Companies in the U.S. are valued 10% above the cost of replacing their assets(bloomberg.com)
bloomberg.com
Companies in the U.S. are valued 10% above the cost of replacing their assets
http://www.bloomberg.com/news/articles/2015-05-18/nobel-winner-s-math-shows-s-p-500-unhinged-from-reality-or-not
16 comments
Hmm. I think the Bloomberg article oversimplified Tobin's work to the point where a) your interpretation of the article's claim is correct but b) definitely not in line with what Tobin claimed.
If Tobin were still alive, I think he would insist that intellectual property (read: code, patents, trademarks and software licenses) also be included. He didn't care about 'factories, machines and inventory'; he cared about 'replacement costs'. The author seems to have glossed over that bit for the sake of brevity and clarity, and in the process accidentally introduced a logic error, at least IMHO.
If Tobin were still alive, I think he would insist that intellectual property (read: code, patents, trademarks and software licenses) also be included. He didn't care about 'factories, machines and inventory'; he cared about 'replacement costs'. The author seems to have glossed over that bit for the sake of brevity and clarity, and in the process accidentally introduced a logic error, at least IMHO.
Obviously, however, replacement cost for intangibles is impossible to estimate accurately. Especially if you consider the risk that the "replacement" is a failure or doesn't accurately replace the institutional knowledge, intellectual property and goodwill the company has accrued.
It is fair to say that stock prices are not representative of current value, but rather the long term value and growth the company has yet to realize. So in that sense, Tobin is right, but the growth the company has yet to realize is really just goodwill accrued as an asset. Meh. I'm rambling now.
It is fair to say that stock prices are not representative of current value, but rather the long term value and growth the company has yet to realize. So in that sense, Tobin is right, but the growth the company has yet to realize is really just goodwill accrued as an asset. Meh. I'm rambling now.
I always understood that potential revenue, to a certain extent, is baked into the value of the company. When things change in the market it doesn't necessarily effect the values of the companies, it's when something unexpected happens, because the market represents a perceived future value of the company.
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Yup, pretty much. One of the challenge of information economics is that the cost to recreate the information on which a business is founded can be much much higher than the cost of the hard assets (imagine what it would cost Google to recreate their search algorithms and index from scratch)
That said, there is a pretty reasonable point that if bonds were returning 5 - 6% over 10 years rather than 1%, quite a bit of capital would move back into bonds and away from equities. That would put a lot of downward pressure on the price of equities.
That said, there is a pretty reasonable point that if bonds were returning 5 - 6% over 10 years rather than 1%, quite a bit of capital would move back into bonds and away from equities. That would put a lot of downward pressure on the price of equities.
It's quite possible that most startups are worth less than the developers' laptops.
True, but laptops have a fixed price. They aren't worth $0 most of the time and $1B a tiny fraction of the time.
This may in fact, be wrong, if that laptop is the only way to say, stop and outage costing 100 million a minute.
It would be worth $0 most of the time, and ~100 million a minute during that outage.
(Rather than IP, let's say the laptop's TPM chip is what is necessary to get access to stop the outage, so it's tied to something real)
It would be worth $0 most of the time, and ~100 million a minute during that outage.
(Rather than IP, let's say the laptop's TPM chip is what is necessary to get access to stop the outage, so it's tied to something real)
No, a laptop is worth what you can sell it for. You're over-thinking this.
> So by this theory the value of a tech startup is the developer's laptops and the value of a yoga studio is the loaner mats.
Indeed, I'm wondering why the quoted ratio is so low (1.10). Much of a company's value is in its customer and supplier relationships and these aren't tangible assets that can be sold.
Indeed, I'm wondering why the quoted ratio is so low (1.10). Much of a company's value is in its customer and supplier relationships and these aren't tangible assets that can be sold.
> Indeed, I'm wondering why the quoted ratio is so low (1.10)
Not just that -- from the article:
>> To Smithers, the ratio’s doubling since 2009 to 1.10
Having "the economy" be "worth" only 55% of its scrap value seems crazy...
Not just that -- from the article:
>> To Smithers, the ratio’s doubling since 2009 to 1.10
Having "the economy" be "worth" only 55% of its scrap value seems crazy...
The 'doubling' is from 1.05 to 1.10 -it's a ratio, not a %age
I believe the ratio tries to take into account all assets, tangible and intangible, but I have no idea how for example Facebooks user base/network effect would be recognized in GAAP accounting.
Does anyone know?
Does anyone know?
Q ratio is Market Value / Asset Value.
In the case of low value businesses like Yoga Studios & Startups, yes the value is nil. For good reason -- a Yoga studio's only asset is it's book of business. You don't fire the employees and get any meaningful liquidation value. Ditto for startups -- startups are evaluated at future value... present value is laptops + IKEA Tables.
