Email of the day
Comment of the Day

July 02 2013

Commentary by David Fuller

Email of the day

On the 'Q Ratio
"Thank you for your service. I was listening to you commentaries and the concept of a valuation contraction. I have been reading Russell Napier's Anatomy of the Bear, which mentions the concept of the Q ratio and it ending up at extreme valuations at the bottom of the bear, below 0.3x in the previous 4 great bear markets. Today the ratio for the S&P is 1.04. If we are to end up at a ratio of < 0.3, can this simply be achieved by ranging, or is it different this time, with the bear market bottoming at a higher Q ratio than in the past?"

David Fuller's view There are far more analytical tools out there than anyone can follow. And if we had teams or machines to follow every indicator, would we be any wiser, or just uncertain and confused?

I think you would get a better assessment of the Q Ratio from those who monitor it, starting with Russell Napier, whose assessment you are presumably familiar with. This article by Emil Zamarelli will also provide more information on the Q Ratio. It has some parallels with some of my work in that he is talking about a long-term bear market in equities; what I prefer to describe as a valuation contraction cycle, which contained two very sharp bear markets, mainly in 2000 and 2008.

I think this cycle is now in its latter years and that we saw quite a few valuation lows for equities in 2H 2008 and 1H 2009. At the market highs in May for Wall Street and a number of other leaders, the valuations had obviously risen, as had the Q Ratio as the email above points out. I think quantitative easing (QE) has kept interest rates lower and valuations higher than would have otherwise been the case, and that is certainly one of the reasons why Eoin and I are somewhat more cautious than the Wall Street consensus today, in contrast to our optimistic view following the mid-November low and well into this year, until the S&P became quite overextended prior to that big key day reversal on the 22nd of May.

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