Two are based on earnings: 1) The ratio of total stock market capitalization to gross national product (GNP). The market cap. to GNP ratio was popularized by Warren Buffet. 2) A cyclically adjusted PE ratio (typically a 10-year PE ratio). The 10-year PE was popularized by Robert Schiller (but not first proposed by him).

The other ratio is Tobin’s Q, similar to a market price-to-book ratio. It measures the replacement cost of publicaly traded companies.

Taken as a whole, where do these indicators stand?

The total market capitalization of US stocks is approximately 15.5 trillion, as of the last trading day of the year.

The GNP at the end of SEP 30 was 15.4 trillion. In other words, the Buffet ratio ratio is roughly 1. According to Buffet, that is average; he considers a ratio of around .75 to be a good deal. In his 2001 article when the ratio was 1.3, he suggested the market might return 7% annually over ten years (it yielded around 2%).

Schiller publishes the 10-year PE ratio on his Web site. It is currently 21, in comparison to the historic average of 16.4. Again, the market seems to be overvalued, or at least no screaming deal.

Finding values for Tobin’s Q is a bit more complicated. There is a Web site run by Smithers & Co. (an asset manager) that tracks it. According to that source, the market is roughly 33% overvalued (it was 29% overvalued on SEP 30).

What other buy/sell signals are there for the market as a whole? Valuation indicators are bets on mean-reversion. What about betting on the trend? The market is just below its 200-day moving average. Nothing bullish there.

There is one overwhelming bullish economic signal. The yield curve is substantially positive. A difference of more than 65 basis points between the 3-month and 10-year Treasury is bullish. The current spread is 187 basis points. But, that is because the 30-day Treasury yields virtually nothing. This is an economic indicator, rather a stock market indicator per se, although it is histocially correlated with bull markets. It probably stimulates the market because the world’s main investment choices are corporate and sovereign, and sovereign debt is expensive when rates are low.

In summary, we enter the new year with the following picture:

* PuraMed Bioscience (PMBS) has a “going concern” warning from its auditor, and has stated that it cannot continue business without raising money. Source: annual report.
* The company had $30,000 in sales last year, while the 2 executives paid themselves $180,000 and enormous quantities of stock (which they have to dump in order to get their money). Source: annual report
* The company has a track record of paying bills, such as those from consultants, by issuing large amounts of shares for as little as $0.15 per share. Source: annual report.
* The company has marketed as an “independent study” a study of its main product, LipiGesic, that it funded. The CEO was one of the researchers. The CEO paid himself in shares for conducting the research on LipiGesic. Source: press releases and the company’s annual report.
* LipiGesic is based on feverfew, which is a kind of daisy that anybody can grow. Yet, the company is trying to sell LipiGesic in packaging that only contains 6 doses for between $20-$30. Source: company site and Web searches.
* Feverfew is associated with side-effects, including rebound headaches and miscarriages. The company doesn’t, or didn’t until recently, warn about side-effects. Source: Web research; company Web site.
* The company is changing its Web presence in response to comments on the PMBS.OB Yahoo message board.
* The vast majority of posts to the PMBS.OB board are from accounts that post almost nowhere else. Many of those accounts were created in the last few months, for the exclusive purpose of promoting the stock.
* Many of the insiders were previously involved with Quigly Inc.’s product, Cold-EEZE. The nasal spray version of that product destroyed the sense of smell of some users, resulting in a class-action lawsuit. The officers were also sued by shareholders for unjustly enriching themselves at shareholder expense. For example, see this old Motley Fool article…

…the Barron’s piece laid out an astonishing web of people “censured, barred or jailed by securities authorities for stock fraud” who have had, or still have, connections with Quigley Corp. The article ended with the kind of knowing comment Barron’s loves to issue: trading in Quigley stock was now under investigation by the Securities and Exchange Commission (SEC), so investors shouldn’t expect the stock to “levitate” forever.

Specifically, Alpert reported that Raphael D. Bloom, a disbarred stockbroker convicted in 1989 of stock fraud, had introduced company Chairman and CEO Guy Quigley to a financial consulting and public relations firm called Diversified Corporate Consulting. The “managing member” of Diversified is William A. Calvo, III, a securities lawyer who was disbarred in Florida state court, and later in Federal Court, for his participation in a fraudulent public offering…..

Can you short penny stocks? Actually, some brokers allow it. The maintenance requirements are high, however.

