Thanks for responding, Berney. My complaint with your numbers is
that they rely on earnings. Earnings are very hard to predict.
Earnings have been growing well recently. But earnings are
limited by sales, and sales just haven't been growing. In other
words, you should take total sales into account at least as much
as you take into account earnings.
I'm easy. Let's split the difference. The sales of the SPX are
growing at about 4%. The earnings have been growing about
12%. So lets use the average, 8%. This gives an SPX of about
741, by my calculation. This is off your chart to the low side,
and well below the current SPX.
Sure you can use earnings growth, but you have to admit
that earnings change a lot more radically than sales. Someday
earnings growth will reach a limit. In fact, I expect that earnings
will eventually return to their historical percentage of GDP. (Which
I will analyze on this thread some other time.) When that happens,
and you still have that 4% limit of SPX sales growth, the resultant
bear market will be tremendous. This is because current earnings
are way way above historical averages.
As long as I'm on the subject, what do you think the effect of
turmoil in Asia will be on US profits? You know that a lot of our
companies compete directly with theirs. You must admit that
their having given their workers big (currency) pay cuts is going
to make it harder for our companies to compete with them. And
earnings are very much dependent on small marginal changes
in competition. That's why earnings are so hard to predict. But
when the asian part of the world accounts for 33.9% of the world
GDP, and they are essentially announcing a fire-sale on everything
they make, you have to be pretty much enumerate to expect that
this will leave US earnings uneffected. But how much?
Let's suppose that 6% of the goods sold in this country get their
prices reduced by 5%. Not much of a change. On the average,
US companies would end up recieving 0.3% less income. But it
comes directly off their earnings, and would have to reduce earnings
by about ten times that, or 3%. Now your 12% earnings growth
rate changes to 9%. By profession I am an engineer, I am used to
making conservative estimates. In actual fact, I think the effect
could be a lot worse. This is a great example of why I use sales
growth rates instead of earnings growth rates. With my way of
calculating, you don't have that little problem with infinity that
arises when a company's earnings increase from zero to a finite
number. (I.e. use your formula on a company which had zero
earnings last year, but earned $1.50 this year.)
I'm enjoying this, what say we keep it up?
-- Carl |
