Augie,
SPX etc.
Yes, there are 3 different earnings to look at: Ebidta, reported and "core."
Ebidta I think we can toss aside as being close to wholly irrelevant, which leaves us with reported and core.
I'm not a fundamentalist, so it's generally a bit dangerous to have me say anything about earnings in any event, but I don't want to look at earnings as something to hang a PEG ratio on, but rather as a simple metric for the market in general to look at and evaluate. I pulled off the screen numbers going back to 1996. Now, you may say that's just bubble numbers and I wouldn't disagree, but they're also recent numbers which reflect a newer, more integrated world economy. I don't know why anyone would look at 1932 numbers, or 1945 numbers, unless we were going to include numbers from England in the 1740s as well.
The problem with core earnings is we've never used them, and they include things like stock option costs which are very hard to put into real earnings. We can determine SPX core earnings to be 18.48 which yields a p/e of 53.56, but we can't say whether that's a high p/e or a medium p/e or a low p/e for "core earnings," because core earnings was just invented. It's entirely possible that core p/e's of 60 or even 70, given a low interest rate environment, would be bargain metrics for people going long.
So, we're stuck with real (as reported) earnings, despite their several failings. Going back six years you have p/e's ranging from 18.82 (during the 1997 mess and quasi-meltdown) to 46.50 (2001).
All I want to know is what price for stocks, in terms of the crude measure of p/e, will bring out purchasers of shares, so that the demand side of the market is holding up its end. To figure that out you absolutely have to figure in interest rates, since low ones reward home buyers but punish fixed income in the extreme.
Someone somewhere has done the math, but generally if interest rates are 6% (money market) then people will not pay a lot for the added risk of equities. Prices will go down and p/e's will compress. However, if interest rates are 1.5%, then people will begin to take more risk on equities which will inflate their prices and p/e's.
In the end earnings don't matter, whether ebidta, operating, reported or core. In a market, whether it's for apples or pork bellies or shares of DPMI, what counts is supply and demand, bid and ask, on the part of people deploying their cash for expected (or hoped for) returns.
Kb |
