Mike,
RE: Lets look at earnings I don't have the precise numbers handy but the market would have to decline 50-70% to return to 1929
I take it you are referring to returning to the same PE level. The problem with this is that it's more appropriate to construct a model that makes assumptions about earnings growth and discount rates. I have no idea what growth rates were in '29 or discount rates, perhaps similar, but I doubt it.
If I thought GE was going down the tubes in the next decade, because all Neutron Jack decided to manufacture was shortwave radios, the PE I would reward them would be significantly lower than if he was going to grow their earnings by 18% per year for the next ten years. Therefore, I'd claim that static numbers such as PE are vastly overrated.
RE: Andrew Smithers did a study showing than if esops were expensed on the income statements the PE on the S&P would be 50% higher in 1998
I'd enjoy reading through his study (did I read this in Forbes recently?). I'm aware of the situation of esops bypassing earnings, and so I did an anecdotal study using MSFT. I assumed if his number averaged out to %50, a company aggressively using options like MSFT would be higher. As I recall, including ESO's only diluted earnings by something like 8%.
I do enjoy the debate, but what I'm more interested in, is the potential bust of the cycle that may be caused by expansive credit. I recently saw some numbers that made me think that credit expansion wasn't too out of line. Can you guide me to some info to scare me?
Richard |
