i would take issue with several of Bary's points:
1. he says SPX PE is 17x, but he neglects to mention this is a PRO FORMA ESTIMATE, which has been REVISED DOWNWARD countless times. i would say real earnings are more like 25x, or 23x as Grantham states.
2. the assumptions he mentions, e.g., Wien's 10% profit growth, are ludicrous. there is no reason to think that in a low-inflation environment (with huge excess capacity thanks to malinvestment during the bubble) the SPX as a whole can sustain 10% profit growth for the long term (it certainly hasn't in the past).
3. even his 7% profit growth assumption is suspect. while this is a historical figure, it incorporates a very inflationary period, so the nominal figure is misleading. safer imho is to assume 1-2% real profit growth as per historical avg. add the dividend yield to that and the real-return outlook is not very appealing compared to TIPS imho.
4. i really agree w/Grantham that the best you can say about the market is that it's not as overvalued as it used to be. bulls may catch a good trading rally, but from a forward expected-returns perspective, i find it hard to call this market a compelling buy.
5. every past bubble has ended in a shambles, with exceedingly cheap values, not just "not-as-expensive-as-before" type of values. why should this one be different?
6. these jokers always like to compare the SPX "earnings yield" (which is BS pro forma in the first place) against the 10yr note. what they should really compare it against is corporate bonds, which makes stock values look even less compellling.
7. we don't know what other skeletons are lurking in the closet, but there probably are some, and they are probably not the kind that make equities look less risky.
8. the market has essentially priced in no excess risk premium in the aftermath of 9/11. if another such event were to occur, the market may readdress the risk-premium issue (i.e., make equities cheaper). |
