Tuesday, May 19, 2009

Are Stocks Cheap?

I am out on a business trip until Wednesday so I thought the title of this post would be a great question to discuss while I'm gone:

My Take:

LOL...I think all of you know my answer already: Hell no they aren't cheap! I will admit that we are getting closer to where we need to be from a historical perspective from a P/E ratio standpoint. However, bear market bottoms usually end with P/E's down around a 6-1. We currently sit at a P/E ratio of 15-1.

As a result, Stocks need to drop another 50-60% in order to mark a TRUE bear market bottom when you look back at historical secular bear market bottoms following financial catastrophes. This puts the S&P at around 400-450.

Historically, as the chart shows, P/E ratio's are normally higher than a 6 because companies are growing at a faster rate from an earnings perspective because the economy is growing. The problem we have today is earnings are plummeting!

When earnings are collapsing like they are during our Great Depression 2, stock prices need to reflect this! You saw the S&P earnings chart two days ago that I posted folks. Earnings are down 90%. P/E's must drop back down to a 6-1 P/E in order to be attractive IMO.

Until stocks are fundamentally priced, buying equities is a fool's game.

History repeats itself folks.

Do you think anyone in 1929 thought that P/E's would drop back to where they were in 1920? The stock brokers would have laughed in your face you if you had predicted such a scenario. Who was laughing down the road in 1932? It wasn't the bulls!

Good luck tomorrow. I should be back on Wed.

Until then!


Molecool said...

"However, bear market bottoms usually end with P/E's down around a 6-1. We currently sit at a P/E ratio of 15-1."

What are you forgetting is that we are in a 'secular bear market' and those do not complete until the P/E reaches something along the lines of 1/1. I am NOT kidding and this is not a misprint. Steve Hochberg and Robert Prechter have been quite verbose on this subject. As bearish as you are my friend - you are not bearish enough ;-)

Jeff said...



Some believe that the real resistance on the DOW is at 1000.

I am probably too high with the S&P 400 call. Anything below this results I destruction. These bear markets tend to overshoot on the downside so I am sure u are right.

Scary scary times my friend

John said...

I agree that PEs need to be in single digits for a true bottom to be in. If it does get as bad as Mole suggests it's game over. You might as well move to the country and learn to be completely self-sufficient because our/any society will literally crumble. Things will be bad enough at PEs of 5 or 6

When they reach those levels and everyone you know never wants to see another stock as long as they live, then it will be time to back up the truck and buy again for the long haul.

Jeff said...


I totally agree.

We still haven't seen that capitulation that marks a bottom. We all know this ends ugly. The question is how ugly does it get. Investors are still way too bullish to mark a bottom.

snood said...

Don't forget the effects of inflation. Stocks could do as they did in the 70's and simply gyrate up/down while inflation stealthy robs them of value.

Anonymous said...

guys, you got to remember that the bottom in 2003 occured with valuations twice as high as what were at the lows in March. The market then rallied 100% for 5 years.

Therefore, don't be dogmatic to think that the ultimate low you speak of MUST occur during this cycle. Bears like Precther and the rest got destroyed due to dogma...if they actually invested on their predictions.

Jeff said...


We weren't 10 trillion in debt in 2003. That 100% rise was based on a housing bubble which has vanished. The days of cheap money are over. Its time to be very very dogmatic

Jeff said...

Stood good point

The problem is wages are not increasing like they were in the seventies. They are decreasing.

This will cripple the consumer and my guess is stocks would plummet as a result

Let's see what happens!

Jeff said...




Jeff said...

post up around 6:30