Is Shiller P/E Worth It?

The Shiller P/E has been in the news lately (1, 2, 3) as various critics and proponents say say that the high level (~24 vs 17.5 average in the last century) is either indicative of danger or not applicable in this case. To review: the Shiller P/E is the 10 year inflation adjusted trailing P/E of the S&P 500. Also called the cyclically adjusted price-to-earnings ratio, the ratio is meant to smooth the volatile earnings of the business cycle and generate a genuine measure of value for the market.

After reading AQR's paper extolling the use of Shiller P/E (10 yr trailing P/E) while acknowledging its limitations, I am tempted to ask the question - Shiller P/E even worth it as a tool?

(Source: http://www.multpl.com/shiller-pe/)

There is little question that the indicator is elevated. Apart from the 90s technology craze and the 20s pre-Depression bubble the indicator has never been this high. But what does this actually mean for markets going forward? Before even questioning the assumptions behind Shiller P/E, what is its track record taken at face value? Again, AQR (and many others) have done some analysis:

As highlighted - we are in the 2nd to highest decile. This implies a measly 0.9% mean annual return going forward. But what about the volatility? The best 10yr return was 8.3% annually vs -4.4% worst. Not exactly compelling for a buy, but is it worth it to sell (short)? Selling now and being wrong means possibly missing/losing 8.3% annually for 10 yrs. Does that present an attractive risk reward?

On the other hand, buying at the lower two deciles is far more compelling. The worst case is a 4.8% return for the lowest return & 10.3% average. I'll take that all day.

Bottom line - I don't think Shiller P/E is useful for calling tops, even using the proponents' data. It is, however, possibly useful for bottoms. The market may correct severely tomorrow, but don't think that using this indicator one would have sold anywhere near the top.

Contemplating ING US (VOYA)

Ran into ING US (VOYA) while hunting for cheap price to book investments. It has turned into a bit more interesting than just that metric and indeed may be an aig-style investment.

A background:
ING US is a financial services company that until recently was part of the Dutch company ING Groep NV. It, like many global financial services companies, went to the brink of catastrophe in 2008 and more specifically received a $13.5B tarp-like capital injection from the the Dutch State. Since then, ING has been selling assets to repay the bailout, most recently with the IPO of ING US (to be renamed VOYA Financial in 2014).

Key points of a long view here include: 1) forced selling by ING's parent 2) a stabilizing retirement, insurance & asset management business:

1) Forced selling - VOYA's own prospectus calls this ipo a divestment transaction meant to repay part of the remaining 2.2B EUR ( 10B - 7.8B from previous transactions) that VOYA still needs to repay. As such, it is clearly government-driven and not focused on economic value given back to the firm.

2) While it is one of the largest life insurers in the US, nearly half of VOYA's revenues actually come from the retirement division:

Revenues from that half the firm are fairly recurring and stable as a percentage of AUM. Provide plan administration, i.e. the boring/safe side of the business. Same goes for the asset/investment management side of the business. On the insurance side, there is exposure in the variable annuity product in that VOYA provides capital protection in an equity-like product. It is risk, but one that I continue to like because of my overall positive view on us equities (see previous blog posts).

Finally, there is the issue of the closed books (i.e. the "bad bank" that holds alt-a and other legacy assets from the financial crisis). Considering the great reversal of many of these former toxic instruments and the gains from last year, I do not think they are marked aggressively).
 

As such, is such a business trading @ ~0.5x book value in an industry usually => 1x book a compelling investment? This is not meant to be a full pitch, but rather a starting point for further thoughts.

P.S. Looks like I am not the only one looking into VOYA.

Thoughts?

Disclosure: I am long VOYA

Time to Buy Big Banks? (BAC/C/WFC/JPM)

Bank-bashing has become a national pastime in the last few years (1, 2, 3, 4). From unfair subsidies as too big to fail to unwieldy conglomerations that no one knows how to value, run or even understand, there is no shortage of criticisms for TBTF banks.

Early contrarian investors in 08 such as Bill Miller were trampled by the herd and in retrospect buying way too high. Paulson/BAC and Ackman/C have been similarly hurt trying to time to bottom and inevitably sells at the bottom:

Paulson in BAC 2011

Ackman with Citi in 2012:

So, what is different now that could make banks a buy? I actually won't go into the fundamental reasons because they are common place. At a high level, bac/c are trading at slightly less than 1x tangible book and all are trading ~10x or less "normalized" earnings.

I don't believe fundamentals can be an effective timing tool alone here, so let's look at market psychology. Are flows finally moving into financials?

As such, is now a good time to buy and hold for the next 3-5 yrs (until normalization?)