pertinent economic facts objectively and dispassionately.
  • NTU analyzes trends and confronts them with conventional economic wisdom and the flavor of the day in the media.
  • NTU carefully analyzes and monitors equity market valuations using all appropriate tools but placing significant weight on The Rule of 20 which values equities using actual trailing earnings and inflation rates.
  • NTU assesses equities based on their risk/reward ratio as upside potential needs to always be measured against the downside risk.
  • Contrary to most people who let their assessments of the economic and financial environments dominate and dictate their valuation work, NTU starts with valuation, then assesses if the economic and financial environments are favorable to a closing of the valuation gaps if any.
  • NTU also offers competing views and opinions from other analysts and commentators, to challenge and verify my own initial ideas.


NTU is a personal site used for my personal investments but open to everybody. If you ever invest on the basis of NTU’s analysis, do it at your own risk and peril since there is no guarantee whatsoever about anything, including my own sanity. Remember that past performance is no guarantee for the future, even though I work very hard at it since our personal lifestyle totally depends on it.


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