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Current Market Move Is Third Biggest PE Multiple Expansion Recorded In Shortest Time Ever
Some historical observations: while readers may continue scratching their heads over just what the causes may have been for the torrid 5 month rally we have witnessed, two main things distinguish it among the last ten recessions stretching all the way back to 1953:
- While the S&P has increased by 50% to the (to date) peak, it has done so on a -6% decline in actual EPS, implying the rally has been one of PE expansion, 66% to be precise. As the chart below demonstrates this is the third largest recorded PE expansion in history, with only the 72% PE expansion recorded in 1982 and the 78% in 1974 surpassing the current market.
- Yet, what is unique about this market, is that while both 1974 and 1982 achieved their move higher in about a year (11 months for the trough to peak PE move in 1982, 16 for 1974), the S&P has hit its current PE peak a mere 5 months after the trough. This is an unprecedented record in the history of US recessions, and demonstrates just how much of a push influence Obama's stimulus and Bernanke's QE have had on the PE multiple alone, if not on actual EPS.
Another observation is that at a 19.9x PE through the current market peak, the market is almost 3x turns more expensive compared to the historical peak PE average of 17.1x, and was cheaper at the peak than just the recessions of 1961 (22.7x), and 1990 (21.6x). Any claims that the market is cheap at current earnings are outright lies.
At this point hope is exhausted (in the form of the PE multiple having plateaued), and any further gains will all have to come from an actual improvement in earnings. Yet for that to happen, more than just overhead will have to be cut: actual revenues will need to increase. However, with the record amount of slack still in the system, and the under investment in corporate CapEx, the probability of revenue growth at this point (and this EPS growth) is slim to none.
The graph below provides a convenient way to illustrate this. The past 5 recessions all attained their PE peak at 17x within a yea, at which point it was the Earnings turn to pick up. However, this is precisely where the risk of a double dip occurs: all the growth so far has been one-time in nature, due to various stimuli and subsidies. There is no continuous upward trendline that will encourage EPS growth as discussed above. This likely means that the market will exhaust its "hope" promptly and the current PE of 20x will collapse long before the EPS growth phase is initiated, resulting in either a double dip, a W, or whatever other soundbiting definition one wants to attribute to what the market will look like over the next 6 months.
Data from Morgan Stanley
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Great work there. Things look fishy ahead..
P/E under 20? Oh? Really? Try 130. Seriously. To claim the p/e is anywhere near 20 is flat out propagandizing. What next, a declarative statement on market value based on 2011 earnings? Wall St analysts are douchebags.
I agree, where do the P/E of 20 come from?
The only real market PE is based on trailing earnings,
not expected earnings conjured by hypotheticals.
At 134 based on actual Q2 earnings, the S&P500 PE now
is more than 19 times previous market low PEs of 7.
It should be noted that even trailing earnings now are
suspect since the GAAP abrogation of mark to market.
So many financials did not consolidate balance sheet
with off balance sheet subsidiary losses in derivatives.
Gary Shilling expects $40 S&P earnings for 2009.
At 7 times earnings, that might be an S&P of 280.
We think we may go lower before earnings bottom out:
http://www.jubileeprosperity.com/
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493
Smelly P/E: http://austrianfilter.blogspot.com/2009/09/smelly-pe.html
What more would you expect from a vicious bear market rally? They are like applying a soothing ineffective balm to 3rd degree burns and to calm everyone down. Then the bear comes back with a vengeance and trounces the market yet again. Whether we are there yet in terms of the bounce is of little consequence. On a long enough time line, the S&P is going to get a lot closer to zero than where we are now...
I agree with you but you are applying logic to something that's quite illogical.
Personally, I think anyone putting their money into equities, other than resource plays is committing financial suicide but that's just one man's opinion. A correct one at that.
Can one have an 'incorrect' opinion?
you act as though fundamentals, or anything resembling fundamentals, matter anymore.
