Wednesday, June 17, 2009

Tobin's "q" Remains Below 1.0

Argus Research estimated the "q" value for first quarter 2009 based on flow of funds data from the Federal Reserve. In Q1 the "q" ratio is estimated at .64.

Tobin's 'q' first quarter 2009
Argus notes:
‘Q’ is defined as the ratio of the market value of a firm to the replacement cost of its assets – in this case, we are estimating those figures for the entire industry. According to Nobel Laureate James Tobin, the ratio of total stock market value to the stock market’s net worth (corporate net worth) is a reliable indicator of market valuation. When the stock market trades at a ‘discount’ to the replacement cost of its assets, the market is inexpensive. This discount possesses ‘q’ ratios that are less than 1.0. Conversely, when ‘q’ exceeds 1.0, the market trades at a premium to its replacement cost. The run-up from 1996-2000 had ‘q’ approaching the unthinkable value of 2.0. Encouragingly, the most recent (QI 09) level of 0.64 is the lowest since QII 91 – quite discounted. The long-term average (since 1952) for Tobin’s ‘q’ is 0.75.

Tobin’s ‘q’ at 0.64 in Q1 ($)
Argus Research
June 16, 2009

1 comment :

TC said...

Thanks for posting this! I will be sure to pass it along to my blog's readers.

Being an Elliott Wave analyst, I can visualize how present expectation for another wave down (to levels last seen in major indexes during 1994) over the next year or so could put Tobin's q-Ratio in a position even more favorable than was the case during the early-'80s.

I first came across Tobin's q-Ratio in "Valuing Wall Street" by Andrews and Smithers, published in 2000. What a timely read it was then! The book does a fine job of presenting the academic case for making the q-Ratio a part of one's analytical toolbox.

Thanks again for this update.