Thursday, June 16, 2011

Super Bulls - Welcome Back to Earth!

Lately, life has not been kind to the super bulls who, just a few months ago, were all aglow with expectations of record busting highs for stocks. Triple digit S&P 500 operating earnings times above average (>15) P/E ratios = Big bucks!! Who said, “Greed, for lack of a better word, is good”, was dead?

Never mind the fact that the root causes of the damage wrought by the Great Recession were never fully and properly addressed. Who cares if, metaphorically speaking, treating the cancer in the global economic patient with antibiotics and morphine will most likely not work? Corporate profits, courtesy the global technological and labor arbitrage plus robust, if somewhat suspect, emerging economies growth, are off to the races. And, when combined with the Bernanke put, lofty P/Es (>15) times robust earnings = great returns.

So, what has really happened these past several months?

The valuation levels you see in Table 1 provide the parameters for fair value for the S&P 500. At yesterday’s closing price, Earth at its historical P/E (15 times) rate times a more realistic (yet, still record busting) operating earnings (for the next 12 months) = fair value.

It may not be Heaven, and it hopefully won't devolve into Hell, but Earth is where the markets have settled in - for now.

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