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Strategies & Market Trends : Value Investing

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From: E_K_S	4/16/2009 8:59:42 PM
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Is the Stock Market Cheap? dshort.com (April 10, 2009 updated with the latest Standard & Poor's earnings estimates) From the article:"...An old-fashioned way to answer this question is to look at the historic Price-to-Earnings (P/E) ratio using reported earnings (as opposed to earnings estimates). The number we want is the sum of the reported earnings for the previous four quarters. Since the first quarter of 2009 earnings aren't available, we'll use the earnings through Q4 2008. With 99% of earnings reported as of March 31, Q4 earnings were -$23.25 per share (negative earnings). That negative number added to the three previous quarters puts the 2008 reported earnings at $14.88. Thus the 2008 year-end P/E ratio for the S&P 500 is the December closing price of 903.25 divided by 14.88, which gives us the stunning P/E ratio of 60.7 — the highest in the history of the S&P Composite since 1871. The average P/E over this timeframe is only 15. In fact, at the top of the Tech Bubble in 2000, the conventional P/E ratio was a mere 30. It peaked north of 47 two years after the market topped out. But wait. It gets worse. If we calculate annual earnings based on Standard & Poor's earnings estimate for the first quarter, the number drops to $6.66. That gives us a P/E at the latest close (April 9) of 128.46...." ..."...A more cautionary observation is that every time the P/E10 has fallen from the first to the forth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 600. Of course, a happier alternative would be for corporate earnings to make a strong and prolonged surge. When might we see the P/E10 bottom? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now in its ninth year...." EKS

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