Are “Animal Spirits” Moving the Market?

10/02/2013 8:00 am EST


Laszlo Birinyi

President, Birinyi Associates, Inc.

Veteran market strategist Laszlo Birinyi makes the case for why the market still has room to run, even though most commentators, economists, and measures say it is overvalued.

HOWARD:  I’m Howard Gold, editor at large for and a columnist for Market Watch, and I’m speaking with Laszlo Birinyi.  Hi Laszlo, how are you?

LASZLO:  I’m good, sir.

HOWARD:  Well Laszlo, you know a lot of investors follow what’s called the Shiller P/E, the CAPE adjusted for inflation over 10 years, PEs over 10 years, and right now, if I’m not mistaken, it’s around 23 to 24 times, which looks a little high.  You have done a lot of work on this.  How do you see this?

LASZLO:  The first question I ask is why.  For years, we looked at trailing and multiples in the market and for years that worked, but all of a sudden, in this market, we’ve come up with this fascination with looking at a different viewpoint.  I think part of it is because a lot of people are so negative, a lot of people from the beginning have been reluctant, and this happens to create a negative message, as opposed to the Traditional approach, and with all due respect to Dr. Shiller, if you go back to 1990, for example, that market started 17 or 18 times.  Now, no one was concerned about it then, and this time around…

HOWARD:  17 or 18 times on the CAPE or 17 or 18 times on the Shiller?

LASZLO:  On the Shiller.

HOWARD:  On the Shiller, okay.

LASZLO:  This market – Shiller, according to Forbes Magazine, said he wouldn’t buy until it got to 10, so…

HOWARD:  Well he also did say – actually, earlier this year I saw him on the television.  He also did say that even though it was at that level, he said it’s not humongous and he was actually buying stocks as opposed to TIPS, which have been a big favorite of his, which struck me as very surprising.

LASZLO:  Sometimes you change course, if you admit it, but again, I look at it, and historically, I don’t think it’s been quite the issue that it should be.  I think part of it, unfortunately, is because Dr. Shiller has been credited with calling the dot-com bubble…

HOWARD:  And the real estate bust, too.

LASZLO:  But in reality, he was bearish in 1996, and told Mr. Greenspan and friends that the market was grossly overvalued and he wrote a couple of papers including one in 1997, and in 1997, he said the market 10 years from now will be down 45%, and so to me, the whole issue fails (SP?) in intellectual and historical basis.

HOWARD:  So let’s get back to P/Es.  I mean, he was trailing P/Es.  Where do we stand in trailing P/Es right now and how does that stack up to previous market?

LASZLO:  Well, it’s above the norm.

HOWARD:  What is it about 18 or 19?

LASZLO:  17 or 18, but one thing we have – no one has mentioned this in the market, it’s what’s called Animal Spirits.

HOWARD:  Animal Spirits, that’s the Keynes phrase.

LASZLO:  Actually, Dr. Shiller wrote a good piece, a good article about that, a good book about that, and that I think is a very critical issue.  When you get to a point – as Yogi Berra once said, “If people don’t want to come to the ballpark, you can’t stop them”, and sort of reviewing (SP?) at some point we’re not going to talk about P/Es, we’re going to talk about potentials.

HOWARD:  Right, so right now, I mean, a lot of people say well, the P/Es are getting a little higher, but they’re really not dramatically high.  We’re not talking about, like, a 1999 P/E, or something like that.  I mean, we’re talking about sort of in the upper-middle range, right?

LASZLO:  Upper-middle range, and the potential of a better economy.  I mean, this economy is still – one article says it’s mixed and yet Time has a four-page story about how we’re underestimating the economy, so I think the jury is still deliberating regarding the economy, and if you give it the benefit of the doubt, it would probably still be moderate, but again, I don’t buy the argument that Shiller at 23 times is a real cause for concern, because the last time it was 23 times going up was in 1995 and over the next five years then it went up 127%.

HOWARD:  Thank you very much.

LASZLO:  My pleasure.

HOWARD:  We’ve been speaking with Laszlo Birinyi on the Video Network.

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