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Posted: December 12, 2013

Bubbles, bubbles, everywhere

Are we in one now?

Ron Phillips

Some investment market, in some part of the world, is out of whack at some time or another. Take a look at these examples.

CHINA REAL ESTATE BUBBLE

If you haven’t heard of it yet, let me be the one to break the news to you. China is in a gargantuan real estate bubble. Here are a few facts to consider.

• CNN: Beijing: apartments selling for $11,400/square meter
• Bloomberg: home prices have tripled since 1998; real estate makes up 60 percent of household assets
• Businessweek: 1/3 of China’s economy is real estate related; China’s four largest cities saw annual price gains of 16-20 percent
• MSN: Chaoyang district: typical apartment prices are near $300/square foot or 80 times the average income

U.S. TECH BUBBLE VERSION 2.0

The U.S. is experiencing another, albeit much smaller, tech bubble. Here are the P/Es of several major tech and related stocks. Remember, the higher the number the more over-valued the stock.

• Amazon: 1322
• Facebook: 119
• LinkedIn: 997
• Netflix: 282
• Twitter: N/A (they don’t even have any earnings!)

The S&P 500 has an estimated 2013 P/E ratio of only 16.

TREASURY BOND BUBBLE

The Fed is buying $85 billion of treasury securities every month. This adds up to $1.02 trillion each year. Is this a positive action for stimulus? Sure. Is it leading to wrong valuations on treasury debt? Probably.

The current price for a 30-year T-bond is about 98.95. That means it trades at a 1.05 percent discount to face value. Yet, without the extra one trillion in government purchases, this price should be much lower. Add in the eventual interest-rate increase, someday in the future, and treasuries are probably going to nosedive in value.

PRECIOUS METALS BUBBLE…STILL

Precious metals have had an 11-year streak. That alone should make an investor run. Past bubbles teach us that nothing goes up, without interruption, forever.

Gold was recently at $1,276 an ounce and silver at $20.43. Arguably, these are reasonable prices. These general levels might even be permanent. A sort of inflation adjustment. But beware: gold and silver can have decade-long bear markets.

U.S. BROAD-MARKET BUBBLE?

With all of these bubbles, along with our markets regularly hitting new records, are we in yet another bubble? I don’t think so.

Using earnings estimates from Thompson Reuters, the S&P 500 will have a P/E ratio of 13.1 in 2015. That’s based on a current price of 1784 for the index, putting it well below the 85-year average P/E of 15.6.

Will we have volatility, corrections and bear markets? Absolutely. But I think we’ll have more earnings growth and more years to this new super-bull market.

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If you’d like information on avoiding bubbles and other common mistakes, request my free report “Ten Investor Oversights.” Use the contact info below.
 

Ron Phillips is an Independent Financial Advisor and a Pueblo, Colorado native. He and his wife are currently raising their two sons in Pueblo. Order a free copy of his book "Investing To Win" by visiting www.RetireIQ.info or leaving a message on his prerecorded voicemail at 924-5070. Simply mention Promo Code #1001 when ordering.

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