More on Roubini and Shiller's Dour Outlook

Well, you guessed it. I'm here to post up even more bullish news! And, by bullish news, I obviously mean bearish news. After all, its Nouriel Roubini and Robert Shiller.

Here's the deal, Shiller has a set of S&P earnings and P/E ratios available in spreadsheet format here. Big hat tip to Cliff Küle for flagging this Shiller data and graphs to our attention. Cliff posts up some historical info, illustrated below. First, real S&P composite earnings:
Click to enlarge:

And secondly, historical P/E ratios and interest rates.
Click to enlarge:

By that historical data, you'd think that a 5 P/E could be achieved given the severity of everything that's happened. But, if you're not that apocalyptic, then maybe somewhere around 10x would be more appropriate. And, 'Dr. Doom' himself, Nouriel Roubini thinks that the S&P500 will see 600, which could be somewhat close to 10x by his measurement. Taken from Bloomberg,

The benchmark index for U.S. stocks would have to slump 12 percent from last week’s closing level to meet his forecast. Roubini is assuming that companies in the S&P 500 will report profit of $50 a share this year and investors will pay 12 times that for equities.

My main scenario is that it’s highly likely it goes to 600 or below,' Roubini said Thursday in an interview at the Chicago Board Options Exchange Risk Management Conference in Dana Point, California. A level of '500 is less likely, but there is some possibility you get there.'

Comments

[the ilster:]

Those charts really amplify the bubble we were in and now are popping

Mar 12 07:13 PM

[J. D. Swampfox:]

But... there's no problem with the banks according to Pandit, Lewis, Geithner and Bair! And if there's no problem with the banks, then there's no problem with the economy. And if there's no problem with the economy, there's no reason why stocks should not return to their old highs. Wutsa matter, don't you believe in this rally?

Mar 12 07:43 PM

[Nik Kondrat...:]

Well, of course, JD Swampfox, isn't this all just a crisis of confidence? Once the banks start lending again, Uncle Sam starts doling out all that stimulus money, and consumers start spending again, we'll be back to normal. That's what Timmy and Benny are telling us so it must be true. Now if we could just get the rest of the G20 to follow along.

Mar 12 08:25 PM

[ArkansasAngie:]

" ... don't you believe in this rally?"

As a matter of fact ... I don't.

Mar 12 09:12 PM

[Marp:]

www.contrahour.com/con...

Mar 12 09:20 PM

[2houndz:]

Let's see - 53 percent of Americans are worried about losing their jobs, but all we need is for the banks to start loaning again. Surely all those worried about their jobs will lever up and start spending like drunken sailors (with acknowledgement to all my drunk sailor friends).

And how can Bair say this week that the banking industry is fine when six days ago she said the FDIC is at risk of becoming insolvent?

No wonder the market is confused. Public Official Pandit basically said this week that this is the least Citi has lost since it started losing money, and now that the pubic has taken most of the crap off their balance sheet they look really good. Well guess what Vikram? If you or the taxpayer or my Dad would cover my rent and my car payment, I would easily be solvent.
This news caused people to go on a buying spree? Seriously?

Mar 12 09:26 PM

[samwise:]

oh there's a bubble all right, but this ain't the one. and since swampfox has brought it up--didn't congress just legislate away all the bad paper today?

Mar 12 09:35 PM

[Yamaka:]

I believe the Stock Market will settle around 825 for SP500 in a few weeks because the 52 week earnings in the last 12 months is $55 (Bryini, as reported by WSJ).

For the year end, it will hit 1125, as the expected earnings for the next 12 months is $75. A P/E of 15 is the long term average. If this happens, then this is just yet another pedestrian recession, which happens once in 6-8 years. Long term investors need not worry!

Mar 12 09:54 PM

[E Thomas St.:]

Except the causes of this recession are not pedestrian like the early 90s one was. It is not an excess of production and stagnating inventories that caused this, it was a debt bubble popping and popping hard.

And long term investor should hope for a deeper recession.

