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Strategies & Market Trends : Moomin Valley (formerly Troll-free Zone)

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To: RealMuLan who wrote (2823)	5/18/2007 12:20:56 AM
From: RealMuLan	Read Replies (2) of 2852

"The recent rally in the stock market has made the stock market somewhat more overvalued. We take exception to the view, which is widely held, that "stocks are cheap" because they trade at price to current year (2007) earnings multiple of 16x. The inherent cyclicality of earnings makes it essential to normalize earnings and smooth out distortions caused by economic expansions and contractions. One method used by the Leuthold Group that we believe is analytically sound takes a five year average of earnings using 18 quarters of historical results combined with two quarters of estimated results. On this basis, the S&P 500 is trading at a P/E multiple of 20.9x. Based on the past 50 years of data, this valuation multiple is in the 72nd percentile and is 8% higher than the median valuation over that period. Smaller capitalization stocks are substantially more overvalued, falling in the 97th percentile using this methodology and requiring a 30% correction to get back to median valuations. Contrary to the overly simplistic static P/E analysis that is commonly used, stocks are certainly not cheap from a historical perspective." usmarket.seekingalpha.com

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