This ridiculous thing became the unofficial mascot of the 1990s tech stock bubble. Looking back, it should’ve been a clear sign of what was to come.
Of course, Pets.com and plenty of other stocks with even more ridiculous business models that never made sense eventually failed. Even the winners of that period suffered nasty declines.
My friend and colleague Mike Carr believes we’re in a similar period of reckoning, and calls it the “Silicon Shakeout.”
Along with Adam and Ian King, we covered this earlier this week in The Banyan Edge Podcast, and I recommend you take a minute to give it a watch. (Next week we’re going full-throttle geek mode, picking apart the market with some of our favorite metrics.)
I’ll give you an early look at one of mine…
I regularly use the cyclically adjusted price-to-earnings ratio, or CAPE, as a quick-and-dirty scan of the market. The CAPE takes a 10-year average of S&P 500 earnings and compares it to prices. The idea is that, over any 10-year window, the ebbs and flows of the business cycle should average out.
But the CAPE has one glaring weakness: It doesn’t account for interest rates. In a low-rate environment, stocks should be worth more than in a high-rate environment.
So … enter the Excess CAPE yield!
This metric flips the CAPE upside down, turning it into an earnings-to-price ratio as opposed to a price-to-earnings ratio. It then subtracts the inflation-adjusted yield on the 10-year Treasury note. Here’s a chart of the ratio going back the past 140 years…
(Click here to view larger image.)
A high number means the broader market is cheap. You’re getting a high-earnings yield on your investment, above and beyond what you would get if you just dumped your money in risk-free Treasurys. A low number means the market is expensive, and your return compared to Treasurys is lousy.
So, where are we today? Roughly the middle of the pack. When the metric gets to the top of the shaded area, the market is a steal. When it dips near the bottom of that box, you should likely steer clear.
Interestingly, despite falling in 2022, stocks didn’t get all that cheap … because bonds also fell. The relative value between the two didn’t change all that much.
So … what’s the takeaway?
At current prices, stocks are ever so slightly more attractive than bonds. But neither really offer truly spectacular potential returns. To find those returns, you’re going to need to do something more than simply buying and holding.
And that, as we’ve been telling you all week, is where Mike Carr comes in.
Mike believes right now is the time to focus on the short term, and nimbly trade in and out of stock market volatility to capture excess gains along the way.
As I speak, Mike is up 72% on a trade in Google (GOOG) in four days … and just recently closed out another in Paccar (PCAR) for 63% in four days.
This is what Mike does… In and out, often in less than a week, and making big returns for his trouble. Go here to see how Mike’s been scoring these wins in this bear market, and how you can get involved.
