The S&P 500 is now trading at 131 times earnings

Discussion in 'Trading' started by ByLoSellHi, May 20, 2009.

  1. More Irrational than the Dotcom Bubble Minimize

    Tuesday, May 19, 2009

    The Honest Indicator Pointing to a Sharp Correction in the Stock Market

    In its epic battle against reality, “Green Shoot” mentality is getting back into the driver’s seat.

    Stock indexes pushed forward yesterday...the euro’s preparing for a run against the dollar…and India’s stock market saw an incredible 18% gain on the heels of a very favorable election.

    And after waning last week…bullish talk and pundrity re-emerged this weekend from the white house, where Peter Orszag told CNN interviewers that the, “freefall in the economy seems to have stopped.”


    We’re never eager to take the White House at their word…and we’re always willing to check the facts.

    But when we looked into it…the whole rally started to look a little…

    Well, let’s just say that we found something in today’s stock markets that might truly shock you…
    It’s All About Price to Earnings…

    After all, earnings are a major part of the reason you invest in a company.

    We all remember the dotcom boom…and the insane prices that were offered for shares of companies with little or no earnings.

    Back then, it was due to optimism about the internet. The web was growing so fast…and the variety of profitable Internet franchises seemed boundless. The possibilities seemed truly endless…

    That is, until we realized they weren’t. And it all came crashing down.

    Could today’s bear market rally be even more irrational than the dotcom boom…leading to a sharper correction?

    The Price-to-Earnings (P/E) ratios seem to be saying “yes”…

    When the dotcom boom went bust, P/E ratios – a key valuation metric – shrunk back down to more realistic sizes as so many start-ups went bankrupt and faced de-listing. And investors went on to use this metric as a touchstone…evaluating the relative value of bank stocks, REITs and Real Estate Developers.

    But not everyone calculates P/E the same.

    And like so many other complicated concepts – such as inflation – the bottom-line number often serves to hide the assumptions made in calculation. For example, when I say a stock has a P/E of “15” or “6,” I give no description of the time period being used for my calculations, or the various assumptions I’m making.

    It’s like taking inflation – one of the most complicated, hard-to-grasp concepts in all of economics – and saying it’s 4. It’s almost asinine. And it grossly understates…
    What’s Really Happening Out There

    …What’s really happening out there is a freefall of corporate earnings unlike anything we’ve ever seen. The single fastest drop they’ve suffered in recorded history…

    Earnings Fall off a Cliff…But What About Prices?

    If analyst estimates remain on point, then Q3 of 2009 will see the first 12-month period in which earnings run negative.

    But that doesn’t make any sense!

    If earnings were really falling so fast, then why are stock prices rallying? It’s not like we’re all looking at some rosy, tech-boom future. So what’s the deal? Is the “Green Shoot” mentality really that strong…is it really that irrational?

    In a word, yes. But here are a few more words…

    As I mentioned above, P/E could be “cooked” in any number of ways. It could be calculated over a 5- or 10-year period. It could calculate negative earnings as zeroes. Certain analysts might quarantine the bank stocks in their evaluation. Any number of rabbits could be pulled from any number of hats to generate any P/E you want to look at.

    The possibilities are endless.

    But…what if we calculated current P/E based only on this most recent batch of earnings numbers and analyst estimates for the future?

    (I’ll ask you to hold your breath here…)


    Accounting for negative earnings reports for the S&P 500 over the last several quarters, the S&P 500 is now trading at 131 times earnings!

    Of course, it's not the same as when the index traded at 44 times earnings back in the days of the dotcom bubble. That was a peak P/E ratio compared to peak earnings. In that case, both Earnings and P/E ratios eventually fell as the S&P plummeted over 45%.

    In fact, high P/E ratios can sometimes presage a good opportunity to buy…

    That's when earnings simply fell faster and farther than share prices... and earnings were on the verge of a recovery. But we don't think now is one of those times.

    When we look at expected earnings for the S&P 500, we see forecasts of 28.5 for 2009 and 39.3 for 2010. That would put the current value of the S&P at about 32 times this year's earnings and 23 times next year's earnings. Those are numbers far above the long-term trailing P/E average of 16.

