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"Fair" Value of the S&P
So called "top-down" earnings estimates for the
S&P 500 are made by brokers and economists, who look at the S&P
in aggregate and estimate the index as if it were a single "firm".
Whereas the "bottom-up" estimates are made by security analysts
who estimate the earnings of the individual firms in the S&P, then
add them up to estimate the total earnings of the index. Richard Ripp compares top-down to bottom-up estimates and concludes that top-down estimates have proven to be more accurate over time.
Macro Man
has a great post in which he compares two versions of top-down
estimates for 2010 earnings for the S&P and one bottom-up estimate.
Looking at 2010 earnings estimates yield an incredibly
broad range of forecasts. If you believe the crack-smoking bottom-up
guys who strip out everything that could be construed as a "loss", you
get a resounding $74 pr share. Not bad!Taking the same approach (stripping out the quarterly "one offs"),
but from a top-down framework, yields a substantially less rosy result:
earnings of just $46 per share. And actually counting all the turds for
what they are on a top-down basis yields 2010 EPS of just $37 per share.
Here's his chart (click it to enlarge) that shows various multiples
applied to each of these three earnings estimates (the $74 bottom-up,
the $46 top-down, and the "as the analysts think earnings will be
reported" $37 top-down):
Note that even the most generous multiples applied to the "as
reported" estimates still indicates the market is overvalued at present
levels. If analysts are underestimating earnings by say 15% and we
adjust their "middle of the road" $46 estimate upward by that 15%, then
we get a "corrected" estimate of about $53. Even then, only if we then
apply a multiple of 20X to them do we get a value comparable to the
present market level. You be the judge - what's a "fair" multiple for
S&P earnings in 2010? Is it 20X? BTW, Jeremy Granthum's current estimate of fair value for the S&P is 880.
View the original article at:
http://www.swampreport.com/investments/fair-value-of-the-sp/
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Last I checked, S&P had pulled all top-down (GAAP) estimates from its spreadsheet... very interesting...
Check it out at http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices...
NIPA corporate after tax profits is 912....a 1 to 1 ratio
has historically been considered cheap but things got crazy
last fall and the first of the year...
S&P posts a big Excel file with all you need to know about earnings. Just google S&P 500 earnings, and the latest version pops up. Look at "as reported" earnings for the real deal, bottom line profits.
I was reading on financialsense that S&P500 PE ratio is 723!
Here is the link:
http://financialsense.com/fsu/editorials/shepherd/2009/0728.html
I read a similar article from Karl Denninger.
This article paints an entirely different picture.
Fair value has to consider what stocks actually pay out to their owners. The div yield is about 2.5%, though the payout ratio (div/earnings) is about 80%, meaning dividends should fall by 40-60% or earnings need to double soon.
With the risks at hand today, I'd look for 7% dividends as fair compensation, and if dividends fall by 60% from peak levels (earnings are down by much more already), that would be about the 200 level on SPX.
Hyperinflation concerns are an indication that too many people think about the monetary system in the way Bernanke does. Debt traps us in deflation. Not forever, but for much longer than most suspect. Besides, on the way to hyperinflation, if it does happen at some distant point, is just regular inflation, which is bad for stocks: witness the 70s.
As the previous poster said, inflation is a negative for stocks - look at what happened in the 1970s. The reason for this is that the fundamental value of a stock is the present discounted value of its future cash flows, and when inflation is high (and therefore so are interest rates) investors apply a higher discount rate to future cash flows.
To the extent you believe fundamentals matter any more, anyway.
Fundamentals don't matter, anymore.
this analysis does not consider the possibility of hyper inflation, does it? in an environment of hyper inflation (or the expectation of hyper inflation) current equity prices are dirt cheap, arent they?
equity prices are bound to correlate closely with with inflation. consider that even in the case of equities in general appreicating in value "somewhat worse than the general inflation", equities will probably outbeat most other attempts of value preservation.
if hyper inflation is expected why would it not be normal to see equities rally prior to actual inflation manifesting itself.
too far fetched???
too far fetched???
Yes. . .
Agree that equities will always be a good hedge against inflation, but the anticipation of hyperinflation is akin to me winning the 100m sprint in the next olympics.
over the long run equities are a horrible hedge
against inflation....
Does this take into account changes in mark to market? oh, never mind.
Must do ... seeing that it is at directors valuation, not the valuer/accountant.
There is the key, their valuations .. which makes sense.
This is called an asset bubble courtasy of big ben at the fed and his discount window. Goldman gets frre money we have to pay back at 4% to play with on the NYSE. Additionally it effects macro issues such as currency exchange rates (the dollar) and future estimates of inflation. yes he is gutting the savings of hundreds of millions of americans to please his goldman masters.
Why does this hedge fund get all these perks to gamble in the markets. Isn't the point to get lending going. what is wrong with our government?
greed and corruption from the oligarchs - david
rockefeller and the other owners of the 300 shares
of federal reserve banking system....
Yes, we need to name names. Tear down the corporate veil, it's the only hope. Unspeakable evil is being committed while thieves hide behind their corporations. Put them on trial, and name names.
Tyler, let's use the new network formula popularized by the 6 degrees of separation (Kevin Bacon) to determine who is responsible, as colluding groups are pulling the strings. This is just a shell game, so if you go after just G.S. there are many other tentacles.
the stock market is a sham
ok...what are earnings for the last 3 quarters? i would then tack on a very modest factor for the next quarter....if the tack on is 5-10% then i would go with 15-20x earnings for s/p as speculative swing trade.....if 3-5% i would go with 10-15x earnings.....if 0-3% i would go with 8-10x earnings...if negative i would go with 5-8x.....
however, with the macro economic picture painted on zh in the article the end of the end of the recession i believe that there will be no earnings growth over the next 1-4 quarters and that whatever it is will be anemic and based upon cost cutting which will be someone else's pain....
the stock market is wildly over valued right now in terms of fundamentals...did anyone see the histogram on earnings groupings posted here yesterday....not good.