Comments on: Tobin’s Q Ratio Valuation Gives Bullish Market Signal

by: bsum

Thu, 25 Jun 2009 04:09:48 +0000

please keep us updated with the quarterly Q values. Thanks!

by: christian78

Wed, 24 Jun 2009 09:36:23 +0000

Your discussion is around the signal of Q (bullish or bearish), but
did someone ever question the mean of Q being way below 1?

I am thinking of the market side: Q should be close to one or above, otherwise it can’t be an equilibrium if on average the market values the assets less than they are in the books, why should markets for these firms or even the firms themselves exist, as on average nobody believes in their (book) values?

Isn’t that funny? Or am I missing out something here?

by: papatse

Sat, 13 Jun 2009 07:10:25 +0000

The new value of Tobin’s Q for June 2009 can be calculated
table B.102, and dividing line 35 by 32. Since this equals about 0.64,
should we take this as a bearish signal, since most deep recessions bottom
out closer to a Tobin’s Q value of 0.3?

by: Babak

Mon, 01 Jun 2009 21:22:15 +0000

badcompany, great minds think alike

mitstop, you’re right - which is why it is just one, among many indicators. For example, the Coppock Guide. You put it all together, stir and then take a sip.

pwm, really? what does Grantham use?

by: Chris

Fri, 29 May 2009 22:54:42 +0000

Roam: “assets of information technology company (e.g., IP, people) might be reflected differently and mathematically undervalued on their balance sheet versus a factory with tangible assets and property”

Smithers talks about this in the book. In short, he refutes this view. The explanation revolves around the fact that historical returns on equity have been consistent as long as statistics are available, at 14% or so.

Smithers claims that your contention is a fallacy of composition. Any given company may indeed have intangible assets that allow it to earn an above average return on equity. If the economy as a whole had substantially understated assets, then there should be evidence of higher returns on equity, which is not in evidence.

by: pwm

Thu, 28 May 2009 17:46:34 +0000

The ratio has less near term predictive power the closer it is to its long term mean. Grantham at GMO uses a similar measure and is convinced that cyclical effects will dominate in the next couple of years.

by: roam92

Thu, 28 May 2009 16:46:43 +0000

Is there any consideration with Q that the US economy has moved more towards service and technology, versus the smokestack manufacturing of the old days?

In other words, the assets of information technology company (e.g., IP, people) might be reflected differently and mathematically undervalued on their balance sheet versus a factory with tangible assets and property.

Just wondering if any allowance should be taken for this in looking at Q over the decades…

Of course, as a previous commenter noted, a lot of things in the world have changed over the years - not just this.

FWIW, Russell Napier (author, “The Anatomy of the Bear”) believes “Q Ratio Signals ‘Horrific’ Market Bottom“

by: mitstop

Thu, 28 May 2009 13:10:15 +0000

The Q could remain at .43 for years or go down to .30 and stay there for years. Big deal. Long term indicators provide foundational thought for long term long positioning in equities- that’s the extent of it.

by: Greg

Wed, 27 May 2009 20:55:46 +0000

Some of the Fed’s line by line data on p.103 is questionable.
E.g. line 3 shows real estate at market value for purposes of the denominator.
I disagree that non-financial corp RE holdings can be worth 41% more in Q4 2008 than in 2004.

More generally, the numerator is (by definition) marked-to-market, but the denominator’s correct valuation, uh, lags.

by: Mark

Wed, 27 May 2009 20:30:38 +0000

The obvious concern is that the market is overvaluing current assets….i.e. given a deleveraging consumer, who doesn’t need/can’t afford as much stuff, excess capacity exists around the globe. So, why would you want to replace assets that aren’t needed?