Monday, May 12, 2008

Update on Indices Relative values

These are the spot and historical P/E. The white line is the level and green line is the risk premium (P/E ratio).

At the same "P" 4-5 months ago we had 30% MORE "E".

Historically, that was where it was for about 4 years.

On the upper right hand corner notice we are posting EPS at the rate of $60.51 and analysts ARE expecting SPX to post earnings at $92.09 going into next year, roughly a 50% earnings increase.

Assuming a financial leverage of say, 8x in SPX, this must translate into 6.25% growth in sales.

Can you get that from GDP of 2.6% growth (entirely from price) ?

( I suppose you could, if there is the extra 3.65% taken out of negative savings or more bluntly, home equity extraction )

Notice the various markets that look "reasonably cheap" when compared to US markets (or SPX) and think about their a) relative growth, and b) savings rate, to USA.

Finally, go here to see that the earnings was posting at the rate of $63 (vs. current rate of $60 per annum - or 5% below ) on April 21, 2008.

The price, was $139 that day. We are at $140 today.

The P/E went from 22 to 23+, or slightly less than 5%, again mostly on track with the declining rate of earnings from $63 to $60 (about 5%).

In 3 weeks, what we did was increase our tolerance of risk by 5%, with no corresponding increase in earnings. Notice in both cases we have about $92-93 earnings target for next year, unchanged.

Based on the above, every week shows $1 slower earnings clip and this has been on track for the past several (at least 6) months as the graphs has shown.


PCap said...

I noticed that the PE for the INDU is now excluding the negative earnins (Hello GM!). However, do they set them to zero, or totally remove them?

MTGSPY said...

No, BB has decided to join the crowd and remove C and GM out of the index. They are total farking tools, as you said.