I'm probably going to write more on this but valuing google on a relative basis against Yahoo provides an indication of where the shares are likely to trade. It's interesting that the financials of both companies are relatively similar.
|Implied Market Cap from P/S||32Bn|
|Implied Market Cap from P/E||34Bn|
|Implied PPS from P/S||$130|
|Implied PPS from P/E||$140|
Most interestingly based on a discounted cash flow analysis I calculate Price Per Share (PPS) of around $20-$40.
The Price of Oil Relative to the US Dollar
I have seen many articles refer to the fact that oil prices have increased because of the fall in the US dollar. This implies that oil behaves somewhat like a currency or gold and that as the US dollar falls Oil becomes more expensive as does gold or Euros. This sounds reasonable on the surface and here are a couple of links in which this is mentioned:
http://www.polkonline.com/stories/040404/opi_oilpricerise.shtml - "Between the end of February 2002 and the end of February 2004, the price of oil in dollars rose by 51 percent (from $20 a barrel in 2002 to more than $35 a barrel today), but it rose by only 4 percent in euros. Over the same two-year period, the value of the dollar plunged from 1.16 euros per dollar to 0.80 euros per dollar. In this situation, it is perfectly rational for foreign suppliers of oil to charge more in dollars to make up for the falling value of our currency." " It may seem like a stretch to blame the price of oil on fiscal mismanagement, but the rising price of oil is closely tied to the falling dollar, " - this has been republished by many other newspapers
http://www.ntrs.com/library/econ_research/daily/us/dd021004.pdf -- "Why do I blame the Fed for this? Because the Fed controls the supply of dollars in existence. And a depreciating dollar implies that there are too many dollars in existence. So, if the Fed had printed fewer dollars in the past, the dollar would not have depreciated and the price of oil would be coming down, not staying high." -- this is from Northern Trust Company.
"WTI crude oil forward prices are currently at or above US $28 barrel through 2008 on the NYMEX. Some of this indicated price appreciation in crude oil may reflect compensation for the falling value of the US dollar, but I believe as many others do that we have also entered a new era of crude oil supply and pricing." - MARCEL R. COUTU, President & Chief Executive Officer, Canadian Oil Sands Limited.
Of course the corollary is also quite reasonable. That is, the US dollar rises when the US economy is strong. When the US economy is strong demand for oil increases and with the increased demand comes higher oil prices.
As there seemed to be no research into the subject I took data from early 1983 for oil prices and a weighted index of the US dollar against a basket of currencies. You would expect to see a negative correlation of oil prices increase with a decrease in the dollar. In fact the correlation was positive and nearly .6. This would seem to indicate that a rising US dollar, which we may be about to see with interest rates rising, should cause oil prices to move even higher.
This bodes very well for an investment in Canadian Oil Sands (COSWF, COS_u.TO).
Will the market be overvalued in 12 months time
At today's valuation - yes, very.
I realize that the previous question, Is the market overvalued
is not quite the correct question. The problem is that there is really more than one value of the market. There is today's value and there is the value looking forward. In the event that something is materially different in the future then the valuation has to move from the current to the future valuation.
Where this is really going is that the 20-25% overvaluation of the market based on long term averages of interest rates indicates that the market has a long way to fall when interest rates do rise. The fed model is provides a snapshot suggesting a stock valuation given an interest rate. Now we are probably at a fair value for the S&P with a fed funds rate of 3.5% but any higher than that, such as the long term 5.8% average, leads to a 20% or more overvaluation.
This can play out in three main ways:
The stock market does not increase in value until earnings catch up with the 20% overvaluation. Stagnant market for four years. -- 25% chance
Price to earnings multiples expand as interest rates decline and the market continues to move higher (somewhat unprecedented). Market keeps increasing. -- 10% chance
The stock market drops as would be indicated by the fed model and the market overshoots. Bear market upcoming a bad year in 05 - 65%
Based on my likelihood weightings (which are based on more factors than just the fed model, such as the length of bull markets) there is a lot of downside risk in the broad market right now because valuations are so high. This is not a particularly good time to buy the market. Over the next few years any opportunity to buy the market below 855 on the S&P probably has 6-10% upside per year and increasingly larger upside as you get a price better than 855.
Of course this has little to do with the economy. I expect that we will see a very prosperous economy due to the global boom. The US economy is likely to perform very well and to keep performing very well for a good few years to come. The reason stocks are risky is not because of the economy but because they are currently priced too high. This is the core argument of those in the Bull Market in a Secular Bear Market camp. Based strictly on valuations I believe they are probably correct. There will be buying opportunities in the next decade but they will be at substantially lower prices.
I read an incredibly study which timed secular bull and bear markets. It showed that secular bear markets don't end until PE ratios get down to the single digits. Now I don't think there is any reason to think that is going to happen in the near future with the economy so strong but the risk from today's valuations is ALMOST ENTIRELY TO THE DOWNSIDE