It’s scary stock-market ratio day! Bloomberg’s Lu Wang and Jennifer Kaplan point out that economist James Tobin’s Q ratio — companies’ market value divided by the replacement cost of their assets — is higher for U.S. companies “than any time other than the Internet bubble and the 1929 peak.” Meanwhile, FT Alphaville tells of a Macquarie report on margin lending in China, which now accounts for 8.9 percent of the combined free float of the Shanghai and Shenzhen stock markets. That “could already be the highest level of margins vs free float in market history.”
What are we to make of these ominous-sounding measures? Something. Definitely something.
First, Tobin’s Q. Tobin, who died in 2002, was a Nobel-winning Yale macroeconomist who was very interested in financial markets. An article he wrote in 1958 was key to the development of modern portfolio theory, the approach to investing that gave us efficient frontiers, asset allocation, index funds, beta and all that. Then, in 1985, he helped start the alternative investing boom by recommending that his former doctoral student David Swensen take over Yale’s endowment, which Swensen transformed into a market-beating assortment of private equity, hedge funds, forests and other interesting things. Tobin was also the model for a character in his Navy buddy Herman Wouk’s book “The Caine Mutiny,” although he doesn’t appear to have made it into the movie.
Read Full Text HERE