Chart of the Week - 28th March 2009 - S&P 500 Forward P/E 1927-current

[arbitragr]

 

Markets have rallied due to economic data suprising on the upside this week - in particular housing sales data and plans from Treasury about the Private Public Investment Program (PIPP). Could this be the start of a longer term rally? There are still some headwinds to surmount, in particular unemployment, however it seems as if long term there might be something to build upon here. The historical valuation numbers certainly suggest so, even after inflation adjusted figures;

 

http://i163.photobucket.com/albums/t314/ripleyx/Finance/ChartoftheWeek-28thMarch2009.jpg

 

[Guest ericopoly]

 

Markets have rallied due to economic data suprising on the upside this week - in particular housing sales data and plans from Treasury about the Private Public Investment Program (PIPP). Could this be the start of a longer term rally? There are still some headwinds to surmount, in particular unemployment, however it seems as if long term there might be something to build upon here. The historical valuation numbers certainly suggest so, even after inflation adjusted figures;

 

 

 

The only doubt I have of this chart comes from the term "pre-prov".  There are provisions even in good times (Wells Fargo for example has never had zero loan losses in a year) -- what would that EPS figure be if they added back in a normalized provision?  Perhaps it would be immaterial, perhaps not (I really don't know, which is why it doesn't give me confidence to mark it to zero).

 

The chart might instead have put all years on an even-footing:  pre-provision across the board, instead of "as reported" for every year but one.

[Santayana]

It all comes down to what you think earnings will look like over the next couple of years.    I think $63 is incredibly optimistic given that we just came out of a quarter where the number was negative.  There were a variety of sources listed, do you know where the earnings estimate was coming from?

[Guest ericopoly]

I think $63 is incredibly optimistic given that we just came out of a quarter where the number was negative.   

 

It (pre-provision) wasn't negative last quarter.  They aren't saying "as reported" will be $63.

[Santayana]

That's a good point.  But it makes me wonder if the historical numbers are on the same basis.  Hopefully most of the writedowns are done already, and the difference won't matter much.

[Partner24]

That's an interesting chart. History doesn't repeat iself, but it rhymes.

[Mungerville]

We are not even close to 1974 or 1982 lows.  Not even close.  Confirmed by Grantham multiple times, Buffet as well.  It doesn't mean its going to go there, but its been worse than this. 

 

We are simply around fair-value for equities at this point - maybe marginally below fair-value - say 15% below fair-value.  No biggie.  This is nothing much to talk about unless you really believed you were as wealthy as the market quote said you were when the S&P was at 1500 about 18 months ago.

 

No big deal.  Funny how everyone thinks it is.

 

 

[Mungerville]

That chart is wrong. 

 

It implies the 1929 valuation on equities was lower than 2000 which is completely ridiculous because every other measure suggests that 1999/2000 highs dwarfed 1929 in terms of over-valuation.

[rmitz]

That chart is wrong. 

 

It implies the 1929 valuation on equities was lower than 2000 which is completely ridiculous because every other measure suggests that 1999/2000 highs dwarfed 1929 in terms of over-valuation.

 

Your statement seems to be self-contradictory.  Not that P/E is useful in figuring out overall valuation...but 1929 is clearly far lower, which is what you said you expect.

[omagh]

Hi Mungerville,

 

You're probably thinking of a different set of data using "trailing E" vs "realized forward E".  Using trailing E generates the graph that you likely have in mind.

 

http://seekingalpha.com/article/125756-more-on-roubini-and-shiller-s-dour-outlook

 

Hopefully this graphic comes through, but if not, here's the link:

http://static.seekingalpha.com/uploads/2009/3/12/saupload_historical_pe_ratios.jpg

http://static.seekingalpha.com/uploads/2009/3/12/saupload_historical_pe_ratios.jpg

 

- O

 

That chart is wrong. 

 

It implies the 1929 valuation on equities was lower than 2000 which is completely ridiculous because every other measure suggests that 1999/2000 highs dwarfed 1929 in terms of over-valuation.

[Mungerville]

Thks.  Yes.  This latter chart seems more appropriate.  If you slice and dice a bunch of different but reasonable ways, most of the time you get to the answer that 2000 highs and 2007 highs (i.e. after the 2002 to 2007 biggest bear market suckers rally ever) were both higher than 1929 highs relative to various measures like normalized earnings, GDP, price-to-book, etc.

 

All that first chart on this thread may mean is that in the last decade, we have been taking huge provisions, thus remaining forward earnings before provisions are actually higher today than they were - so its a question of what bucket you put it in and that will change with time depending on management/accounting leniency/Goldman or whoever made the charts' bucketing techniques.

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The P/E means less in the first chart on this thread because the E signifies "earnings before all the bad stuff" and managements may have been more prone to bucket more stuff in the bad stuff category in the last decade. 

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Furthermore, the analysts have been overestimating "forward" earnings since mid-2007 when the shit hit the fan so I don't think they'll get it right this time.