Barry Ritholtz has a post up spelling out a simple argument for fair value for the S&P 500 being at 440. There has been a little bit of chatter about this in one or two other places as well.Fair value is not a simple concept. The math is simple; whatever number you want to use for earnings and then whatever multiple you think is correct.
Where it gets a little more complicated is that fair value doesn't usually end coinciding with any sort of stopping point in either direction nor is their any sort of indication of how long stocks might stay above or below fair value.
If Barry is right there is nothing to say that stocks go anywhere near that low or conversely that a massive decline would somehow stop at 440. Maybe I have this wrong but I can't recall a time where a fair value number has been a primary factor for the market. There is utility in knowing whether the market is relatively expensive or inexpensive. Generically speaking if the market is expensive the risk of a decline might be a little higher.
The current state of the market however is not generic. The market has had a massive decline and has been stumbling along the bottom for several months now. Based on the market action thus far the days of massive declines could be behind us until the next cycle. Now factor in the fundamentals and the never ending bad news and uncertainty and going down a lot more is certainly possible.
I continue to believe the low is in, give or take a few percent, that there will be more ups and downs but no violation to the downside and I also think we still have a massive bear market rally in here soon as well. I've been whistling this tune for a while as some may know. But since I first piped up on this idea the news has continued to get worse yet the market is churning around the same range as opposed to following the news lower. This action makes me more comfortable with my thesis. I don't view this as a bullish call.
A big feel good rally followed by a run back down to 800-ish will scare a lot of people and generally not be a good thing for most folks. Further, I don't have a real sense for when the next bull market will be. A lot of people are calling for trading ranges with no progress for many years. Looking out for 12 months is difficult enough let alone looking out for years and thinking a prediction can be correct.
12 comments:
I was really surprised anyone mistook that post as anything significant -- its 2 sentences and a pointer to a WSJ article.
On a related note, the Bob Bronson chart on SPX earnings growth rate is quite fascinating
(Here: http://www.ritholtz.com/blog/2009/02/sp500-q4-earnings-collapse/)
i think it was Chad Brand who tisk-tisked the post I linked to. Can you recall where someones idea of fair value became a meaningful stopping point?
Roger- do you still have any concern over protectionism policy? See today's post by Mish.
http://globaleconomicanalysis.blogspot.com/2009/02/asias-export-economies-in-free-fall.html
yes i do have concern about protectionism. i tweaked out of (so I sold) something (not an across the board name) very recently partially because of the buy american verbiage that seems to be coming. i do not think there will be the need to run screaming from a burning theater with this but it is concerning if it happens.
Roger do you think the simulus package wil have a positive affect or just continue the current trend? Politics aside it is a lot of money one woud think something has to stick?
The issue with the 440 valuation level is it that it is based on as reported earnings. The past couple of quarters (and likely the next few) are bound to be "kitchen sink" type quarters. CEOs and CFOs are going to be looking for every charge they can take to set themselves up better for when things turn around. This includes numerous non cash charges such as impairments and bad debts. Just my 2 cents
Should have clarified in my previous comment that it is based on as reported earnings vs operating earnings
i don't know what effect it will have. I can easily envision it creating more question and uncertainty. if that is correct then there is little to be hopeful about in the near term.
one thing (the only thing?) that W got right was the cap gains and div taxes. This created a flow of capital toward better treatment.
Roger, any predictions or thoughts on the extent of a coming bear market rally, and when it will be time to short the S&P 500?
Eric in Nebraska
i said previously i have been expecting a big feel good rally to at least 1000 on SPX. bigger picture it would be to a level that convinces many people that a new bull has started. further i would think something like this would occur over a short period of time. we'll see.
Non-investment comment: Is that a Soleri bell hanging on your porch? My wife and I lived at Arcosanti for a year and I worked in the bronze foundry for part of that time.
nice eye, that is a Soleri bell.
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