As noted previously, at times, things like “valuation” or the economy or earnings don’t matter — until they suddenly do.

Here’s Rosie via Abelson:

“David Rosenberg, of Gluskin Sheff, notes that on an operating (“scrubbed”) basis the price/earnings ratio of the Standard & Poor’s 500 has expanded a whopping 10 points since its March low, and stands at 27.6. Historically, Dave observes, when the economy is making the switch from contraction to expansion, as it did in the third quarter, the P/E is 15.

Trailing earnings are untouched by clairvoyance, in contrast to forward earnings, which depend heavily on projecting the future. But such estimates have their drawbacks, particularly since Wall Street forecasters are a cheerful lot predisposed toward upbeat prognostication.

A year ago, equities were trading at a modest 12 times forward estimates. In fact, as Dave puts it, with perfect hindsight, the market at the time was really trading at 30 times forward earnings.

Currently, Dave reckons, the S&P 500 is priced for $83 in operating earnings, or double the most recent four-quarter trend, and normally it takes five years for profits to double from a recessionary low. Such a feat would be more than a little impressive, since revenues, for the first time ever, have registered four quarters in a row of double-digit decline.

Given the going estimates for operating earnings of $48 a share this year, $53 next year, $63 in 2011 and $81 for 2012, he concludes that “the market is basically discounting an earnings stream that even the consensus does not see for another two to three years.” In Dave’s book, stocks remain more than fully priced.”

I have no idea when, but Dave’s approach will eventually be correct. However, it will also eventually be 2011, two in the morning and April.

The difference is, we know precisely when those things will occur. I have no idea when valuation will matter again . . .


What Does the Economy Have to Do with the Market? (October 6th, 2009)

The Most Hated Rally in Wall Street History (October 8th, 2009)

Are Stocks Cheap? (June 14th, 2009)

Is the U.S. market “cheap”? (November 14th, 2008)

SPX Earnings & Multiples ? (October 25th, 2008)

Ganging Up on the Dollar
Barron’s OCTOBER 12, 2009

Category: Earnings, Markets, Psychology, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “Are Stocks Fully Valued?”

  1. Bruce in Tn says:,Authorised=false.html?

    Asia steps in to support dollar

    “Asian central banks intervened heavily in the currency markets on Thursday to stem the appreciation of their currencies against the US dollar amid fears that their exports could be losing ground against China.

    The mainly south-east Asian countries have been spurred to defend the competitiveness of their currencies by China’s decision to in effect re-peg the renminbi to the dollar since July last year.”

    … all the smart guys have been watching the declining dollar, rising equities equation….it appears, other than the Chinese, that some are getting sick and tired of getting kicked in their lower regions…

    …could be interesting…

  2. PrahaPartizan says:

    The issue isn’t whether the market valuation is based on any rational assessment of earnings or finds itself being powered by pure animal spirits. The issue is whether society as a whole should continue to believe the financial communities claim that the market itself acts as a rational, forward discounting mechanism for evaluating performance versus it simply being a casino driven by hype and ambience. Once it becomes clear that the latter is truly the metier for the market, then we can abandon all of the preferential tax treatments the financial community has bamboozled society to grant it and give the market itself a valuation closer to that of Off-Track Betting parlors.

  3. jc says:

    Well if earnings and earnings ratios don’t matter then we’re all just throwing darts. Jump before the bubble bursts.

    But if jobs, discretionary spending and earnings don’t pick up then Uncle Ben keeps the presses running and creates the next bubble – commodities/equities again?

  4. steve from virginia says:

    I’m beginning to wonder if the long- awaited ‘value- readjustment’ crash is going to happen. I don’t mean this in a ‘fire in the theater’ sense, rather in the equity- and other finance markets can create their own liquidity by lending it into existance the same way ordinary banks can.

    In this case, the volume/amount of transactions determines increase/decrease in funds available. Finance revolves around churning and transactions for their own sake; it isn’t so much the manipulation inferred by ‘flash trading’ that matters so much as the aggregate of trades, itself.

    This leaves two separate and unequal OECD economies; a physical economy that is declining beneath a finance economy that is currently expanding. The physical economy is constrained by high fuel costs – a trend that reaches back ten years and shows no sign of reversing.

    It cannot, in fact. Oil, water, arable land and other resources will continued to become less available over time and industrial output will continue to shrink along with that shrinkage. Industrialization itself will eventually become unsupportable.

    At the same time, as long as currency flows, derivatives’ sales, Fed injections and other forms of lending are taking place, finance and equities will continue to expand. The danger now seems not so much to be a crash, but increasing irrelevance.

  5. steve from virginia says:

    Ugh! Shrink along with that shrinkage!