But we're not talking about Yoga studios, we're talking about Fortune 500 companies. When you are selling for more than you are worth, you'd better hope you keep delivering, because the market will punish you brutally when you slip up.
In the case of low value businesses like Yoga Studios & Startups, yes the value is nil. For good reason -- a Yoga studio's only asset is it's book of business. You don't fire the employees and get any meaningful liquidation value. Ditto for startups -- startups are evaluated at future value... present value is laptops + IKEA Tables.
But we're not talking about Yoga studios, we're talking about Fortune 500 companies. When you are selling for more than you are worth, you'd better hope you keep delivering, because the market will punish you brutally when you slip up.
Fortune 500 companies have institutional cultures that have allowed them to avoid collapse despite their huge size. That's not any more trivial than someone who knows how to teach Yogo.
That may be true, but you can sell a Fortune 500 company. Good luck with your Yoga studio! (unless you own the building)
My thoughts exactly - first sentence in and we're already discrediting intangible assets, IP, and human knowledge workers.
If you sold every share of every company in the U.S.
and used the money to buy up all the factories, machines
and inventory, you’d have some cash left over.
Where do you see a "theory" in that statement? I only see a calculation.
The problem with Q ratio is it relies on hard assets. The reality is, much of the US industry isn't dependent on hard assets and is instead based on the value of the software that runs on those assets.
http://en.wikipedia.org/wiki/Tobin%27s_q
This is an economic theory that was first published 1968/1969. It was a good model when Tech/IT wasn't a huge sector of the economy in its own right.
http://en.wikipedia.org/wiki/Tobin%27s_q
This is an economic theory that was first published 1968/1969. It was a good model when Tech/IT wasn't a huge sector of the economy in its own right.
Customers are probably one of the highest rated "assets" of any company nowadays. So much of the expenses of the company go into acquiring them.
Yes. But my understanding of the Q ratio is it takes into account on-paper assets, not the cost of "acquiring" customers or knowledge to produce R&D type "assets".
Rationally priced assets are valued by their prospective value.
In principle, the valuation seems overly simplistic. Corporate stocks — the combination of people and entitlements that can be wielded to generate revenue – should be more than the sum of the value of the piecemeal assets, IMHO.
Even if not overly simplistic, I feel like the methodology would leave a lot of room for broad speculation. How did they value: future redeemable assets, trade assets, intellectual property, intangible leverage, market and demographic prospects, cultural distinctions of the corporation, and goodwill? These things all tend to be waffly in the accounting, but they have a real impact on future income and therefore the prospective value of the company.
Everything I have read about Tobin suggests that the man was spectacularly clueless, and every time I read something about him I cringe and emit some guttorial sigh. In all likelihood I deeply misunderstand his thinking, but I have yet to see anything remotely resembling clear, persuasive arguments in defence of his ideas, which seem tragically disconnected from economic reality.
In principle, the valuation seems overly simplistic. Corporate stocks — the combination of people and entitlements that can be wielded to generate revenue – should be more than the sum of the value of the piecemeal assets, IMHO.
Even if not overly simplistic, I feel like the methodology would leave a lot of room for broad speculation. How did they value: future redeemable assets, trade assets, intellectual property, intangible leverage, market and demographic prospects, cultural distinctions of the corporation, and goodwill? These things all tend to be waffly in the accounting, but they have a real impact on future income and therefore the prospective value of the company.
Everything I have read about Tobin suggests that the man was spectacularly clueless, and every time I read something about him I cringe and emit some guttorial sigh. In all likelihood I deeply misunderstand his thinking, but I have yet to see anything remotely resembling clear, persuasive arguments in defence of his ideas, which seem tragically disconnected from economic reality.
Ah but the interesting part isn't the long term correction factor but the rather shocking change over just a couple years. What has really changed in the last five years economically to result in such an impressive increase? Oh, nothing? Well, these things do vary randomly over time while tending to revert to the norm.
It is true, that when I toss a ball into the air, the error of my measurement from the instantaneous position of the ball to the gravitational center of the earth is very fuzzy. In fact the error bars are probably wider than the measurement of height given enough hand wavy argument and bad measurement tools. I agree with your interpretation of that observation. I really don't have any idea how far away that baseball is from the center of the earth. None the less, toss the ball up in the air higher than you've ever seen it tossed before, its coming back down faster than ever before, eventually.
Or rephrased it doesn't seem to be a random walk error where the odds of being higher or lower are always 50:50 no matter if its right on 1.000 or higher than its ever been. It does seem to revert to the norm. So if its higher than its ever been, then the odds of reversion to the norm in the near future are higher than they've ever been...
