The answer is quite simple, their alternative is money market at 2%. Any company that shows an internal rate of return in excess of 2% is "equivalent" return. A rate of return of 2% is equivalent to a PE of 50 (once again, taking risks of "survivability" out), many of the companies you cite, there is great visibility that their internal rate of return 9evn on current prices or there about) will be greater than 2% and that return has a good chance of growing within few years. In the short term, market psychology will play a major part and thus I am on record (being zipped in my bear suit), that we will approach, but probably not breach the September lows. But I am also on record that the lows we have set in late September are "it" for this cycle. Once rates start climbing, the earnings will have a harder job of following. For instance, if money markets yield 5%, a PE of 20 is required to compete, and if there are growth prospects, even higher PE could be justified. The reason we had PE under 10 in the early 80' was that money market were yielding more than 10% and treasuries spiked near 16%. Don't expect these kind of valuations unless interest rates spike up drastically, which I do not see for the near future..
Zeev |
