Saturday, October 18, 2008

S&P 500 P/E Ratio Update

this is a follow up to a post I wrote in August entitled S&P 500 P/E Ratio.

"This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke... Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years."

no, that's not a quote from Mr Buffett. it's actually by R. W. McNeel, some market analyst writing at the end of October, 1929. (many more quotes from the era can be found at this page.)

the Dow Industrial Average has declined as much as 45% from the top last year, about as much as 1973/74 bear. but of course the 29/32 crash shaved nearly 90% off the Dow.

but if you look at it priced in Gold, the Dow's a quarter of what it was nine years ago. so it could be said that the Stock Markt has been 'crashing' for nearly a decade now.

this Dow/Gold Ratio has recently been probing the 10 to 1 level. this is where the ratio was in 1995, at the base camp of the great bubble. eventually this ratio will move even lower, of that I have no doubt. but there could be a lot of back and forth before it does.

Still a Question of Earnings.

there is the appearance of some value in equities presently. I see some high dividends about and also some low book values. not everywhere but enough to notice. but the problem is Earnings. the trailing P/E ratio for the S&P 500 is at 19.2. (psst...that's still high, folks.) sure, many supposed 'quality' companies have P/Es less than 10.

we've seen the 'Credit Crisis'. my fear is that we've yet to really see the 'Earnings Crisis' play out. according to the forward consensus P/E for the S&P 500 is 11.9, so there is still the collective prediction on Wall Street that earnings are in for a huge rebound. the wishful thinking just refuses to abate!

when forward consensus earnings go below actual trailing earnings then Trend & Value might get bullish on the Stock Markt. the level of the market may be higher or lower when that happens, but as a contrarian I just won't be comfortable in the bull camp until then.