in your original message, you seemed to ask me for historical data:
"do you have that information available to make the case for each respective period in question to share with all of us that illustrates the inflation rate, interest rate, yield curve, dividend yield, etc"
but then you seem kind of dismissive of same after i provided this data
I didn't mean to be dismissive. Rather, I wanted some sort of a combined effort of gathering certain information from historic charts that demonstrated when interest rates are x.x, the inflation rates is x.x, the yield curve is x.x and dividend yields are x.x - then a price to earnings multiple based on trailing twelve months can be expected to have a mean average of _ _ . If it was all that simple and the formula was so easy to compute - then we would all know where the trough was now, wouldn't we? Of course, there are plenty of charts and historic information in a book such as Random Walk Down Wall Street that addresses much of the information many find interesting.
Any of my tone of being dismissive comes through when I read a comment that simply says "in past bear markets PE ratios fell to 7 (or 10 or 11 or 17 or 20 or whatever the number) and so this market is still overvalued until it hits one of those previous numbers." Now if a comment such as that was centered around an argument that could draw conclusions based on the inflation rate, interest rate, dividend yields, etc... in which the current market must fall to match a particular other point in time that represents a close comparison, it would be a more compelling argument - at least from my point of view. If we plug in all of that data and say that current PE ratios must fall to the same level as the level reached in the early 70's at that bear market bottom, then I would want to discuss the high inflation, high interest rates, higher dividend yields and a variety of other things to say that the PE trough then may not represent what the PE trough this time will be.
If you read Random Walk, you will find this statement about recessions and P/E ratios:
Typically, P/E's are high during recessions, when earnings are likely to be depressed below "normal" levels.
Then again, some of those charts you presented did indeed illustrate that no two troughs were identical. As well, not all stocks 'fit' and meet the PE trough criteria. There are always some above the mean as well as below the mean. So to say that Cisco (or pick a MSFT) must drop to a PE of x.x or xx.x or whatever because that's what happened in 19xx can be misleading. In addition, since the data ending on June 30, 2001 of those charts could be updated to include the moves the equity indexes have taken since then, it would be interesting to see how part of that corrective process fits on those charts. Of course, with the unknown about EPS fall out from the September 11 terrorist acts, it is difficult to make a case that PE's have gone done as they may actually have gone up.
i'd say there is no such model. rather, i am better off owning multiple segments of the market than trying to pick the "magic bullet".
You won't find me disagreeing with you there. I'm one of the GG board members who does spread my capital around in many segments.
my personal opinion is that most models break down when there are paradigm shifts in the market. that is why i think it is important to look past recent history to gain some perspective on where the market could go.
Basically, we could simply say the market will go where the earnings go. Price may or may not have contracted enough, but no doubt there is work to do on the "E" portion going forward.
BB |