It is true, that when I toss a ball into the air, the error of my measurement from the instantaneous position of the ball to the gravitational center of the earth is very fuzzy. In fact the error bars are probably wider than the measurement of height given enough hand wavy argument and bad measurement tools. I agree with your interpretation of that observation. I really don't have any idea how far away that baseball is from the center of the earth. None the less, toss the ball up in the air higher than you've ever seen it tossed before, its coming back down faster than ever before, eventually.
Or rephrased it doesn't seem to be a random walk error where the odds of being higher or lower are always 50:50 no matter if its right on 1.000 or higher than its ever been. It does seem to revert to the norm. So if its higher than its ever been, then the odds of reversion to the norm in the near future are higher than they've ever been...
can we conclude that it's basically become a game at this point? place your bets, manipulate where you can, and hope you sell before the other guy does?
Exactly this.
Things are never going to change because you'll never get enough people to willingly give up making so much money. Take bubbles, i.e.: When the numbers are so far askew that everyone knows there's a bubble, you are still not going to see anyone not play the game. There's just too much money to be made.
Things are never going to change because you'll never get enough people to willingly give up making so much money. Take bubbles, i.e.: When the numbers are so far askew that everyone knows there's a bubble, you are still not going to see anyone not play the game. There's just too much money to be made.
And Tobin's point is that we're all feeling bubble-icious.
Handwaving about intangible values or customer goodwill doesn't change the fact that market expectations are primarily built on faith in the future, which is an entirely irrational basis for economic decision-making.
It's certainly difficult to quantify the value of IP, as opposed to the value plant and machinery.
But are most valuations driven by guesses about the future value of IP that have at least some connection with economic reality? Or are they driven by hope, hype, and momentum?
The reliable and empirically predictable manic-depressive boom-bust cycle of corporate capitalism strongly suggests the latter.
Or to put it another way - at some point the QE taps are going to be turned off, and the economy is going to have to go back to buying and selling stuff that people want instead of relying on stock price inflations created by cheap money hand-outs to banks so generously donated by the Fed and the other national banks.
Anyone who thinks there won't be a "significant adjustment" when that happens is - IMO - fooling themselves.
Handwaving about intangible values or customer goodwill doesn't change the fact that market expectations are primarily built on faith in the future, which is an entirely irrational basis for economic decision-making.
It's certainly difficult to quantify the value of IP, as opposed to the value plant and machinery.
But are most valuations driven by guesses about the future value of IP that have at least some connection with economic reality? Or are they driven by hope, hype, and momentum?
The reliable and empirically predictable manic-depressive boom-bust cycle of corporate capitalism strongly suggests the latter.
Or to put it another way - at some point the QE taps are going to be turned off, and the economy is going to have to go back to buying and selling stuff that people want instead of relying on stock price inflations created by cheap money hand-outs to banks so generously donated by the Fed and the other national banks.
Anyone who thinks there won't be a "significant adjustment" when that happens is - IMO - fooling themselves.
> "market expectations are primarily built on faith in the future, which is an entirely irrational basis for economic decision-making"
Faith in some version of future events is the only rational basis for economic decision making. You pay present money in the hope of future value, because otherwise you'd simply retain the present discounted value of the purchase price.
As long as that faith isn't blind, but instead well researched and based on a defensible thesis, there's nothing wrong with it.
On a company-by-company basis, it's practical to evaluate how much of the company's market value derives from intangible components like goodwill and market position, but it's much harder to do it on the scale of an entire economy, which is what the analysis in the article claims to do.
It's more reasonable to look at capital intensive industries like manufacturing and agriculture and see if their Q values are historically high. Lumping compannies like Adobe and Apache into that same group and using the same metrics for the whole group is disingenuous.
Faith in some version of future events is the only rational basis for economic decision making. You pay present money in the hope of future value, because otherwise you'd simply retain the present discounted value of the purchase price.
As long as that faith isn't blind, but instead well researched and based on a defensible thesis, there's nothing wrong with it.
On a company-by-company basis, it's practical to evaluate how much of the company's market value derives from intangible components like goodwill and market position, but it's much harder to do it on the scale of an entire economy, which is what the analysis in the article claims to do.
It's more reasonable to look at capital intensive industries like manufacturing and agriculture and see if their Q values are historically high. Lumping compannies like Adobe and Apache into that same group and using the same metrics for the whole group is disingenuous.
As someone who has refused to put money into shares for the last 18-24 months on the basis that this shit is artificially high and cannot last...
I feel like a fool :(
I feel like a fool :(
Well, to be fair, the QE program has been stopped, and S&P 500 is still skyrocketing.
