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How "Cheap" is the Market?



February 08, 2009 – Comments (6)

I saw this chart of the day picked up on Big Picture.

The caption reads, "Earnings are down 60% over the past 17 months making this the biggest drop on record.

The way I see it is the price of the market had the expectation of future earnings priced in it.  I saw the market as way over valued at given levels of earnings.  And now earnings are down 60%.

I think the market is still expensive.  I just don't see earnings going into a strong recovery in the next decade.

6 Comments – Post Your Own

#1) On February 08, 2009 at 10:04 PM, alstry (< 20) wrote:

I just want to know that your blog is very timely and provides readers with great information.

Imagine what the fair value of the stock market would be if you discounted future declines in earnings to present value.....can anyone say much much lower from here.

But few are able think beyond the Pavlovian nonsense they have been fed for the past 30 years.  We had a baby boom generation.  They borrowed and spent a lot of money. 

Most everything got levered and business boomed and prices skyrocketed.  Now everyone wants to cash in at the same time........whooops........

I hope you don't mind but I just recommended this blog 23 times  by recommeding all your posts in 2009.  From a substantive standpoint, it is at least 23X more relevant than a lot of the junk out there.

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#2) On February 08, 2009 at 11:19 PM, angusthermopylae (37.49) wrote:

The chart raises two questions for me:

--First, would this argue for a continued drop, or a bottom?  My gut says "continued," since the earnings went so much higher beforehand.  If there was never an argument for a "bubble", then this chart is definitely it.

--Second, how do you think that chart would translate into song?  I'm thinking something along the lines of a Gregorian chant...moody and dark.

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#3) On February 09, 2009 at 12:02 AM, usmilitiadude (< 20) wrote:

Future p/e for the S&P 500 for 2009 is 20.7. I got that from the S&P 500 earnings and estimate report that is in excel format.

 I'm not sure what the future play should be on the market. I'm mostly cash, 5% in gold bought in November,and some poorly timed SDS. I wonder if cash is even safe, thank you very much reserve fund.

Hopefully I won't lose money and try to learn more about the market.


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#4) On February 09, 2009 at 2:00 AM, awallejr (51.85) wrote:

And yet Valueline has its world of stocks with current PEs at around 11, well under last bear market's average. 

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#5) On February 09, 2009 at 7:46 PM, sentinelbrit (55.68) wrote:

What would the chart look like if financials were stripped out? My guess is that earnings would not have risen so much nor would they have fallen so much.

I think investors often underestimate the potential for earnings to recover sharply after a deep recession. Companies are taking out huge amounts of costs (labor and capex) so any half decent recovery will cause profit margins to rise sharply.

Of course, the financials will see a huge recovery in their profits once all the toxic assets/write-offs etc go through the financial statements. The banks are probably earning a great spread given they are borrowing money from the Fed at marginal rates of interest. 

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#6) On February 10, 2009 at 12:48 PM, SideShowMel0329 (32.92) wrote:

Looking at the chart, based on historical patterns we're pretty much at the bottom right now. Intrinsicly, most U.S. companies haven't lost value (besides exceptions like banks and housing).

Why do you think the market is still expensive?

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