Musings on Markets

FEBRUARY 11, 2023

In this section, I will begin measures of country default risk, including sovereign ratings and CDS spreads, before moving to more expansive measures of country risk before concluding with measures of equity risk premiums for countries, a pre-requisite for estimating the values of companies with operations in those countries.

Risk Premium 96

Risk Premium Start-ups Equity Marketability 96

Musings on Markets

JANUARY 20, 2021

Note that nothing that I have said so far is premised on modern portfolio theory, or any academic view of risk premiums. It is true that economists have researched risk aversion for centuries and concluded that investors are collectively risk averse, and that the level of risk aversion varies across age groups, income levels and time.

Risk Premium 52

Risk Premium Risk-free Rate Equity Dividends 52

Musings on Markets

JULY 17, 2023

Exacerbating the pain, corporate default spreads rose during the course of 2022: While default spreads rose across ratings classes, the rise was much more pronounced for the lowest ratings classes, part of a bigger story about risk capital that spilled across markets and asset classes.

Marketability 98

Marketability Risk Premium Start-ups Treasury 98

Musings on Markets

JANUARY 30, 2023

Just as rising equity risk premiums push up the cost of equity, rising default spreads push up the cost of debt of companies, with the added complication of higher default risk for those companies that had pushed to the limits of their borrowing capacity in a low interest-rate environment. in 2022, higher than the 1- 1.5%

Treasury 96

Treasury Start-ups Risk Premium Equity 96

Musings on Markets

OCTOBER 4, 2023

Price of Risk The drop in stock and bond prices in the third quarter of 2023 can partly be attributed to rising interest rates, but how much of that drop is due to the price of risk changing? below the actual index level of 4288, making it close to fairly valued. below the index value of 4288, confirming my base case conclusion.

Marketability 120

Marketability Start-ups Risk Premium Treasury 120

Musings on Markets

JULY 27, 2022

The effects of inflation show up first as higher risk free rates , across currencies, and next in higher risk premiums, with both equity risk premiums and default spreads rising. As a company with the bulk of its business in India, Zomato again is more exposed to these developments. 2% from my IPO valuation.

Risk Premium 98

Risk Premium Start-ups Equity Marketability 98

Musings on Markets

JANUARY 27, 2022

That said, the three primary inflation indices in the US, the CPI, the PPI and the GDP deflator all told the same story in 2021: Download historical inflation numbers The inflation rate during the course of the year reached levels not seen in close to 40 years, with every price index registering a surge.

Risk-free Rate 99

Risk-free Rate Treasury Price to Book Start-ups 99

Musings on Markets

JANUARY 5, 2024

Beta & Risk 1. Equity Risk Premiums 2. I also have implied equity risk premiums (forward-looking and dynamic estimate of what investors are pricing stocks to earn in the future) for the S&P 500 going back annually to 1960 and monthly to 2008, and equity risk premiums for countries. Buybacks 2.

Dividends 105

Dividends Risk Premium Equity Book Value 105

Musings on Markets

JANUARY 8, 2022

Risk Premiums : You cannot make informed financial decisions, without having measures of the price of risk in markets, and I report my estimates for these values for both debt and equity markets. I extend my equity risk premium approach to cover other countries, using sovereign default spreads as my starting point, at this link.

Risk Premium 99

Risk Premium Start-ups Market Capitalization Corporate Finance 99

Musings on Markets

JANUARY 24, 2024

The graph below looks at US treasury rates, for maturities ranging from 3 months to 30 years, during the course of 2022 and 2023: Download data As you can see, while treasury rates, across maturities, jumped dramatically in 2022, their behavior diverged in 2023.

Treasury 52

Treasury Risk Premium Start-ups Risk-free Rate 52

Musings on Markets

FEBRUARY 10, 2021

The answer, to me, seems to be obviously yes, though there are still some who argue otherwise, usually with the argument that country risk can be diversified away. In that post, I computed the equity risk premium for the S&P 500 at the start of 2021 to be 4.72%, using a forward-looking, dynamic measure. as mature markets.

Risk-free Rate 52

Risk-free Rate Risk Premium Start-ups Equity 52

Musings on Markets

MARCH 19, 2022

The overriding message in all of this data is that Russia/Ukraine war has unleashed fears in the bond market, and once unleashed that fear has pushed up worries about default and default risk premia across the board.

Start-ups 100

Start-ups Risk Premium Equity Market Capitalization 100

Musings on Markets

JANUARY 9, 2021

The macro variables that I track on my site relate to the price of risk, a key input into valuation, in both equity and debt markets: US Equity Risk Premiums : The equity risk premium is the price of risk in equity markets.

Risk Premium 52

Risk Premium Market Capitalization Equity Start-ups 52

Musings on Markets

FEBRUARY 15, 2023

the returns you can make on investments of equivalent risk, and that game became a lot more difficult to win in 2022. To explore differences in profit margins across industry groups, I broke stocks down into 94 industry groups, and sorted industries, based upon operating margin, from highest to lowest.

Start-ups 52

Start-ups Equity Risk Premium Risk-free Rate 52

Musings on Markets

JANUARY 26, 2023

As I noted in my last post , rising risk free rates and equity risk premiums have pushed up the costs of equity for all companies, and Tesla is not only no exception but is perhaps even more exposed as an above-average risk company.

Start-ups 98

Start-ups Marketability Risk Premium Equity 98

Musings on Markets

MARCH 25, 2021

Risk premiums No effect or even a decrease. Risk premia may rise as inflation increases, because higher inflation is almost always more volatile than low inflation. Download data While the chart itself has too much noise to draw conclusions, the correlations that I have calculated provide more information.

