The S&P Needs to Fall Another 50% Before Stocks Are Cheap 13 comments
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With the words “green shoots” and “bull market” getting more and more coverage in the mainstream financial press, it’s worth considering if this current market / economy is actually improving. Personally I don’t know what data the folks at CNBC are looking at. Because to me, all signs point to further wealth destruction and great economic contraction to come in the months ahead.
For starters, there’s the issue of sentiment. Many commentators have made a big deal out of the fact the Chicago Board of Options Volatility index (VIX) - a common measure of investor sentiment - recently fell below 30 for the first time since the Market Crash in October. However, a VIX reading of 30 only indicates that investors are back to normal “bear market” freak out mode as opposed to full-blown “the world is ending” crisis hysteria: Remember the VIX was at 30 during the recession of 1990-91 and during the Tech crash. So this hardly indicates things are getting much better.
Moreover, from a valuation perspective, stocks are nowhere near cheap. During the recessions of the early ’70s and ‘80s, stocks fell to trade at single digit Price-to-Earnings (P/E) ratios. With this current recession obliterating earnings every month, P/E ratios are actually rising, NOT falling.
Consider that earnings estimates for the S&P 500 in 2009 currently stand at $28.51. With the S&P 500 trading at 887, this puts the stock index at a P/E of 31! That’s the kind of valuation seen during bubbles, NOT bear markets.
For the S&P 500 to trade at a P/E of 7 (where it did during the last two major bear markets), the S&P 500 would have to fall to 200 (I’m not saying this will happen, but simply pointing out how expensive stocks are). Even a P/E of 15 would put the S&P 500 at 382: a more than 50% decline from where the market trades today.
Of course, this is assuming that the current earnings estimates are accurate: as recently as Feb 9, 2009, earnings estimates for the S&P 500 in 2009 were as high as $42. It’s also worth mentioning that earnings are generally massaged to be higher than real profits via various accounting gimmicks. REAL corporate profits (cash flows) are likely to be even lower.
No, if this bear market goes the way of others, we’ve still got quite a ways to fall. Indeed, as far as bear markets go, we’re currently right in the middle based on the number of weeks declining:
Bottom line: Don’t trust the mainstream financial commentators or government officials. We may be seeing “green shoots,” but remember that green shoots can spring up even in a barren parking lot. This doesn’t mean you’ve got the makings of sustained growth.
Instead, it’s far more likely that this market has a long ways to fall. We’re certainly long overdue for a correction of 10% or so. I wouldn’t be surprised if we got this in the next four weeks.
Prepare your portfolio accordingly.
Good Investing!
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The earnings forecasts for 2010 are only $46 – only 7% growth over 2009 estimates, for a of PE 19.8 – a fantastic forward PE especially for a strong bear market and having only 7% growth form trough earnings.
Bear market PEs have ranged from 6 to 10. Average PE during the bear market 1974 – 1984 – 9.47, low of 7.3 in 1974, max of 12.4 in 1983 (based on year end S&P close and actual earnings).
S&P estimates have actually down over the last 3 months: 3/22 – $49.09; 04/20 –$ 44.40; 05/20 – $42.93. So much on the green shoots & V recovery theory being propounded over the same period.
So the story simply does not add up.
Most experts attribute a PE of 10 for bear markets. Based on that current PE of 21 is way way too high. Based on a high PE of 10 S&P should go below 500 very easily.
But markets can stay irrational longer than you can remain solvent. Currently the market has decided to get into a euphoric mood, even sentiment is up. No matter the housing data, job losses, or GDP data (revisions due tomorrow) – market seems to take it into stride and goes up – hogs to the slaughter.
However, some INDIVIDUAL stocks are huge bargains. No need to time the market, just buy underpriced securities, ignore the rest.
On May 27 01:24 AM Fighting Yoda wrote:
> The current S&P earnings forecasts for 2009 are $ 42.93 (top
> down operating earning earnings consensus forecasts as compiled and
> published by S&P). With S&P closing today at 910 it translates
> into a PE of 21.
> The earnings forecasts for 2010 are only $46 – only 7% growth over
> 2009 estimates, for a of PE 19.8 – a fantastic forward PE especially
> for a strong bear market and having only 7% growth form trough earnings.
>
>
> Bear market PEs have ranged from 6 to 10. Average PE during the bear
> market 1974 – 1984 – 9.47, low of 7.3 in 1974, max of 12.4 in 1983
> (based on year end S&P close and actual earnings).