On Mar 12 09:54 PM Yamaka wrote:

> I believe the Stock Market will settle around 825 for SP500 in a
> few weeks because the 52 week earnings in the last 12 months is $55
> (Bryini, as reported by WSJ).
>
> For the year end, it will hit 1125, as the expected earnings for
> the next 12 months is $75. A P/E of 15 is the long term average.
> If this happens, then this is just yet another pedestrian recession,
> which happens once in 6-8 years. Long term investors need not worry!

Mar 12 10:34 PM

[logicalman:]

read it..doom and gloom end of the world scenario..not worth a fiddlers fart.


On Mar 12 09:20 PM Marp wrote:

> www.contrahour.com/con...

Mar 12 10:46 PM

[Jason Rines...:]

The short term outcome is being loudly proclaimed, more pain. The medium term due to QE will be recovery and then stagflation afterwards, tepid Bull in five years. I am getting bored with the same discussions over and over and am actually doing something about it. No more time for vanity. Best of success to you gents.

Mar 12 11:22 PM

[Fred Voetsch:]

On Mar 12 09:54 PM Yamaka wrote:

> I believe the Stock Market will settle around 825 for SP500 in a
> few weeks because the 52 week earnings in the last 12 months is $55
> (Bryini, as reported by WSJ).
>
> For the year end, it will hit 1125, as the expected earnings for
> the next 12 months is $75. A P/E of 15 is the long term average.
> If this happens, then this is just yet another pedestrian recession,
> which happens once in 6-8 years. Long term investors need not worry!


That's all tongue-in-cheeek, right?

Well, just in case you're serious go to Standard & Poors data sheet for the earnings rather than using Bryini's, which is Q3 earnings combined with the current S&P 500 level.

www2.standardandpoors....

What you see is that using the 98% of reported earnings for Q4 give us a 40 P/E ratio.

Mar 13 02:13 AM

[Fighting Yoda:]

I think the graphs have been poorly drawn, the scale of earnings does not match with S&P – the value disparity is too high. Also the author has not disclosed/described the Shiller methodology. Shiller computes PE based on average of last 10 years earnings- adjusted for dividend and inflation. That is not the way conventional PE is computed/published. Conventionally PE is TTM (trailing 12 months actual earnings) or forward estimate - no adjustments for inflation or dividends. (Not necessarily disputing the merits of Shiller methodology)

So if look at S&P PE, by the conventional means – we have current earnings projections ranging from $35 - $65. During bear markets the PE has ranged from 6 – 12. If you take a PE of 10 and $50 earnings estimate, you will get S&P @ 500. Yes during bear markets earnings fall as well as the multiple contracts.

So yes, current S&P at 750 is at a 15 PE- that is way too high, not just from a bear market troughs, but actually also higher than historical averages- average PE (TTM) was 9.4 from ’74 –‘84.

Mar 13 03:01 AM

[Henry Buttal:]

Good post, SB-Tiger. I think the comparison to 74 to 84' is the correct one.

However, I think part of issue here is that the recent earnings include significant right down of assets to "market". These assets haven't disappeared, they have just been revalued. Some of these will be written back up at some point, whether as balance sheet adjustments, or as realized profit for some investor.

I think it is unlikely we will fall all the way to 500. At the end of the year I looked at GDP as compared to the market, and thought 600 to 650 was more likely, as that would take it back to a 1995 to 1997 time frame in GDP ratio.

Mar 13 12:40 PM

[Steve Ward:]

If the banks are in good shape then the first people that line up forloans are the companies and individuals who are the shakiest in their ability to re-pay. It's the nature of things. And if the banks lend, the loans go bad we are right back where we started.

Mar 13 07:15 PM

[A. R. Rotsevni:]

I urge all to take Shiller's raw data and perform semi-log plots. The net result is that two clearly definable economies with ~1.7% pre-1933 SP500 ann growth and ~6% post-1933 SP500 ann. growth rates. The establishment of the Fed's control in the Banking Act of 1933, the creation of FDIC and the Glass-Stegall Act of 1933 dramatically reduced the rate of capital destruction.
Shiller averages all periods to make his forecasts. He is incorrect to do this. He is so incorrect that one wonders how he ever got tenure.

Mar 16 10:17 AM