If you sold every share of every company in the U.S. and usedthe money to buy up all the factories, machines, and inventory,you'd have some cash left over. That, in a nutshell, is the mathbehind a bear case on equities that says prices have outrunreality.

The concept is embodied in a measure known as the Q ratiodeveloped by James Tobin, a Nobel Prize-winning economist at YaleUniversity who died in 2002. According to Tobin's Q, equities inthe U.S. are valued about 10 percent above the cost of replacingtheir underlying assets—higher than any time other than theInternet bubble and the 1929 peak.

Valuation tools are being dusted off around Wall Street asinvestors assess the staying power of the bull market that is nowthe second longest in 60 years. To Andrew Smithers, the 77-year-oldformer head of SG Warburg's investment arm, the Q ratio is anindicator whose time has come because it illuminates distortionscaused by quantitative easing.

“QE is a very dangerous policy, in my view, because it haspushed asset prices up, and high asset prices, we know fromhistory, are very dangerous,” Smithers, founder of Smithers &Co. in London, said in a phone interview. “It is very stronglyindicated by reliable measures that we're looking at a stock marketwhich is something like 80 percent over-priced.”

Dissenting Views

Acceptance of Tobin's theory is uneven at best, with investorssuch as Laszlo Birinyi saying the ratio is useless as a signalbecause it would have kept you out of a bull market that has added$17 trillion to share values. Others see its meaning debased in aneconomy whose reliance on manufacturing is nothing like it used tobe.

To Smithers, the ratio's doubling since 2009 to 1.10 is asymptom of companies diverting money from their businesses to thestock market, choosing buybacks over capital spending. Six years ofzero-percent interest rates have similarly driven investors intoriskier things like equities, elevating the paper value of assetsover their tangible worth, he said.

The Standard & Poor's 500 Index rose 0.3 percent at 4 p.m.in New York, closing at a record for a third straight session.

Members in the benchmark gauge last year spent about 95 percentof their profits on buybacks and dividends, with stock repurchasesexceeding $2 trillion since 2009, data compiled by S&P DowJones Indices show.

In the first four months of this year, almost $400 billion ofbuybacks were announced, with February, March, and April ranking asthree of the four busiest months ever, according to data compiledby Birinyi Associates Inc.

Spending by companies on plants and equipment is lagging behind.While capital investment also rose to a record in 2014, its growthwas 11 percent over the last two years, versus 45 percent inbuybacks, data compiled by Barclays Plc show.

With equity prices surging and investment growth failing to keeppace, the Q ratio has risen to 58 percent above its average of 0.70since 1900, according to data compiled by Birinyi and the FederalReserve on market and asset values for non-financial companies.Readings above 1 are considered by some to be too high and theratio has exceeded that threshold only 12 percent of the time,mostly between 1995 to 2001.

That's nothing to be alarmed about because the American economyhas become more oriented around services than manufacturing,according to George Pearkes, an analyst at Harrison, New York-basedBespoke Investment Group LLC. Nowadays, companies like Apple Inc.and Facebook Inc. dominate growth, while decades ago, it wasrailroads and steelmakers, which rely heavily on capital.

Mean Reversion

“Does that necessarily mean that the Q ratio should be as highas it is right now? I don't know,” Pearkes said by phone. “Withthose sorts of long-term indicators, they can sometimes mean thatthe market is overvalued. But the reversion to the mean on them isusually going to take a lot longer than most people's timeframe.”

Any investors who based their investment decisions on the Qratio would have missed most of the rally since 2009, according toJeffrey Yale Rubin, director of research at Birinyi's firm. Themeasure rose above its historic mean three months into this bullmarket and since then, the S&P 500 has climbed 131 percent.

“The issue we have with Tobin Q is that it does a very poor jobat timing the market,” Rubin said from Westport, Connecticut. “Thefollowers of Tobin Q never told us to buy in 2009, yet now we arewarned that we should sell. Our response is sell what? We werenever told to buy.”

Everyone from Janet Yellen to Warren Buffett has spokencautiously on stock valuations in the past month. Both the Fedchair and chief executive officer of Berkshire Hathaway Inc. saidprices are at risk of getting stretched should bond yieldsincrease. The rate on 10-year Treasuries slipped last week to 2.14percent while the S&P 500 gained 0.3 percent.

“It's probably a sensible configuration for the stock market tobe overvalued because competing investments are so poor,” RobertBrusca, president of Fact & Opinion Economics in New York, saidby phone. “As an investor, you're not just looking at the value ofthe firm, but the value of the firm relative to other things youcan do with your money.”

At 2,260 days, the bull market that began in March 2009 thismonth exceeded the 1974-1980 rally as the second longest since1956. While measures such as price-to-earnings ratios are holdingjust above historical averages, the bull market's duration issowing anxiety among professionals who watched the previous two endin catastrophe.

“We're still close enough to that prior experience, and thathold-over effect is still there,” Chris Bouffard, chief investmentofficer who oversees more than $10 billion at Mutual Fund Store inOverland Park, Kansas, said by phone. “When you start to see priorcycle peaks on the chart like Tobin Q and any other valuationmetrics that people are putting up there, it looks dramatic, stark,and scary.”

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