>
> S&P estimates have actually down over the last 3 months: 3/22
> – $49.09; 04/20 –$ 44.40; 05/20 – $42.93. So much on the green shoots
> & V recovery theory being propounded over the same period.<br/>
>
> So the story simply does not add up.
>
> Most experts attribute a PE of 10 for bear markets. Based on that
> current PE of 21 is way way too high. Based on a high PE of 10 S&P
> should go below 500 very easily.
>
> But markets can stay irrational longer than you can remain solvent.
> Currently the market has decided to get into a euphoric mood, even
> sentiment is up. No matter the housing data, job losses, or GDP data
> (revisions due tomorrow) – market seems to take it into stride and
> goes up – hogs to the slaughter.
On May 27 02:21 AM TonyNasir wrote:
> Majority of earning surprises this quarter have come on the heals
> of cost cutting. There's always a limit to the extend you could
> go on cutting the costs without affecting the critical operations
> needed for the future growth etc.. What matters is the future P/E
> rather than the current one. If the market is anticipating the earning
> growth to pick up soon and rallies on that belief...it's ought to
> come down if that assumption does not materialize. As an investor,
> one has to be real careful here as in spite of deteriorating economic
> data, Majority of earning surprises this quarter have come on the
> heals of cost cutting. There's always a limit to the extend you
> could go on cutting the costs without affecting the critical operations
> needed for the future growth etc.. What matters is the future P/E
> rather than the current one. If the market is anticipating the earning
> growth to pick up soon and rallies on that belief...it's ought to
> come down if that assumption does not materialize. As an investor,
> one has to be real careful here as in spite of deteriorating economic
> data, analysts from Golman Sachs and Morgan Stanley have been making
> the bullish calls to prevent the market to break down from the critical
> levels....which amounts to a clear manipulation of the stock market....but
> remember, it could only work for the short term and won't help ultimately.
> In the mean time, it does enable these crocked people to jack up
> their own firm's stock prices (indirectly) and profit from cashing
> out their options....they give a damn what would happen to those
> investors who bought into their bullish and obviously insane calls
> and upgrades. Just watch out…you are going to see more of the upgrades
> like BAC & CAT last week by Goldman and AAPL by Morgan Stanley
> today at the critical junctures.
9:00 am : S&P futures vs fair value: -0.80. Nasdaq futures vs fair value: -5.30. Corporate headlines have picked up in the last hour. Monsanto (MON) this morning that it expects third quarter earnings to come in at $1.15 per share, which is well short of the $1.58 per share that Wall Street had forecast. As for fiscal 2009, Monsanto expects earnings to total $4.40 per share, which misses the $4.61 per share that analysts have projected. Shares of MON have reacted to the announcement by falling more than 4% to $81.69 per share ahead of the
what I don't get is the large systeic corporations all report worsening conditions (cat, deere, microsoft, dow) and the news is ignored. consumer confidence is up, but that is the most easily manipulated. what what happens as the price if gas goes up.
On May 27 01:42 AM mrxg4 wrote:
....
> However, some INDIVIDUAL stocks are huge bargains. No need to time
> the market, just buy underpriced securities, ignore the rest.
You're certainly correct in thinking that a correction would affect all stocks to some degree, but it will vary, which is why certain sectors like healthcare and telecoms are considered defensive. They may well decline, but nothing like the high-fliers.
I think that whether correlations would again approach 1, like they did late last year, and into Feb./March would depend on how any correction plays out. I'd guess that if the process was a long, drawn-out grinding down process, the tightening of correlations would be minimal.....historic norms would hold true. If, however, there's a sharp break, precipitating panic selling, they would again approach 1.
On May 27 11:13 AM onebir wrote:
> True enough - but when there's a correction, won't underpriced shares
> fall too? One widely observed feature during the stockmarket falls
> preceding this rally was unusually high positive correlations between
> asset price movements (within and between asset classes I think).
>
>
> On May 27 01:42 AM mrxg4 wrote:
> ....
also, many market wtchers believe it is more accurate to look at the pe ratio based on 10 year trailing earnings. on that basis the currect market position indicated a buy point.
On May 27 01:13 AM MDRunner wrote:
> Broad market P/E measures may be misleading due to impact of asset
> write downs and losses in the financial sector. A sector by sector
> P/E analysis would be more useful in determining how "expensive"
> or "cheap" the market is.
"Never bet against the market" - the first +30% from the March lows were hard to achieve with this strategy (one cannot pick a bottom AND market direction - I missed that one), but the next +30% are more predictable. Yoda (above) is right, markets can stay irrational longer than you can remain solvent.