    They are farther still from the single digit market P/Es we have seen at previous major market bottoms.

    What's more, market history also shows that when you buy at a P/E above 20, you can expect to see negative share price action over the ensuing 3-, 6- and 12-month periods.

    Last but not least, we find the current level of the S&P in relation to estimated '09 and '10 earnings to be especially pricey for a market that still has so much macro-economic risk in it.

    So today we’ll remind you of the old adage; “Sell in May and go away.” Seems that could be a good strategy this time around.

    Hmmm…I wonder how much those S&P puts are going for…

    Yours in Personal Sovereignty,
    MATTHEW COLLINS, A-Letter Editor
  2. They are conveniently ignoring what S&P earnings will be. This is what happens when you have rookies in gov't. I bet Bernanke really knows the score, he is in over his head trying to keep the dollar from self-destructing though. Good luck, Ben.

    you really think the big banks are never going to turn a profit?
  4. ammo


    not for a long time, their debt (cds) will never be worth a dime
  5. According to Phil Grandy these "markets are rigged"!!
  6. Just taking a simple look at basic weekly reports like unemployment, home sales, etc., the fact that the majority of companies lost big money (and analyst reported they would) and the obvious disconnect the Bernankes, Geitners, and entire Senate has with free enterprise has to make one think that the market rallying is not reality. Especially the financials, I mean not one person on this earth knows what they are really worth? Sure, they are all accounting for their vacant land and homes the same but there is NO market to mark to market. The stress test results are worthless because #1 they were done by the banks themselves and #2 what value did they give to the property that has no value until somebody starts buying it and gives it a value? I respect that the market is always in some way irrational but believe the speed the market rose to these levels and the levels themselves are going to have to reach tipping point at some point soon. You'd be stupid to live in fear and not make money on this volotility but don't turn your back on the obvious. Buylowsellhigh's analysis of the S&P 500 overwhelmingly supports what we all know and that is these levels are too good to be true. Madoff's going to show his head soon. Democratic policy set the stage for a ground zero market and CNBC drove it into the ground faster than ever. These are the same parties responsible for sending it to the sky, in my mind.
  7. Fundamentals don't matter.

    If the market is rising, you go long. If it's falling, you go short. That's how you make money in this market. Sitting in cash is lost opportunity; betting against the market is a losing proposition.

    Yes, the market seeks equilibrium, but we (the market) are all human.
  8. Cutten


    But you cannot tell if the market is "rising" or "falling", because at any split second the market price is static at one price point (last tick). The market may have "risen" (past tense) or "fallen" (past tense), but it is not possible for a market to be rising or falling present tense.

    If you think you should go long because the market has risen (past tense), would you care to explain why? That would mean you should have bought dot.coms at the top and shorted them at the bottom. It would mean you should buy the highs and sell the lows of every trading range. You do not make money as a trader by what has happened in the past, you make money by what is going to happen in the future.

    A trader should be trying to buy when prices are "going to" (future tense) go up, and shorting when they are going to go down. Often this is the exact opposite of what they have done in the recent past.

    As for fundamentals not mattering, so if another 9/11 happened you would be piling in from the long side?
  9. When most people say "the market is rising" they usually mean to say "the market *was* rising".
  10. There ya' go.

    There is ZERO juice in the tank for earnings.

    At a time when peoples' homes have plunged in value, anyone who managed to save any wealth and put into a 401(k) or the markets got decimated, that's having huge knock-on effects such as lower consumption from everything from carpeting sales to restaurant meals, businesses are cutting way back as a result, people are traveling far less, businesses have to let workers go (look at the housing, travel, manufacturing industries)...

    ...and now the dope sellers (credit card and HELOC companies) are actually denying people product and getting rid of customers.

    If I had told you this was going to happen just two years ago you would have said "it's not possible."

    We have a long way down.

    Don't let any 'green shoots' or 'goldilocks' people try to pull the wool over your eyes.

    Every time they try to con you with some fanciful tale or marginal statistic, go right back to jobs (lack thereof), wages and lost wealth.
    #10     May 21, 2009