"Yet, what is unique about this market, is that while both 1974 and 1982 achieved their move higher in about a year (11 months for the trough to peak PE move in 1982, 16 for 1974), the S&P has hit its current PE peak a mere 5 months after the trough."
The power of HOPE (TM)
You know the equity market rise isn't what bothers me at all, in fact I could care less about it since ultimately it will correct.
What I find most disturbing is the statistical fallacies we're being fed. For instance the FRB has a goal of maintaining employment and stability, but currently the stimulus and backstops reflect a significantly worse employment condition than is being reported a-la BLS and the FRB knows it. Second the moves aggressive as they may be will be short lived and the various stimulus' (stimuli?) is already beginning to show a 'zero' multiplier, in some instances like the house credit or cash for clunkers (if financing was used) there may be a negative effect if one should get laid off and default on the purchase.
This is really a classic Keynesian failure in action, where failure is attempted time and time again because it creates the illusion of 'doing something' within the best interests of the public. Rapid money supply expansion will create an artificial feeling of well being in the marketplace a sort of psuedo confidence, time buying game. The subsequent contraction will be sharp and most likely severe (see China the last two weeks), however since the US didn't rebound nearly as quickly as other various marketplaces it will probably not experience a contraction as severe. Remember this problem wasn't just started 4 years ago, this has been festering for well over a decade and has spread from households to businesses to other nations and developed a nice feedback loop.
Because of it we've experienced 1987, LTCM, Asian crisis, Tech bubble and now Subprime. It will take years to fix and even if the recession is declared over it's a near certainty we'll collapse back into another recession or lower case 'd' depression within 3 quarters when we really see the explosive hubris of Keynesian ineptitude in full swing.
If only you could buy sell package and short stupidity. Oh wait it's a CDO^3.
"Statistical fallacies we're being FED."
Unintentionally summed up in one soundbite, no pun intended. A bullshit burger by any other name etc.
I think we have the unique exeprience of both Keynesianism and disastar Capitalism of the Chicago school (Milton Friedman) Failed stimulus and funneling tax payer money directly into the coffers of trans-national corporations and international banking. I think it's fair to say that the current debacle relates more to the latter than the former. 1987, LTCM, Asian crisis, Tech bubble and now Subprime relates far more strongly to the Chicago school than to anything in Keynes. The idiotic stimulus is as much smoke and mirrors as it is to Keynesianism.
I would assert it's as much Keynes as Chi city, but the media's focus is on Keynesian methodology so it's more meaningful to approach and criticize. Additionally Keynes' methods were proved wrong and disasterous by Volcker/Reagan combo, again making it easier to highlight the ineptness and lack of discipline Keynesian methods require.
All because a system was built on promises that they can't and won't keep.
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Last decade?
Hell, Keynes around since before 1929.
Four dirty secrets:
One, even Keynes said you have to eventually balance the budget, or something for nothing won't work very long.
Two, Not only did Hoover and FDR not solve the unemployment problem, which was in the 20%s into WWII, he killed 60 M
people and broke enough things that it took America, Japan and Germany decades to recover. England never did. U is now
21% on ShadowStats.com
Three, it was not government bailouts, handouts, red
tape, stimulation or 96% taxes that recovered America,
but forced thrift, hard work and not being attacked.
All bets off since 9-11, Murrah and TWA800
Four, adjusted for inflation and survivor bias, Mr
Market did not regain 1929 value until the mid 1960s...
points all well noted, but again keep them in context of the current crisis. This crisis is being approached with a Keynesian touches and is particularly relevant to the last decade, perhaps further but intervention wasn't noted until about a decade ago (significantly lower short term rates).
Also I'm aware of the recovery process, but as the current FRB chairman will remain in office and the President will maintain his position for at least 3 1/2 more years, we can rule out any meaningful attempt at recovery for at least 3 1/2 more years.
