Don’t Bite on the “Cheap Market” Bait
12:01 UTC 13 Feb 2009 
5 Comments
How long have we heard that the market is “cheap” ?
The "cheap market" Fish bait
This verbal diarrhea has been non stop as the market continues to go down. So I decided to dive into the facts and put the actual numbers together. At the Standard and Poors website you can download loads of information in Excel formats that gives all the earnings information for the past few decades that they have been tracking them. What I found was that this market is anything but cheap with its current data trends in the operating earnings, as reported earnings, and P/E ratios.
This paragraph is going to be a quick explanation of the difference between “Operating Earnings” and “As reported Earnings”.
- Operating earnings are optimistic, idealized calculations that ignore one-time losses that companies don’t consider to be part of their normal operating budgets.
- For example banks which have lost billions of dollars in defaulted loan payments are not necessarily subtracting them from their operating budget.
- Future projections of these earnings assume that their budgets will go right back to what they were before the losses, which is a precarious assumption.
- Real “as-reported” earnings, on the other hand, don’t hide anything, and include every blemish in the budget.
- Whether you use “operating” or “as reported” earnings makes a huge difference in your calculations these days.
Unfortunately, the majority of websites, newsletters, and media outlets don’t use the real P/E ratio of the S&P 500. Instead, they usually provide the P/E ratio based on “operating earnings.” This kind of math has destroyed Value investors that use “operating earnings” in the past year. For instance Yahoo Finance today shows the P/E ratio for SPY as 10.72, which is extremely optimistic and Im not even sure where they could come up with such a number unless they are using the old earnings and current price. After running the numbers the current “operating” P/E is 15.62 and the “as reported” P/E is 30.19. You can look at the slideshow pictures associated with this post below to see some nice graphs I made to show you the trends.
- Last quarter (Q4 ’08) is nearly fully reported (81%) and the “As reported earnings” came in with the first negative result that has ever been reported since the Standard and Poors started tracking at an ugly -$9.38.
- The “operating earnings” came in at $5.97. The operating earnings are coming in 61% lower than a year ago. This operating earnings is around the same level as the earnings numbers of the late 1980′s when the S&P 500 was at 350.
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Any thoughts or comments? Click on the “comments” link below.
(5 votes, average: 4.20 out of 5)
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Excellent point on the reported earnings. SPX is trading rich here – should be at least 1 SD below long term average. Fundamentally we should base out around 470…
Great post and agree.
We may see some false rallies along the way, but if the S&P breaks the 750 closing lows and 741 intraday low, expect the Dow to be trading around 7000 or lower. This should trigger a major selloff on the S&P to account for de-leveraging and an inevitable hedge fund implosion. This is the trigger that will move the S&P down to 600-650 levels before the Gov’t finally says “enough is enough” and gain public support. At this point, expect them to do what it really takes to fix this mess…the creation of a $2 Trillion bad bank.
Support at 660 and 460 on the Spyders…5600 and 4000 on the Dow. All in the 1995-1996 timeframe.
If we can finally implode these hedge funds, the best buy opportunities will be Gold and Silver. They “should” sell off because it is the only thing in these portfolios that are worth anything.
Yeah i definitely think that its safe to say that the current P/E is at least 22.9, which is halfway between the “operating earnings” P/E and the “as reported earnings” P/E.