The 200-day moving average profits from trends. In this system, the market is trending upward when it crosses its moving average (buy), and falling when it corsses below (sell). The system fails in cyclical markets, i.e where mean-reversion profits. (See Faber and Hulbert)

The multi-year (5 to 10 years) PE ratio is cyclical. It’s a bet on mean-reversion. Logically, it’s a good complement to a trend-following system such as a moving average. (See Hussman and CXO Advisory)

A normal yield curve, in which 10-year Treasuries are more than 65 basis-points higher than 90-day Treasuries is strongly correlated with bull markets. (See Crossing Wall ST and a more recent look). However, the yield curve right now is considered by some to be abnormal, because the government is keeping short-term rates at near 0%. See this interview with bond-expert Van Hoisington for example.

What would happen if you just invested in thirds? Put 1/3 of your portfolio into the market when it’s above the 200-day moving average (thus capturing the profit available due to trending). Invest another third when the market’s long-term PE ratio is at or below average (capturing the profit predictable from mean-reversion). And add the final third based on the yield curve.

Another overall valuation metric is the ratio of total stock market capitalization to GNP or GDP. This could supplement the 10-year PE ratio, or you could break the portfolio into fourths, giving it more of a value-tilt. (See Warren Buffet and Motley Fool)

Where to find the data:

• Buffet’s ratio. GDP-version: gurufocus.com (it predicts the market is at the high-end of fairly valued, with a likely annual return of 5.1%).
• A 10-year PE ratio: Schiller and gurufocus.com (currently high, predicting a low return).
• 200-day moving average for VTI (a total stock market ETF): Yahoo! Finance (currently the market = its moving average).
• The yield curve: US Treasury …use the 3-month and 10-year columns (currently very bullish, but note concerns about atificially low interest rates right now).

* Day-late update: There is also Tobin’s Q, which is similar to book value. See Smithers, which also mentioned Schiller’s 10-year PE ratio (called “CAPE” for “cyclically adjusted”), and Equities and Tobin’s Q. Tobin’s Q also suggests the market is slightly overvalued.
* Another source of info on Buffet’s and Schiller’s market valuation methods is MyPlanIQ.

Another good article on the current stance of the yield curve:
http://www.capitalspectator.com/archives/2012/01/is_the_yield_cu.html

Tickers of major companies with a high percentage of their value from oil production: PBR, CVX, SU, CNQ, OXY, PWE, IMO, CEO. All of these get around 75% or more of their current value from oil production. (The rest is from natural gas or refining.) Source: http://www.mcdep.com/

The four major ETFs for oil invest in futures contracts: USO, OIL, DBO, and USL. The first two have underperformed the WTI spot price index horribly, while the latter two have underperformed slightly. DBO has a longer track record than USL. You can compare the performance of stocks and ETFs to the price of West Texas oil at Bloomberg:
http://www.bloomberg.com/apps/quote?ticker=USCRWTIC:IND

BNO is an ETF that tracks Brent oil–most of the oil sold in Europe rather then the US.

Why care more about oil? It is unique. Natural gas, coal, solar, hydro, wind, nuclear are ways to contribute energy to infrastructure. Mostly, they go into the electric grid, or sometimes directly to industry use. They compete with each other, and so each is less unique. Oil has little competition. There are no hybrid Boeing 747’s. The majority of the planet living on little income is not considering a Prius Chevrolet Volt for its next purchase. Biofuel is growing, but small, and potentially limited because it competes with food production. Oil is more needed, and thus more potentially profitable.

At first glance, BMY seems to be a good value, given that all these companies have similar valuations right now, as if the market is priced for similar growth prospects:

Bristol-Meyers Squibb (BMY)
Enterprise Value/Revenue (ttm): 2.32
Enterprise Value/EBITDA (ttm): 6.45

Novartis (NVS)
Enterprise Value/Revenue (ttm): 3.00
Enterprise Value/EBITDA (ttm): 10.30

Pfizer (PFE)
Enterprise Value/Revenue (ttm): 2.62
Enterprise Value/EBITDA (ttm): 6.97

Merck (MRK)
Enterprise Value/Revenue (ttm): 2.47
Enterprise Value/EBITDA (ttm): 6.97

Why, then, does BMY have the worst 5-year growth forecast???:

BMY
Next 5 Years (per annum) -1.60%

NVS
Next 5 Years (per annum) 4.78%

PFE
Next 5 Years (per annum) 2.81%

MRK
Next 5 Years (per annum) 4.23%

The data is inconsistent on BMY. Maybe expiring patents, in addtion to research expense, are the problem….

http://www.bnet.com/blog/drug-business/off-a-cliff-100-billion-in-revenues-will-disappear-from-drug-business-by-2013/8749

Combining the two graphs (like a Venn Diagram), suggests that MRK is the safest bet. BMY seems high risk/reward with additional risk coming from the inconsistency of data.

