Are We Really Overpriced?
November 05, 2009
– Comments (12)
I think we have gotten ahead of ourselves a bit. But the question here is different, it is not will the market fall in the coming weeks? It is where is fair price for this market. Here are two scenarios that can justify either point of view, which looks more reasonable and if something is missing please add it:
Argument 1: Overpriced
If you look at EPS for the S&P we are somewhere over 100. If you exclude extraordinary items (loan writeoffs are part of extraordinary expenses I believe so excluding this is questionable) the P/E is ~25. Historical P/E is about 16. Usually when you see a company selling for a multipule over 20 you are expecting revenue growth north of 6-7% for it to be at fair value. According to a blog by TMF Jake it looks like the stimulus package effect peaked in the 3rd quarter so there will be a net sucking effect on GDP by the bill from here on out. Considering that we managed to grow at 0.875% with a 3% addition from the stimulus package it looks like we may be double dipping. I don't know if that makes things look overpriced to you but it does to me...
Argument 2: Fairly/Under Priced
current EPS is roughly 25 for the S&P 500. that is pretty close of the 1971-2007 avg. of about 24. A shocking majority of the funds from the stimulus packages have yet to be spent so Jake's post may not be entirely accurate. The credit markets are unfrozen! Everything looks like we are growing again and the market is the same price it was back in 1998 (also the same price it was in 02 and 03). Do ya think we've grown production possability since then? above all right now everyone is saying the market is overpriced. As such it probably isn't.
Where do I stand on all this?
Well my opinion is that we are a bit too high and will likely suffer a pullback to somewhere south of 1,000 but I would not not consider it out of the question for us to remain where we are. What is your opinion?
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