Great work Tyler. I've learned more from you, your compadres and many contributing folks here in five months than years of mainstream media outlets.
I travel worldwide for a living and thus experience first hand the reality. Green shoots? Nope...
Anchorage? Dead. And tourists that are there? Spending much less.
Lihue? Hotel reception gal: "Which wing would you like? Ocean or mountain view? Which floor?"
San Jose? Downtown hotel. 20% occupancy rate.
Vegas? Dead. Fold. Snake eyes.
Scottsdale Hyatt and Westin? Packed. With local residents.
Dallas Love? Dead.
Long Beach? 710 to/from the ports? Much safer for cars. Hotels? Packed. But that thanks to a Watch Tower conference. "Ya'll wanna be a Jehovah's witness?" "I can't." "Why not?" "Well, I didn't see the accident..."
Maui? See Lihue above.
More to come...
Anchorage...... No kidding. I counted 80 people standing in line waiting for a soup kitchen to open when I was there in August.
Yeah, flight crews on per diem always looking for a free meal. But seriously, it's getting sad out there. Travel around and ask the worker ants how thing's are going - that's reality...
The only problem with anecdotal data is that there is not enough of it! We all know its true, but to prove it . . . well that's another matter. I always talk to the people cleaning and running the buffers. As you say the trips to Lost Wages are on hold.
love the anecdotals.
I'm UK based,I always talk to the cabbie's when I'm out and about.they've cut the numbers of drivers and thsoe that are working are 40-50% down yoy.
my local barber tells me that people are getting their hair cut once every 6 weeks instead of four.
outside of london,walk past most restaurants and aside from fri/sat,they are dead and generally have more staff than customers.
and this is all without touching on big time lay offs in the manufacturing sector,Rev Par plunging,30:1 leverage in the banking system and the UK govt maintaining bubble time spending commitments to their voters in the public sector.
green shoots my arse.it's at moment slike this ,you need the soothing tones of wallstreetpro2
Here's one: My burb in the Deep South is majorly car culture. It's almost like California in that respect. Every teen, every adult has a car, the whole social activity sphere revolves around cars rolling 24/7.
I live a block from a road that serves as a shortcut between two thoroughfares. Two years ago I could go outside, day or night, and hear the constant roar of traffic (punctuated by the occasional teen gunning the motor of his sport compact).
Now, even today, I go outside and it's eerily quiet. Like the sound on a snow day.
It started when gas prices spiked. But prices dropped and it's still quiet. Like people are making permanent changes.
I live in Jonesboro, Arkansas... I know we've been in the running for lowest unemployment in the country... and our housing market in the sub 200k range is solid (anything above is gonna sit for a very long time and there are sizeable places getting giant haircuts).
Our commercial real estate market is busted... vacancies are increasing... our mall traffic is down... street traffic is down... we're no longer sucking in bargain shoppers from the surrounding 60 mile radius... and just released in the paper were the sales tax collections from the city, which were down 10+% since this time last year, and tax revenues fell off a cliff this time last year...
http://www.jonesborosun.com/archivedstory.php?ID=39529&Search=sales tax
You guys want to look at how state and local governments are doing? Just look at tax receipts.
Not to worry,
Congress about to give 0 the power
to shut the internet down for National Security
I am curious where the current P/E multiple of 20 is coming from and if it is reported or operated earnings.
.
Exhibit A: June 2009
http://www.myinvestmentanalysis.com/an-overpriced-market/
Exhibit B: August 2009
http://www.ritholtz.com/blog/2009/08/chart-of-the-day-sp500-pe-ratio/
.
?
.
There appear to be two schools of intelligent thought as relates to the outlook for the equities markets. (A) Those who contend we are in a manufactured rally concurrent with the first stage of a double-dip recession, with a major market correction in the offing, and an ultimate bottom when the S+P has a P/E in single digits. (B) Liars
How much worse would it be if negative earnings were subtracted? What about accounting shenanigans? Methinks the "E" in that equation is a load of guano.
