What Is the S&P 500's Real P/E? 19 comments
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The S&P 500's P/E ratio is 10, correct?
No, not even close, and here is data direct from S&P to back that up.
According to Standard and Poor's the current P/E ratio using the historically relevant earnings model, as-reported earnings, is 40 with the S&P 500 at 700. That's using the Q4 data with 98% of companies reporting.
If you use operating earnings, the current P/E is 14, 40% higher than 10.
Even if you want to cheat and use operating earnings or Q3 earnings, just take another look at that earnings report and notice what the projected P/E ratios are. Now ask yourself how accurate earnings estimates have been and how accurate they are likely to be.
Both operating and reported earnings have gone negative in Q4 and are likely to stay that way for some time. In the past year, earnings estimates have had to be corrected downward on a week-by-week basis, last quarter falling from +50% at the start of the quarter to -40% as actual earnings came out.
So now you know the truth and you know you are either being lied to or the people who are supposed to be keeping you informed are incompetent; take your pick.
Disclosure: Short the S&P 500 via SDS.
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This article has 19 comments:
and check then the new P/E you might be surprise.
On Mar 10 07:51 AM dzr_greg wrote:
> Take out Citigroup and AIG...
> and check then the new P/E you might be surprise.
So many possibilities...so many uncertainties...
It's kinda like gambling, isn't it?
Well, this guy here thinks that SDS is a buy "below 75":
seekingalpha.com/artic...
BELOW 75!!?!! Jeez, I wonder if it'll drop that much? Well, the chart looks kinda scary to me...perhaps it went "too far, too fast"?
Not to worry...you'll be able to add to your position ("double down"?) when it gets below 75 (or, even better, below 65, where it's a "strong buy"). After all, it couldn't go any LOWER than that, could it?
One thing I can't figure out...why are all these "investors" SELLING their SDS shares today? I mean, just now I see a couple of blocks of 400,000 shares sold at 103! That's a lot of shares, isn't it? 4 MILLION dollars worth, yanked out of SDS in a matter of minutes. Don't they know "the truth"? Haven't they read your article on SA?
Maybe they just can't handle "the truth."
> Hmmm...SDS down 10% now. Time to add to your position yet?
>
> Well, this guy here thinks that SDS is a buy "below 75":
>
> seekingalpha.com/artic...
>
>
> BELOW 75!!?!! Jeez, I wonder if it'll drop that much? Well, the chart
> looks kinda scary to me...perhaps it went "too far, too fast"? <br/>
>
> Not to worry...you'll be able to add to your position ("double down"?)
> when it gets below 75 (or, even better, below 65, where it's a "strong
> buy"). After all, it couldn't go any LOWER than that, could it?<br/>
>
> One thing I can't figure out...why are all these "investors" SELLING
> their SDS shares today? I mean, just now I see a couple of blocks
> of 400,000 shares sold at 103! That's a lot of shares, isn't it?
> 4 MILLION dollars worth, yanked out of SDS in a matter of minutes.
> Don't they know "the truth"? Haven't they read your article on SA?
>
>
> Maybe they just can't handle "the truth."
>
They are probably selling because it makes sense right now, as I have done. When you see one of these corrections coming it is wise to get out of the way and preserve your capital for another day. Holding onto a position to prove a point to someone is foolish.
The truth is that SDS is one of the few things you would have made a profit on this month, this year, last year, or for the past year and a half.
My portfolio is up 50% since the highs of 2007 (having been a bull until August of 2007) and that puts me up 300% over where I would be if I had held my long positions. In that time I have had limited exposure because of the leverage of SDS (2x short the S&P 500).
In truth, I would have been better off to just have bought and held 100% of my portfolio in SDS but in an environment like this it is wise to reduce your exposure and preserve your capital.
My problem with the people who have reacted so angrily to the information I posted is that they have no data to argue with. I simply posted facts that people can use to make decisions. Making investing decisions out of anger or emotion is not wise. I hope the market goes up and the economy improves; I fear it will not for some time; I base that on all the data available to me.
> Take out Citigroup and AIG...
> and check then the new P/E you might be surprise.
Thanks for actually providing that data for us...oh, wait, you didn't.
If I have time I will look it up and post it but the fact that these two companies are so important to our economy suggest that we can't just take them out and set them aside and make investing decisions based on that.
I strongly suggest that those of you who get so angry at being provided DATA that does not support your position take a good, hard look at how you invest. My #1 rule is to ALWAYS be willing to question what I know or believe I know.
> Take out Citigroup and AIG...
> and check then the new P/E you might be surprise.
According to the data sheet I posted from S&P taking out AIG would increase as-reported earnings by $7.10, leaving the as-reported P/E at 28.6 and the operating earnings P/E at 12.9.
They do not provide the same data for CITI but it is safe to assume the affect would be somewhat less.
