Best Of The Web: Is The Stock Market Cheap?

Here's a reasonably short piece worth reading (and maybe bookmarking for repeat visits): http://dshort.com/articles/2009/SP-Composite-pe-ratios.html.

I find the chart useful, but, like most such things, taken with a grain of salt. Here's a couple of sceptical comments about the usefulness of this chart, assuming you've already taken the time to read the piece:

• Scepticism about the use of P/E10 - the use of P/E10 has an implicit reversion to the mean outlook (an assumption that things will return to normal). I'm not at all convinced of this, especially for the USA. Given my pessimism about this, I see stocks as even more overpriced than P/E10 seems to indicate. The three key things I see preventing a return to normal are:

1. Peak Oil - this affects the whole world, not just the USA.
2. USA Debt - the USA's huge and growing debt seems like it will be a major drag on the USA and prevent it going back to normal. This may also be a factor for the rest of the developed world.
3. Demographic Aging - seems like a major, major problem preventing the rest of the developed world from going back to normal. It seems a like a pretty big issue for the USA as well given the baby boomers passing their peak spending / saving /earning and moving into retirement. 

• Scepticism about "every time the P/E10 has fallen from the first to the fourth quintile, it has ultimately declined to the fifth quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 600." I'm sceptical about "every time... blah, blah, blah" technical arguments when every time has only a handful of data points (four in this case). In many cases, the criteria is nothing more than "curve fitting" with no predictive power at all.

What do you make of P/E10, the current trailing twelve month P/E of over 130 to 1 and the outlook for the stock market? Honor me with a reply.

MontyHigh, www.worldofwallstreet.us

Comments

[otto]

The heart of the matter isn't whether the stock market is cheap but whether the dollar is expensive.

As a side issue, the 130X trailing PE is a bit of a red herring as it's being skewed out by those 4q08/1q09 bank write-downs that everyone seems to have forgotten about.