Shenanigans is such a happy word for stealing. Gee, I hope no one shenanigans my car.
"If I hear one more person say "shenanigans" I swear to God, I'll pistol-whip him!"
Congressman Stark says the Republicans are going to cut taxes on the wealthy. So it's at least three years old, likely more.
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Whose version of earnings are you using, Tyler? Everyone is partial to his own brand, it seems.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices...
click on second link from the bottom for most recent
operating earnings.
Smoking Gun?
Or just the smell of Gunpowder?
After the biggest credit bubble in the history of the planet, one would expect a P/E ratio of under 10. Instead, it's astronomical in terms of trailing earnings. Great for fast money & HF traders, not so good for investors who might have a longer time horizon than minutes, days to weeks. If folks want to buy overpriced & questionable merchandise, have at it. They've been "conditioned" for years to buy overpriced equities at overvaluations in an overinflated world.
Thanks to 3greenlights for the on the spot observations. Bloomberg & CNBC have zero value with their "reporting" anymore.
Just use gobs of cash to throw in a furnace to put out the fire. Without it, this would've been the crash of crashes. And if the currency were pegged to anything, gold, grain, matchbox cars, the people would have run it so hard that gov't would have been stopped stone cold.
All because a system was built on promises that they can't and won't keep. When the old promises fail, just make new and better promises to keep up the scheme. Print fancier.
Garbage. They removed the ability of the average citizen to check their governments predations on their unit of accounting. It holds up the whole ponzi pyramid--haltingly.
Take your greenback, I'll take my precious metal. We'll compare in a few years.
Faced with lying criminals in high places as the backing for my dollar? I think I'll take a pass.
Until this undeclared depression is admitted by
government monopoly media, will keep dollars close,
thanks.
Sold gold in March 08 after buying it in 1999.
Gold nowhere but sideways to down for over a year
while get rich quick gold ads and John Paulson
wannabees soar.
We are descending rapidly into a deflationary spiral. The soaring yen, and other currencies vis a vis the dollar, will not produce inflation here. Instead, it is an indicator of collapsing demand in the U.S. The result will be that even as the dollar collapses, prices in the U.S. will also collapse and faster; collapsing demand will ALWAYS be ahead of dollar collapse. This situation will grind the American economy to death.
This will have the result I have long predicted, and one which is never discussed: the supply chain will collapse. Consolidation does not fortify the supply chain--it wrecks it.
And you want inflation? Sure, and it will even be Austrian: Austria 1919.
Soon we will see the most important change for purposes of the fate of our little police state:
the Department of Labor breaks down unemployment among the educational levels. From now on we will see the rate of unemployment among those with Bachelors+, accelerate at magnitudes greater than unemployment among those with less education.
The unemployed underclass is already brewing its rightwing plans, just as it is doing in Japan.
However, the uneducated need educated leaders (think Dr. Goebbels and many other educated thugs who put themselves at the service of Hitler, including Heidegger, who joined the Nazi Party in 1933 and said he would do everything in his power to advance the cause of Hitler).
The unemployment of the Ph.Ds will contribute mightily to rightwing politics in this country. It's not the pampered scum at the Scaife Foundation or the AEI or these other faux right powder rooms, who will lead this little maneuver--those types are all cowards. It will be the hardnosed, educated losers--real screwed up types--who will have the gumption to organize our little putsch.
Ready, kiddies?
Now the chess match for power begins.
Heidigger, heh heh. Now you'll launch into Hannah Arendt. Seems we've read this script before.
No ammo no revo
How do you have P/E without the E? It is all so manipulated (See TD's Textron post earlier) who knows what can be believed?
“What you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it,”
Barack Obama, March 3rd
You just got to have a long term perspective on it Tyler.
