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The debate of two experts: are inflated stocks?

By ES Browning

is a question that is always on the minds of investors, but gains more relevance today: Is the market overvalued?

Two heavyweights of the financial analysis believe they have the answer. Robert Shiller, an economist at Yale University who correctly predicted the stock bubble burst in 2000 and the housing market collapse that began in the United States in 2006, says its data shows that stocks are expensive by historical standards.

David Bianco, a strategist for the U.S. market Bank of America Merrill Lynch, is on a campaign to review the numbers of the teacher. When you adjust the calculations, he says, the shares are cheap.

is much more than just an academic debate. The U.S. stock market has recovered strongly after the March lows of 2009, doubling its value to the fastest pace since the 1930s. But the last leg of the hike, which began last summer, has been driven largely by the Federal Reserve, whose strategy of buying Treasuries to inflate asset values \u200b\u200bin the economy will end in June. Investors want to know whether stock prices are too inflated now, or if there are reasonable estimates of earning power underlying companies. Which team

stick-Shiller or the Bianco-depends in part on whether you're more comfortable with the analysis of an academic who works away from Wall Street and whose job is to create theories, a strategist at the financial sector which is paid to follow the market closely and attract business. Shiller

bases its analysis on a historical comparison of the value of stock index Standard & Poor's 500 with the earnings results of companies that comprise it. The data of this kind do not predict when stocks begin to fall. Shown only when actions are becoming expensive compared with earnings of companies, a sign that could be heading for trouble sooner or later. Shiller maintains data back to the late nineteenth century in its website: www.econ.yale.edu/ ~ Shiller / data.htm.

innovation system is that Shiller is designed to prevent distortion of changes in short-term gains. Most Wall Street analysts compare stock prices to the prior year's earnings or analysts' forecasts of future earnings. Shiller takes an average of corporate earnings in the previous 10 years. Favored by sophisticated investors calibrated model the business cycle, producing a measure of sustainable corporate earnings that investors sometimes called normalized earnings.

On that basis, the method of Shiller shows that the S & P 500 is trading at 23 times earnings, well above the historical average of 16. Does not necessarily mean that stocks are about to fall, the S & P 500 rose to a record 44 times earnings during the dotcom bubble before it burst in 2000. But today's level is not far from the peak of 27 before the shares fell during the financial crisis of 2007-09. During the minimum level in 2009, fell to 13 before rebounding quickly.

Bianco, who is optimistic about the stock, says Prof. Shiller measurement inaccurate and strategist on Wall Street has made public his criticism. In the last year, has written two reports offering alternative calculations. Bianco said he began studying ways to revise Shiller numbers last year after an article in The Wall Street Journal on the subject.

Bianco adjustments show that the S & P 500 currently trades at about 14.5 times its earnings estimate of 10 years, a much more attractive than Shiller estimate of 23 times earnings.

Professor Shiller says he likes his mathematical calculations in the way that made them. "The basic analysis is correct I have been performing well," he said in an email. Bianco

not dispute the usefulness of the average 10-year-Shiller, an idea consistent with the thinking of the founders of modern securities analysis, Benjamin Graham and David Dodd. However, proposes to change the numbers of teachers in three ways, to eliminate what it believes are distortions.

First, Bianco adjust the way corporate profits are calculated. Instead of using earnings reports, Bianco employ what analysts call operating profit they do not have some of the depreciation of the dot-com downturn and financial crisis. This change significantly boosts the average gains of 10 years, which makes the price / earnings ratio is less frightening.

Secondly, I would like to change the historical data with which to compare today's numbers. Prefer to compare the current numbers only data from 1960 or 1980, a period during which relations of price / earnings have been higher than in the past, making the current less extreme levels. If used long-term data, would not count the decade after 1914, and that corporate profits were distorted by World War more than any other modern event, even the Great Depression. Discard the decade also brings up higher proportions of price / earnings past, so today's is better.

Finally, adjusted earnings numbers up even higher, based on the fact that companies have been holding a greater percentage of profits and paying lower dividends for decades. When companies retain and invest more profits, earnings growth is faster and reported earnings do not reflect fully retained the capacity to fuel growth. Bianco calls this Equity Value Adjustment Time (Seasonal adjustment of the value of capital), or ETVA.