Equity 52

Equity Risk-free Rate Treasury Start-ups 52

Musings on Markets

FEBRUARY 2, 2023

To fill in the missing pieces, I redid the valuation picture, adding the revenue growth rate, by year: Download spreadsheet As you look at the sheet, it is worth emphasizing a few estimation details that you may have missed in my original post: First, the revenue growth rate , at least for me, is a means to an end, not an end in itself.

Start-ups 99

Start-ups Risk-free Rate Market Capitalization Marketability 99

Musings on Markets

NOVEMBER 9, 2021

Risk : When I valued Tesla last in early 2020, I used a cost of capital of 7%, reflecting a risk free rate of 1.75% and an equity risk premium of 5.2% for mature markets.

Start-ups 101

Start-ups Dividends Marketability Market Capitalization 101

Musings on Markets

JULY 22, 2021

History and Business Model Zomato was founded in 2008 by Deepinder Goyal and Pankaj Chaddah, as Foodiebay, in response to the difficulties that they noticed that their office mates were having in downloading menus for restaurants. Overall, I will attach a likelihood of failure of 10%, reflecting this balance.

Marketability 99

Marketability Start-ups Equity Price to Book 99

Musings on Markets

FEBRUARY 27, 2023

An Optimizing Tool In my second and third data posts for this year, I chronicled the effects of rising interest rates and risk premiums on costs of equity and capital. In computing the latter, I used the current debt ratios for firms, but made no attempt to evaluate whether these mixes were "right" or not.

Equity 52

Equity EBITDA Start-ups Net Debt 52

Musings on Markets

JANUARY 12, 2021

Last week, was my data week, where I download and analyze data on all publicly traded companies, listed anywhere in the world, and I will post extensively on what the numbers look like after a most tumultuous year. As we approach the turn of the calendar year, I have my own set of rituals that prepare me for the new year.

Corporate Finance 52

Corporate Finance Start-ups Finance Marketability 52

Musings on Markets

JANUARY 27, 2021

In my last post , I described the wild ride that the price of risk took in 2020, with equity risk premiums and default spreads initially sky rocketing, as the virus led to global economic shutdowns, and then just as abruptly dropping back to pre-crisis levels over the course of the year.

Start-ups 52

Start-ups Marketability Equity Treasury 52

Musings on Markets

JANUARY 28, 2024

Risk Differences across Countries In this final section, I will look risk differences across countries, both in terms of why risk varies across, as well as how these variations play out as equity risk premiums.

Risk Premium 117

Risk Premium Beta Start-ups Equity 117

Musings on Markets

MAY 11, 2021

With stocks, I compute this pre-personal tax return at the start of every month, using the current level of index and expected cash flows to back out an internal rate of return; this is the basis for the implied equity risk premium. It is one more reason that blindly using historical risk premiums can lead to static and strange values.

Dividends 52

Dividends Start-ups Risk Premium Treasury 52

Musings on Markets

JULY 25, 2023

Equity Risk across Countries Default risk measures how much risk investors are exposed to, when investing in bonds issued by a government, but when you own a business, or the equity in that business, your risk exposure is not just magnified, but also broader.

Risk Premium 52

Risk Premium Equity Start-ups Risk-free Rate 52

Musings on Markets

JANUARY 17, 2025

Download historical data Across the 97 years that I have estimated annual returns, stocks have had their ups and downs, delivering positive returns in 71 years and negative returns in the other 26 years. Historical Context To assess stock returns in 2024, it makes sense to step back and put the year's performance into historical perspective.

Equity 126

Equity Risk Premium Treasury Start-ups 126

Musings on Markets

JANUARY 10, 2025

Thus, as you peruse my historical data on implied equity risk premiums or PE ratios for the S&P 500 over time, you may be tempted to compute averages and use them in your investment strategies, or use my industry averages for debt ratios and pricing multiples as the target for every company in the peer group, but you should hold back.

Risk Premium 115

Risk Premium Dividends Start-ups Corporate Finance 115

Musings on Markets

FEBRUARY 8, 2025

In the first five posts, I have looked at the macro numbers that drive global markets, from interest rates to risk premiums, but it is not my preferred habitat. The second set of inputs are prices of risk, in both the equity and debt markets, with the former measured by equity risk premiums , and the latter by default spreads.

Risk Premium 72

Risk Premium Beta Start-ups Equity 72

Musings on Markets

JANUARY 28, 2025

Using a different lexicon, the price of risk in the bond market decreased during the course of the year, and if you relate that back to my second data update, where I computed a price of risk for equity markets (the equity risk premium), you can see the parallels.

Banking 69

Banking Treasury Risk Premium Start-ups 69

Musings on Markets

JULY 24, 2024

After the 2008 market crisis, I resolved that I would be far more organized in my assessments and updating of equity risk premiums, in the United States and abroad, as I looked at the damage that can be inflicted on intrinsic value by significant shifts in risk premiums, i.e., my definition of a crisis.

Risk Premium 75

Risk Premium Equity Start-ups EBITDA 75

Musings on Markets

FEBRUARY 6, 2025

The logical step in looking across countries is measuring risk in countries, and bringing that risk into your analysis, by incorporating that risk by demanding higher expected returns in riskier countries. The answers, to you, may seem obvious, but I find it useful to organize the obvious into buckets for analysis.

Risk Premium 67

Risk Premium Start-ups Enterprise Value Equity 67

Musings on Markets

MARCH 15, 2025

Thus, my estimates of equity risk premiums, updated every month, are not designed to make big statements about markets but more to get inputs I need to value companies. In the table below, I show my estimates of the implied equity risk premium for the S&P 500 at the start of every month, since January 2024, and on March 14, 2025.

Start-ups 128

Start-ups Risk Premium Marketability Equity 128