Quick observation: the S&P/Gold ratio indicates that this rally has retraced almost nothing in real terms. It touched .71 and has rallied to the most recent high of 1.1 but to put that in perspective the 2007 high was about 2.33 and the 2000 high was about 5.17
How we really got here ( debt = wealth )... looks like it's the Democrats of California's fault
http://www.youtube.com/watch?v=UjbPZAMked0
LOL
PS just slowly invented magic debt
Good stuff TD. I would love to see a "Value Investor" talk his way out of the numbers. A few posts at our site that you might find interesting with charts and reports on the earnings past and present:
http://www.nakedhedgefund.com/finance/2009-q2-earnings-report-or-lack-th...
http://www.nakedhedgefund.com/finance/stock-fundamentals/long-term-earni...
http://www.nakedhedgefund.com/finance/stock-fundamentals/2009-q3-earning...
Well, I don't mean to be the turd in the punch bowl, but if you had a working crystal ball in either 1961 or 1990 you would have used as much leverage as you could have manufactured to go long the stock market.
And if pigs could fly...
I hate to be the turd in the punch bowl, but if you had a working crystal ball in either 1961 or 1990 you would have used as much leverage as you could manufacture to go long the stock market and you'd have gotten rich.
Not true for 1961. If you were highly leveraged, you would have blown out in 1962.
Homer would've gotten a margin call in August 2002. Then around Labor Day, as he viewed his upcoming 63rd birthday, he'd jump. Marge would then collect the life insurance and run off to Fiji with Regis.
The comparisons to prior periods here is deeply flawed. Interest rates are much lower than the past periods you cite. If you want to assume that rates rise, that is fine, but given the Tylers' penchant for deflation, that would be inconsistent with your other writings.
Corporate earnings increased from Q1 to Q2 this year. They will all but certainly increase again in Q3. Q4 is tougher to call, but given the cleanout of auto inventory a lot of the midwest economy will see some modest improvement.
I respect the bear case immensely, which is why I read everything on this site. But trying to call out valuation shorts is a suckers game.
When yer coming off -23.25 Q4 last year,
anything looks better.
Earnings mostly faked with accounting shams anyway.
Good information TD.. it would be great to hear a "value investor" talk his way out of the numbers. We have a few articles on this topic with some charts and reports at our site:
http://www.nakedhedgefund.com/finance/stock-fundamentals/long-term-earni...
I'm not sure if I agree with your use of Operating Earnings as though they are real and true earnings. Because they are not.
http://seekingalpha.com/article/140011-why-do-cnbc-and-bloomberg-report-...
The P/E based on real earnings of S&P 500 is now 129.19, which is unprecedented in the history of all previous recessions, including the Great Depression.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices...
These are the earnings companies have reported to SEC and to investors. And this is the money the companies actually have. While operating earnings is nothing more than accounting trickery designed to make earnings look better than they actually are.
http://online.barrons.com/article/SB121158260488318589.html
All the stocks with negative earnings have an infinite P/E. With the mass amount of negative earnings, I would venture a guess that the current P/E expansion is greatest on record - ever.
Math dictates that money loosers with "negative earnings" have a negative PE.
A company with NO earnings has an infinite P/E (division by zero)
Any other number is made up by the dismal performing scientists.
Besides those details I agree with your conclusion.
Honestly think fundamentals are very different this time. Seems markets are seperated. Yesterday the dollar rose but gold stayed steady?????? Are we going to see gold break out? Why? Why is the dollar strengthening?
Hope I'm wrong, but I smell a systemic collapse coming up.
When someone liquidates it forces a need for dollars to settle up. So anytime the market moves majorly down you will see the dollar rise and then dump. Last years crash rose the dollar for months. If it crashes again without so much hedge fundy action and super risky stuff going on it could float the dollar up for 2 weeks maybe a month if theres really alot of dollar denominated wealth flows. If you see the dollar JUMP super high like 94 take a dump in your shorts because it'll be uncontrolled and cascading failure. But that will likely happen next year when everyone plays buy and sell the skyscraper.