It is a shame, however, that people choose to focus on how we can manipulate earnings further when it is such manipulation of the facts that got us into this mess in the first place.
Once again, as stated by Standard and Poor's:
"As Reported Earnings: Earnings including all charges except for discontinued operations and extraordinary items, as defined by GAAP. This is the broadest measure of corporate performance of the three considered here. It is also the traditional measure with a long history. It has been used for the S&P 500 and for company analyses for decades."
We should be using as-reported earnings as the standard, not forward earnings, not peak earnings and not operating earnings or pro forma earnings.
Using any of these others is fine as long as it is fully disclosed and they are not compared to the reported earnings that have been used throughout stock market history.
If we expect the stock market to bottom with a P/E under 10, based on a history of doing so, it is vital that we use the same P/E ratio that provided the data from the past.
next year you will be able to buy all the stocks you can pay for at a p/e of 5 or less.
They do not provide the same data for CITI but it is safe to assume the affect would be somewhat less.
It is a shame, however, that people choose to focus on how we can manipulate earnings further when it is such manipulation of the facts that got us into this mess in the first place. "
It's not about masking data, it's about making investment decisions based on information where outliers are having a disproportionate impact.
If you're so interested in using data using the same "methodology as prior history", how about you take a look here: www.ifa.com/Media/Imag...
(Some) criteria for inclusion on the S&P include four quarters of positive net income and a subtantial market cap. The S&P is supposed to be a proxy for the general health of the market. Now I ask you, does a stock trading at 0.40 with a 1B$ market cap belong on the S&P? How "representative" of anything in the market is that stock when the majority of stocks in the market have higher market caps?
So, perhaps, eventually C & AIG will be pulled out of the index. Will that make the market/economy better or worse? Of course not, yet magically the P/E will be lower. Not saying it's cheap or expensive. I'm only showing that calculations on aggregate P/E when just a couple of stocks account for half the multiplier is completely foolish.
Exclusion/inclusion in the index is done by a small committee so you're letting a few old men deciding who gets in the index, color your entire outlook on a nation's economy. Funny, that.
On Mar 10 06:44 PM GoMyLittleSheep wrote:
> If you're so interested in using data using the same "methodology
> as prior history", how about you take a look here: www.ifa.com/Media/Imag...
>
>
> (Some) criteria for inclusion on the S&P include four quarters
> of positive net income and a subtantial market cap. The S&P is
> supposed to be a proxy for the general health of the market. Now
> I ask you, does a stock trading at 0.40 with a 1B$ market cap belong
> on the S&P? How "representative" of anything in the market is
> that stock when the majority of stocks in the market have higher
> market caps?
>
> So, perhaps, eventually C & AIG will be pulled out of the index.
> Will that make the market/economy better or worse? Of course not,
> yet magically the P/E will be lower. Not saying it's cheap or expensive.
> I'm only showing that calculations on aggregate P/E when just a couple
> of stocks account for half the multiplier is completely foolish.
>
>
> Exclusion/inclusion in the index is done by a small committee so
> you're letting a few old men deciding who gets in the index, color
> your entire outlook on a nation's economy. Funny, that.
I looked at the page you referenced and it is something that any objective investor should consider, as I already have.
But there are many problems with your arguement:
1. Even excluding financials the S&P had negative earnings for the quarter.
2. The S&P 500 is large enough that it will not suddenly have a completely different P/E if a company is replaced, or even if several are replaced.
3. The companies you are talking about are "too big to fail" which means they are the very lifeblood of our economy; why would you wish to ignore what they are going through?
4. Financials are the base problem and any investor or economist will tell you that the rest of the market will be lead by the financials. This means that the rest of the economy WILL (has been) damaged by the problems with the financials.
I could go on but I simply posted some DATA that people can use to make their own decisions and if you refuse to use that data then I will benefit from it and your money will soon be in my wallet and I am good with that.
> Well does it really matter? When the PE was 40 and Book was 5 times..
> Cramer and the clowns n CNBC said buy.. Today they're not sure? Either
> way the table at the NYSE Casino will re-open at 9:30 am. Now really,
> is anyone truly an investor in US stocks?
I will be an investor in U.S. stocks, likely within the next two years.
And it DOES matter. When people see these P/E ratios finally come out - and that will happen very soon now as the Q4 reporting is 99% complete - it will be another step towards a real capitulation.
This capitulation will be like the one we saw in the late 1970's and early 1980's or the one in the 1930's & 1940's. A whole generation of people will lose so much money that they won't go near stocks until we get close to the next peak a few decades down the road.
For this to happen we have to go much lower and along the way these investor's who came to consider themselves geniuses as they "bought the dips" for a decade or two will be suckered back into bear market rallies again and again until they have nothing left to lose.
...it IS a bit like a casino, now isn't it?