| Thursday's Headlines 1. U.S. markets rise as the Dow notches a new record high 2. U.S. Senate approves the USMCA 3. Blackrock tops $7 trillion in AUM 4. Stock valuations stretch to historic levels 5. Google joins the trillionaire club Markets Closed
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High Valuation Alert We've written a lot lately about the high valuations of U.S. stocks and why this could threaten the bullish momentum pushing markets to higher highs. The price-to-earnings ratio (P/E ratio) is a classic way of looking at valuation. Another related way to is to look at the PEG ratio, or P/E over growth ratio. The PEG ratio is a stock's P/E ratio divided by the growth rate of its earnings from a specified time period.
It is used to determine a stock's value while also factoring in the company's expected earnings growth and can sometimes provide a more complete picture than the P/E ratio.  The S&P 500's current forward P/E ratio of 18.4 represents the highest level since 2002, while the PEG ratio reached a record high, according to Bank of America research. Put another way, the amount that investors will pay for stocks relative to the stocks' long-term earnings growth expectations is at a multi-year high. Remember stocks are priced based on investor perception of their future profits.
The reason the PEG ratio is at a record high, according to the Bank, is that investors have been chasing yield, because, as the above chart shows, higher valuations are correlated with higher dividend payout ratios.
The S&P 500's current payout ratio is 42% versus a long-term average of about 45%, so the payout ratio isn't likely to go much higher from here, according to Bank of America.
The financial sector's ratio of 27% is well below its historical average of 36% so payout ratios in this sector can rise a fair bit before they're back in line with historical levels.
If it sounds complicated, it's because it is. But, what you need to remember is that you should evaluate a company's P/E ratio and its PEG ratio to make sure they are not overpriced, which could expose you to risk when investor sentiment turns. It will, eventually.  Google hits a Trillion The word googol means 10 to the 100th power, or 1 with 100 zeroes after it. While Google the company may be named after that number, its fame has far eclipsed that of its namesake since the company was launched in August of 1998.
A little more than 21 years later, Google finally reached a $1 trillion market cap, joining Microsoft, Apple, and Amazon in the 12 zeroes club. Saudi Aramco is in there as well, but it went public at nearly $2 trillion, so it's not quite the same.
As a public company since 2004, Google has delivered a better than 2700% return to shareholders. It has also changed the way we live, think, drive, and consume media. For investors, giant market caps used to be a sign of heavy valuations. The bigger you got, the harder it was to move the needle in terms of share price. Apple, Microsoft, and Amazon have crushed that fear given their market performance over the past several years.
Google, now called Alphabet, has made a lot of money for its investors, partners, and the companies it has incubated. It has also made quite a bit of cash for these two former Stanford University graduate students, who, in a garage, came up with the idea to build software to index the internet. photo courtesy Google.com 
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(chart courtesy YCHARTS)  Shares of XPO Logistics climbed today after it said it was considering spinning off one or more of its business segments. Theme park operator Six Flags Entertainment gained today after activist investing firm H Partners Management said it was in talks with Six Flags' management. Morgan Stanley rose after a strong earnings beat.  Aluminum producer Alcoa dropped substantially today after it reported higher-than-expected losses due to the global supply of aluminum substantially outpacing demand. Bank of New York Mellon fell today despite beating earnings expectations after executives said that expenses were likely to rise more than expected this year. Word of the Day Price/Earnings-to-Growth – PEG Ratio The price/earnings to growth ratio (PEG ratio) is a stock's price-to-earnings (P/E) ratio divided by the growth rate of its earnings for a specified time period.
 Today in History January 16, 1707 Today in 1707 the Scottish Parliament ratified the Treaty of Union. When it took effect later that year, it united the kingdoms of Scotland and England as the Kingdom of Great Britain, which would become the modern United Kingdom or U.K. There had been previous attempts to unite the two kingdoms over the previous century, but all had failed. One major driver of the union was the failure of the Scottish attempt to colonize Panama, known as the Darien Scheme. A substantial portion of Scotland's financial capital was invested in the colonization effort, and when it failed, it was a financial catastrophe. Part of the treaty was an English payment to Scotland, most of which went to cover the colonial venture's debts. The union wasn't unopposed and there were multiple instances of street violence and outright rebellion over the subsequent hundred years. Recently, the Scottish National Party (SNP) organized a 2014 referendum to decide if Scotland should secede from the U.K., it failed to pass 45% for to 55% against. However, with Brexit looming, something that Scottish voters were overwhelmingly against, the SNP has discussed holding another referendum to leave the U.K. and stay in the EU. Source: https://www.parliament.uk/about/living-heritage/evolutionofparliament/legislativescrutiny/act-of-union-1707/overview/the-1715-rebellion/
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Thursday, January 16, 2020
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