Wednesday, September 30, 2009

Tobin's "q" Still Below 1.0 In Second Quarter

Argus Research performed a back-of-the-envelope value of Tobin’s ‘q’ – which is a measure of market valuation. This is based on the Federal Reserve's recently released quarterly Flow of Funds data for the second quarter of 2009.
"Investors will recall that '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, or cheaper to buy than build. 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. The most recent (QII 2009) level of 0.78 is notably higher than the 0.65 posting in the first quarter, which was the lowest since QIV 1990."
(click to enlarge)


Anonymous said...

So at the end of June 2009 it was cheap, this Fed data lags quite a bit right? S&P 500 closed June around 900.

Burt said...

A graph of Q vs. 10-year future returns yields an R-squared of about .4. Not bad for a very long term forecast. I'd show you the scatterplot, but I don't know how to insert pdf's.

David Templeton, CFA said...


If you email me the "PDF" I will be happy to add it.