http://www.bloomberg.com/avp/avp.ht...//media2.bloomberg.com/cache/v.8Wcra7zbSE.asf If earnings are on the decline for the next several quarters they aren't cheap yet and their prices will decline further with plenty of time to buy and avoid further declines and dead money at best. Good point made at the end of this video. The economy bottomed in 2001, stocks did not bottom until 2003. And That prior recession was not even close to how deep and how long this recession will be. The economy has become even more consumer driven around 70% of annual GDP. Many more financial debacles to come to drive stocks lower along with falling earnings. Enjoy trading the massive bear market rallies and selloffs! Happy Trades Oh yeah....almost forgot.....Buffy caught the falling knife.....LOVE IT!
Valid points. Many are clamoring here and now about the "value" in the market. But if (when) earnings contract and don't snap back quickly, the P/E should erode down towards the traditional value level of 10x or even lower. The P/E in '82, dropped to 8x... and this mess is likely to be much longer and much worse.
My favorite trick that pundits use is when they use PROJECTED future earnings to justify price now. At least when pricing bonds using present value models you are dealing with fixed and predictable returns.
EXACTLY. Thank you. The fundamentals are eroding and P/E's that might look cheap will be pressured as earnings contract.
You mean like when the Talking Heads were justifying Dot.com prices based upon "muliples of SALES, 5 years out"? (That was the 'new paradigm' at the time... LOL) Sounds totally stupid now, but the street was buying the idea for quite a while...
Projected future earnings are commonly used in fundamental analysis to value stock prices. A common mistake by unsophisticated investors is to make an assumption a stock/co is cheap because the stock price has come down. This is not necessarily true. Just because a stock was $90 once and now it is $30 doesn't not make it cheap or a value buy. Take GM as a perfect example. The stock has gone down but the fundamentals stink and that outlook is unlikely to change any time soon. GM may not be a turn around value play for quiet some time, if ever. As to the overall market and stocks in general. The fundamentals are deteriorating and there is no turn around in sight for earnings. This recession is likely to last into late 2009 at best. Possibly going longer as the driver of this economy the consumer is crushed. We have had manufacturing led recessions but this consumer led recession will be deeper and longer. And in all that time earnings a will not be going higher. Believe it or not but fundamentals drive stock prices. For the market to put in a bottom earnings have to bottom or show signs of a bottom/turn around. We are on the first leg of the earnings declines. If you think earnings are on the upswing then now is the time to buy. I see earnings just getting going on the downswing so I will patiently watch and wait. I just don't see us bottoming here with earnings going lower. That would defy all market laws. Great opportunities to trade. With nice snap back massive up moves/bear market rallies and deep down days. catch those trends intraday. Happy Trades!
I find these 1982 comparisons interesting but an apples vs. oranges comparison. In 82 short term interest rates were are what like 12%? P/E of 8 -> 12.5% earnings yield (1 divided by 8). See a pattern? Also, regarding dividends, today you can pick up a ConocoPhillips (or hundreds of other stocks) paying a 4% dividend yield which easily beats what you get for cash in the bank.