Interesting. I have been doing well long UDN for a while, so as the market unwinds a bit (my opinion anyway), the play would be long the UUP(dollar up)?
Thanks.
If you can do it fast enough. But you're going to lose sleep over it at a time when it would probably make more sense to watch other things.
based upon what exactly ?
Interestingly enough in 1991 PE valuations were very expensive relative to historic average and we had the best 10 year performance in history....
Please note that your current PE of 19.9 is based on Q2 earnings with August S&P prices (trailing)...A slight inconsistency
Looks like Grandma Goldman is out to get ZeroHedge, she's not taking to your liking talking trash and is driving the mkt higher... Grandma is in control... ZH is just an ant in the road getting ready to be run over by the Goldman Mack Truck. Question... is the mkt going lower? Not sure but if you've been short you've been taken out back to the shed by Zed... mkt could go much higher with all the koolaid and shorts getting smoked and covering. ZH time to get on board, doesn't matter about the manipulation... matters if you are making $$$$$. Question is are you?
http://www.youtube.com/watch?v=eNHwHe5BBjg
Thank you, Tyler.
That is a way of looking at PE I wouldn't have thought of, I appreciate your efforts very much.
:)
Good article would be a recapitulation of what has actually been done (laws, regulations, but also exchange participants do's and don'ts everyone follows) to prevent shorting. What if there is some sort of gentlemanly agreement keeping the stocks afloat because noone actualy dares to short them due to fear of repercussions?
You can be assured that Jamie Dimon and Lord Blankfein are
on each other's speed dial.
In other words, this would be an article stating why this is an extended bear market rally.
TPTB tried everything to get the market up (fill in details here.)
This can not prevent a pension fund from selling to met the contractual obligations. Good luck if there is no willing buyer.
August was a great month and September will be better and my blow dealer is a haaaapy man!
How much influence does China's purchase of US securities have these last 5 months and going forward?
If only a few financial institutions control over 60% of the stock market, how difficult would it be for China and any other countries holding excessive dollars to repatriate them via stocks and bonds?
Is there any accurate measure of how many trillions of dollars are still being held by trading partners?
Why is Zero Hedge falling prey to the same P/E measurement trap that Wall Street has set up as the new reality? We
have a current 19.9 PE only if one uses "operating earnings" rather than GAAP earnings, yet GAAP earnings are the historical standard for P/E measurement. If we start
fudging by using "operating earnings" we are comparing current apples to historical oranges. Using GAAP (and ignoring the fact that the banks are no longer mark to market, so they are reporting fictional GAAP as it stands) the S&P P/E is about 30X 2009 GAAP earnings and 25X 2010 GAAP estimates. Those are historical nosebleed levels
and have NEVER ended well. Maybe this time is different.
Awesome insight.
Here's the answer to what the market will look like in 6-12 months:
Epic Fail
But CNBC says all is well and GE and other financial stocks are way cheap!!
"Yet, what is unique about this market, is that while both 1974 and 1982 achieved their move higher in about a year (11 months for the trough to peak PE move in 1982, 16 for 1974), the S&P has hit its current PE peak a mere 5 months after the trough."
Gentlemen, This is not unique, this 5 month time frame. As a kid I can remember during the mid 70's, my dad calling his broker. Even one time, we stopped on the way home from somewhere and my Dad called from a pay phone. No Net, No Faxes, No Answering Machines, just the daily newspaper and nightly news on3 channels. That was the retail investor then. 82 was a little better, maybe an answering machine, a huge cell phone complete with batterie in a suit case, and thermal fax machine. Still a long way from where we are today.
Now my dad is connected to the net, and can trade in a few seconds. So I believe that this is why it has happended so fast, also the net is why the sheeple are waking up so fast now. Took a long time for the sheeple to wake up during the Nixon administration. Information was slower. Just my two cents.