" According to Tobin’s Q, equities in the U.S. are valued about 10 percent above the cost of replacing their underlying assets -- higher than any time other than the Internet bubble and the 1929 peak."
Cue the "new normal" excuses. The "prices have reached a plateau". The same pre-buble-burst talk that has happened every other time.
This will not end well.
Cue the "new normal" excuses. The "prices have reached a plateau". The same pre-buble-burst talk that has happened every other time.
This will not end well.
We'll know we're doomed when WIRED has a cover story on "The Long Boom" and how this time it's for real.
"The market can stay irrational longer than you can stay solvent." --John Maynard Keynes
This article seems odd to me. According to this article [1] a value of 1.1 is rather normal for the last couple of years and the value they are comparing it to is an outlier (of the 2009 crisis). It's likely that the intangibles are driving the recent values above 1.0. Anyways: Stock prices _are_ high - just not sure if Tobin will help us finding the right way out :)
[1] http://www.indexologyblog.com/2013/09/03/too-high-or-too-low...
[1] http://www.indexologyblog.com/2013/09/03/too-high-or-too-low...
Remember Long Term Capital Management... Just in case, Nobel Prizes & "Maths" can be very wrong.
For anyone interested in this topic, be sure to read "When Genius Failed". I finally read it last year and it's excellent.
http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen...
http://www.amazon.com/When-Genius-Failed-Long-Term-Managemen...
True, but they are almost always very wrong to the upside.
Capital value is not how the stock market has valued companies, not since the middle of the 20th century, at least. See http://www.crossingwallstreet.com/archives/2015/05/dont-fret... for a nice explanation.
I find it interesting that it seems like critics of the Q ratio justify the high price by saying that because of low interest rates, other investment options are worse. As much as I agree that still makes it a bubble. It's just not that investors get drawn to the attractiveness of the bubble on the stock market, but rather that the bubble is there because everyone gets pushed into it. Even if you don't buy the Q ratio, this reasoning if correct would mean that the stock market is most likely higher than it should be and probably won't stay there.
Q value doesn't include brand value. The McDonald arches are just as valuable, if not more, than the the fryers, heat lamps, and buildings.
I guess this is talking about price-to-book? In some other countries, price-to-book is usually close to 1, or even below it, which always struck me as strange. Either something is wrong with their stock markets, or companies are not as profitable as they might be for some reason. (Maybe a good reason; profits aren't everything in life). I'm not familiar with the Q ratio so maybe it's a slightly different concept...
It makes sense for a single company, if it is so unprofitable, even including future potential profitability, that it really should be shut down and stripped for assets. But ordinarily I would expect a company to be worth significantly more than its book value. Otherwise, you could easily recreate the company by just "replacing" the assets. But this is only true if the company is based entirely on easily replaceable, low skill labor. Are there any large companies like this anymore?
In reality, there are intangible assets - and I'm not talking about software etc. - that are very difficult to measure, and guarantee that any worthwhile business should be valued at more than its tangible assets. Some things are hard to price, but might be possible to sell off: brand identity, customer base, marketing data, etc. Still, replacing these things is hard.
Some things are very hard to sell off. Businesses have employees, and employees are in an organizational structure where they know how to work with other employees to get their jobs done. As well, there are relationships with contractors and vendors. Replacing these is extremely hard.
It makes sense for a single company, if it is so unprofitable, even including future potential profitability, that it really should be shut down and stripped for assets. But ordinarily I would expect a company to be worth significantly more than its book value. Otherwise, you could easily recreate the company by just "replacing" the assets. But this is only true if the company is based entirely on easily replaceable, low skill labor. Are there any large companies like this anymore?
In reality, there are intangible assets - and I'm not talking about software etc. - that are very difficult to measure, and guarantee that any worthwhile business should be valued at more than its tangible assets. Some things are hard to price, but might be possible to sell off: brand identity, customer base, marketing data, etc. Still, replacing these things is hard.
Some things are very hard to sell off. Businesses have employees, and employees are in an organizational structure where they know how to work with other employees to get their jobs done. As well, there are relationships with contractors and vendors. Replacing these is extremely hard.
I thought markets were designed for unhinging numbers from reality. Surely that's what leverage is all about.
This doesn't account for the liquidity premium, talent, internal process. 10% seems like a bargain. If I bought a equipment today, it would be worth less tomorrow and I'd have to sell it at a deep discount. Investors pay up to have a liquidity premium.
Not only is this model flawed but this sort of thinking makes it hard for small software companies to borrow money : banks value you company only based on hard assets. This limits software companies to raising cash only by selling equity.
So fuck my IP right? It's not worth anything more then the air I breath...
It isn't, unless you can actually sell it.
So by this theory the value of a tech startup is the developer's laptops and the value of a yoga studio is the loaner mats.