One likely expalanation is that wind and solar are primarily candidates for power generation, and as such compete with coal, natural gas, and nuclear. Oil, since it’s portable, is a transportation fuel.

Here’s a simple way to use the tools at Schwab that makes sense. Both Schwab and Ned Davis provide sector ratings, and all the ETFs associated with sectors are covered by MarketEdge’s technical indicators.

Currently, there three sectors that have a net positive rating from Schwab and Ned Davis. I gave a +1 for a positive rating, a 0 for neutral, and a -1 for a negative rating.

• Energy +1 (Ned Davis)
• Industrials +1 (Ned Davis)
• Information Tech +2 (Both)

VGT (Vanguard Information Technology ETF) has a “Long/buy” rating from MarketEdge. Another way to go is the mutual fund BUFTX (Buffalo Science And Technology Fund), which is a no-load fund rated 4-stars by Morningstar. However, any mutual fund locks you in for 90 days on Schwab, unless you’re willing to pay a redemption fee. Both VGT and BUFTX are up about 4% since 11/22 (same as the broader market), when Ned Davis switched its rating to positive.

There are some net negative sectors also, but no unanimity:

• Consumer staples -1 (Ned Davis)
• Financials -1 (Schwab)
• Telecom -1 (Ned Davis).

Health care and materials are “battlegrounds”–they have conflicting positive and negative ratings, but no neutral ratings.

Late payments on credit-card and other consumer loans jumped 23 percent in November from a year earlier, the biggest increase since 2001, according to Experian Plc, a credit-risk consulting firm in Dublin. Brazil, the fourth fastest-growing of the Group of 20 nations, is also attracting a flood of foreign capital and facing its highest rate of inflation in five years.

A surge in credit-card issuance — tripling since 2003 to 153.4 million in circulation, according to the industry’s national association — has helped bring the debt load of Brazilian consumers to 18 percent of total disposable income, compared with 13 percent in the U.S., according to data compiled by Morgan Stanley.

Late payments rose for a seventh straight month in November, according to Experian, based on data from credit-card payments, bills for services and bank loans. Total consumer loan defaults — credit payments overdue for 90 days or more — fell to 6 percent in October, from 8.1 percent a year earlier, according to the central bank.

That’s a tell-tale sign of a bubble: unsustainable borrowing.

Brazil’s central bank is acting to prevent a credit bubble by raising reserve and capital requirements to slow consumer lending. Reserve requirements on time deposits will rise to 20 percent from 15 percent, and an additional requirement for non- interest-bearing accounts will climb to 12 percent from 8 percent. Banks will also have to use more capital to back consumer loans whose payment terms exceed 24 months.

Finance Minister Guido Mantega, who will keep his post when Rousseff takes office next month, said in a Nov. 30 interview that Brazil will cut funding for its development bank by 50 percent next year as part of a plan to slow public spending.

The government is also looking to rein in Brazil’s unregulated credit-card industry, Meirelles said in the interview last month. The central bank president said there should be more oversight and that a task force will study the need for government supervision.

It’s starting to sound a bit recessionary….

Adding to the credit anxiety are foreign investors lured by an inflation-adjusted interest rate of 5.12 percent, second only to Croatia among 46 countries tracked by Bloomberg. Investors “chasing yield” are taking the liquidity the Federal Reserve is pumping into the U.S. economy and investing it in emerging markets such as Brazil and China, where the payoffs are bigger, said Russ Certo, a managing director and co-head of rates trading at New York-based Gleacher & Co.

The Fed is “sowing the seeds of the next volatile moves in markets because these policies are destabilizing,” Certo said. “These economies are afraid of what happens when all this hot money leaves, because when it leaves, it’s going to be tumbleweeds.”

Speculation fueled by easy money, in this case low interest-rates in the US, is another sign of a bubble. On the other hand, the Brazilian stock market has a low PE ratio, at around 14. If there is a bursting bubble, money will flow back into high-quality, boring stocks, the dollar and the yen.