The most recent quarter "E" included a tremendous amount of cost cutting which can not be repeated. Until I see REVENUE increasing Q over Q and Y over Y I won't be in any rush to jump into this market on the long side.
The plumet earnings was massive tax claw backs and since then it's been cost cutting and layoff savings. Which makes the federal budget disturbing because it sort of indicates the everything that got hammered by the cliff dive wasn't a federal tax paying entity clawing back billions and billions out of treasury.
when the Treasury/Fed officials got together and laid out their objectives on the white board, one of the items on the list was a) prop up the major DOW indices to preserve among the general population a sense of returning wealth and general well-being.
It is not economic theory being practiced right now, it is crisis management.
Having provided investment banking services for the smartest people in Las Vegas I had the opportunity to learn about people in their native environments. The number one person in Vegas once said to me if you want to understand people and business then you have to look at the Casino Business Model. When you look carefully you will find factors including laziness;wishfulness;sleaziness; and exactly what drives people.
Cheap food and rooms=no cost trading for trader
Technical analysis=double down on the numbers
Casino credit lines=Federal Reserve/China etc
Sex=Washington (makes you think you are getting soemthing)
Lasa Vegas=story book to make you think you are in a fantasy
There is noting closer to the casino business model as it relates to the markets. If you look at it closley you will find the same drivers that make the PE multiple go to 19.5x without any fundemental basis. We are not watching investing, rather we are watching gambling. The hope the next roll will get you even or up. The stock price will move up and one can sell it to the next idiot. Not that much different than what happened in housing. Give people the "free credit" and they will gamble it.
Ofcourse every runs stops when the house says seven away and this too is out there.
The FOMC minutes released yesterday may shed some light on the matter:
"M2 was little changed, on net, in June and July. Retail money market mutual funds and small time deposits dropped significantly in June and were estimated to have contracted again in July, likely reflecting the very low rates of interest on these assets and a continued reallocation of wealth toward riskier assets."
In other words, the reach for yield and its bubble forming consequences are hereby back in play.
Or the desire for cash in hand
Tyler,
Looks like the 5.0 under "Peak P/E During Rally" is a misprint.
The P/Es Tyler uses in this analysis (at the upper teens) are based on operating earnings. True P/Es--which incorporate "one-time charges"--are running in triple digits as Bankster notes above.
As a fundamental & strategic investor, I've always wondered about the comparative value of these two concepts in understanding the strength and prospects for a firm. Altho I've been investing for decades, I still haven't picked one over the other conclusively. Right now--when the S&P500 are almost all experiencing "one-time charges" almost every quarter--I think the overall P/E gives a more accurate picture of the health (or weakness) of these firms. Besides the two-year track record of continuing "one-time" charge offs, there are still trillions of dollars of charge offs to be made down the road.
You won't see me investing in this environment.
For the sake of argument, let's assume
you can buy long term value at 10X
"operating earnings" in a 1% real growth
world. That's SPX 500...50% down from here..
1974...that might be about right.
Look at a chart of gold in the 70's. If we experience the pre-explosion deflationary sag I expect, the one mirrored here: http://www.itulip.com/forums/showthread.php?p=106493#post106493 (see second chart down the page titled "Argentine Inflation 1995 - 2009")
then we get the hyperinflationary currency crisis, it might look something like the 1970's gold chart, but more extreme. Not a prediction, not investment advice, blah blah blah.
Remember, Volcker did NOT raise interest rates to subdue inflation. He raised interest rates to save the USD from destruction.
TD we made a chart of the P/E ratios (operaing and As reported) that you might like. I think someone else above mentioned the link but here it is to click:
http://www.nakedhedgefund.com/finance/stock-fundamentals/long-term-earni...
nakedhedge; thank you; that is extremely useful; +1000 for a great job
Excellent analysis on historical P/E at the Hussman Funds:
http://www.hussman.net/rsi/valuerecessions.htm