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Strategies & Market Trends : Buy and Sell Signals, and Other Market Perspectives -- Ignore unavailable to you. Want to Upgrade?

To: Keith Feral who wrote (43341)	1/8/2013 12:13:45 AM
From: Oblivious	Read Replies (1) \| Respond to of 220480

Sandy sucked up a lot of rental cars.

To: Keith Feral who wrote (43341)	1/8/2013 6:36:24 AM
From: Vendit™	Respond to of 220480

1/8/2013 6:23 AM ET Sectors & Industries The S&P 500 May Be Trading 10%-20% Below Fair Value - Even though the Presidential and Economic Cycles may generate threatening downdrafts to this already low-flying economic recovery, valuations - based on backward and forward, operating and GAAP EPS -- appear to us to be offering some offsetting uplift. According to Capital IQ, the consensus top-down operating EPS estimate for the next 12 months (NTM) is $108.56 for the S&P 500, placing the forward multiple at 13.02X. Over the past six years, the "500" has been hovering within the multiple bands of 10X and 16X. Yet since May 25, 1998, which is as far back as Capital IQ has NTM history, the median projected P/E has been 16X, after reaching a peak of 53.5X in May 1998 and a low of 9.8X in October 2008. (A median value was used to neutralize some of the excessive values recorded during the late 1990s.) So with the S&P 500 currently trading at 13X NTM operating estimates, the "500" would need to rise nearly 23% in price in order to just get back to the median multiple of 16X, which would place the broad benchmark around the 1740 level, versus the closing level of 1413 on Friday, December 14. Trailing 12-Month Multiples Of course some investors are less trustful of earnings estimates and prefer to balance them out with trailing valuations. In that case, the current discounts to trailing P/E medians are similar to the discount to projected earnings, indicating undervaluation from 20% to 22%. The current P/E on trailing 12-month operating EPS for the S&P 500 is 13.9X, which is a discount of 22% to the median P/E of 17.9X since 1988, when Wall Street started looking at operating EPS. During this same 24-year period, we see that trailing 12-month GAAP (Generally Accepted Accounting Principals) results are trading at a multiple of 16.3X, which is a 20% discount to its median of 20.5X since 1988. And going all the way back to 1936, we see that the current multiple is trading at only a 3.8% premium to the median trailing 12-month GAAP P/E of 15.7X. And for those investors who worry that the current multiple on trailing GAAP earnings is excessive, and think they may slip into single digits as was last seen in the 1970s, history reminds us that since 1953, the trailing P/E on S&P 500 GAAP EPS has never traded in single-digits, unless the yield on the 10-year Treasury note exceeded 7%. Multiples and Inflation Just as P/E ratios are subject to interest-rate ranges, so too are they affected by levels of inflation. The Bureau of Labor Statistics publishes seasonally adjusted monthly consumer price data since 1948. After sorting all 260 quarterly market observations since 1948 in descending order of inflation, and then separating them into quintiles, we see that the S&P 500 traded at its highest average multiple (23X) when inflation was 1.5% or less. In addition, when inflation was lowest, the S&P 500 recorded its greatest average 12-month forward price increase of 13%. On the other hand, the S&P 500 traded at its lowest average multiple (10X) in the final quintile of observations when inflation was at 5.5% or greater. What's interesting, in my opinion, is that the lowest 12-month average price gain for the S&P 500 was seen in the penultimate level of inflation (3.5%-5.5%), rather than the zone of greatest inflation. The BLS reported the latest CPI data on Friday, December 14, showing that inflation rose 1.8% in the past year. Since the current trailing 12-month P/E on GAAP earnings is 16.3X, history indicates that in the 1.5%-2.6% inflation zone, the S&P 500 has typically traded at a trailing 12-month GAAP multiple that is closer to 20X, which is 18% higher than the current level. In addition, it shows that whenever the S&P 500 traded in this inflationary zone, its average price change in the subsequent 12 months was a gain of 10%. So there you have it. The S&P 500 is trading at a discount to trailing and projected operating and GAAP earnings. The current multiple (13X) on projected next 12-months operating forecasts is below the median of 16X and implies the market could be trading at 1740, rather than 1413, or 23% higher. In addition, trailing operating and GAAP multiples since 1988 point to discounts in excess of 20%, while average multiple since 1948 in the 1.5%-2.6% inflation zone point to an 18% discount to the mean multiple and indicate that the S&P 500 has risen an average 10% in the following 12 months whenever inflation has been this low. While there's no guarantee that history will repeat itself, is does add confidence to our Investment Policy Committee's forecast of a near-10% advance in the coming year to the 1550 level.