Think PEs indicate equities are cheap?

M

MrDODGE

Think again.....

"Below we highlight the country indices from the list in our last post that have seen the biggest increases and decreases in P/E ratios (trailing 12-month) in 2008. As shown, Bulgaria's P/E ratio has fallen the most of any other country this year, from 48.46 down to 6.22. China ranks second, with its P/E ratio falling from 44.28 to 14.55. A 14.55 trailing P/E for China is very low.

Just five countries of the 84 on our list have seen their P/E ratios actually increase this year. Unfortunately, the US is one of the five. During bear markets, P/Es usually contract because the price (P) of the index falls more than earnings (E). Since P/Es have increased (albeit slightly) in the US in 2008, it means earnings have fallen even more than price."

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*The chart comes from Bespoke. Just incase the people calling the market "undervalued" missed the report.
 
Quote from MrDODGE:

Think again.....

Just five countries of the 84 on our list have seen their P/E ratios actually increase this year. Unfortunately, the US is one of the five. During bear markets, P/Es usually contract because the price (P) of the index falls more than earnings (E). Since P/Es have increased (albeit slightly) in the US in 2008, it means earnings have fallen even more than price."
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Took this direct quote out from an article from John Hussman "On the basis of the highest level of earnings at the 1972 market peak, the 1974 bear market trough occurred at a P/E multiple of about 10. Currently, the S&P 500 trades at about 10.3 times the level of earnings observed last year. None of this provides any assurance that the market could not fall substantially further in this instance, but it should provide some context in which to interpret the size of the decline that has already occurred. "

http://www.hussmanfunds.com/wmc/wmc081027.htm

I'm wondering how we reconcile the 2 sources giving completely different information on the PE's. I find it hard to believe the US stocks PE's are increasing with a 40+% price drop.
 
Just gonna pull the trailing PE for the some of the Dow components (in alphabetical order)...

Alcoa - 5
Amex - 7
Boeing - 8
B of A - 14
C - negative
Cat - 6
Chevron - 6
Dupont - 8
Disney - 9
GE - 8
GM - negative infinity

Pretty interesting. If the multiples are in roughly the same place six months from now - IE, recession-affected earnings are in the trailing mix - it sure looks like it'll be time to go bargain hunting. For companies with mountains of cash and no debt it may well be time to start buying already.

Disclosure: I bought AAPL and INTC as long term holds late last week.
 
Quote from netedge:

Here's another source for the PE ratio history on the S&P. Unfortunately it's only updated through the end of Sept. We know a lot (to the downside) has happened since then so I know the ratio should be lower than the reading Sept. 30.

http://www.comstockfunds.com/files/NLPP00000\026.pdf
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Interesting chart. I would like to see a chart that attempts to "normalize" P/E for different interest rate levels. I don't think you can use absolute measures of cheap or expensive P/E when short rates range from <1% to greater than 15%.
 
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