    (Note to self; never write comments early in the AM …)

  6. Winston Munn says:

    Earnings are contained. – Ben Bernanke

  7. danm says:

    Forget about the eps. It’s all about the multiple.

    When rates are 10%. The multiple is 10X
    When rates are 5%. The multiple is 20X
    When rates are 1%. The multiple is 100X

    Since most people see deflation the rate is closer to 0%.

  8. Harry Wagner says:

    Earnings are all about the indicies, I just LOVE that word, Lets all say it togeher a one, a two and a three – INDICIES…….

    See how these mini booms will work, do you see it now? By 2012 we will have double our money by buying the dips.

  9. VennData says:

    The Fed will raise rates. The bond market has topped. TBT stands for “turnaround betting time.”

    Sarah Palin will change her Facebook page from bemoaning the “collapsing dollar” to bemoaning the “high” ten year yields by next summer as the election approaches …for those of you who’ve been listening, and following her, Glenn Beck, Rush et al and their keen investment guidance since March 9th.

  10. constantnormal says:

    “… when the economy is making the switch from contraction to expansion, as it did in the third quarter …”

    What economy might that be?

    If he’s talking about the global economy, I think there might be some truth there. But if he’s talking about the US economy, I think, he’s being fooled by some confluence of a rising stock market (which as has already been thrashed to death here and elsewhere, has little to do with the economy at present) and a rewriting of the accounting rules to permit widespread reporting of huge balance sheet losses as wealth (and impacting earnings by postponing the huge write-downs that would otherwise have eradicated the S&P earnings.

    Of course, if one were to look at things under the old mark-to-market rule, it would seem a no-brainer that the S&P’s earnings would be sufficiently low as to deliver that magical PE of 15 (if not the single-digit PE that is typically reached at the bottom of severe bear markets).

    But as things are, we have instead pushed out the day of reckoning for all the toxic assets (“toxic” in that they are deleterious to future values) until the non-performing debts are finally sold off or written down, with the subsequent impact to earnings at that time. In essence, pulling future earnings forward to fill in the holes in the bankster balance sheets today.

    I contend, that with such copious amounts of fog and misdirection, it is impossible to properly assess whether stocks are “fully valued” or not. In fact, at this point I favor ignoring earnings in favor of looking at a measure that it is more difficult to enshroud in falsehoods — revenues. A (semilog) chart of historical S&P 500 revenues going back to the G.D. or thereabouts would be very interesting. Even a 20- or 30-year chart of that data would be instructive. I’m not at all sure that, once you discount the seasonal nature of revenues, we have turned the corner in the economy (note: I am making the distinction here between the economy and the stock market). Next April-May we will have a much better picture and will be able to clearly see in YoY quarterly revenue comparisons, whether the US economy has, in fact, turned the corner and is headed higher.

    As for the stock markets, with the rewriting of accounting rules and the impact of ZIRF (and the corresponding impact on multiples), historical measures of “valuation” have no meaning in today’s world. A better thing to watch is the decline of the dollar and interest rates. When rates begin to rise (as they must inevitably do, if we are to ever again have a market economy that can breathe on its own), REGARDLESS of the state of the economy at that time, the stock markets will collapse as money flows back into the debt markets.

    Perhaps then we will see equities markets and economies return to an arm-in-arm happy relationship, but until that point these two entities operate in completely separate realities.

  11. it may be useful for People to remember that Equities are derivatives..

    with that, there are many moving parts in the ‘pricing machine’, thereof..

    including this cogent, and concise, insight: “at times, things like “valuation” or the economy or earnings don’t matter — until they suddenly do.”– BR, above..

    no pun intended, but if peep don’t drill down and understand how something like:
    is ‘priced’, let alone produced, they’ll be at an, even, greater disadvantage when it comes to Equities..

    btw, were ‘Equities’/ the SPX up 10% last week?

  12. ironman says:

    Earnings, and really, earnings per share, really aren’t the best way to project where stock prices should be. Stock prices are set according to the level of their underlying dividends (both real and imputed, in the case of stocks that don’t pay dividends). Changes in stock prices are then paced by a combination of changes in their dividends per share and what might best be described as speculative noise.

    Going just by dividends per share, stock prices have been highly predictable through much of this year (meaning that they’ve pretty much gone where they should be just based on how the future expectations for dividends has changed), although that situation has changed beginning in mid-September. What we think we’re seeing today is the unwinding of what happened a year ago, when investors fled the stock market for the safety of treasuries. What we’re seeing now, a year later, is money coming back out of treasuries, a portion of which is going into stocks, which has resulted in stock prices rising above where just their dividends per share alone would place them.

    That extra supply of cash going into the stock market today does have an expiration date. When it arrives, that may well indeed be where valuation will matter again.

  13. royrogers says:

    stocks are fully valued if they go down in the future and undervalued if they go up
    in the future.
    So all you have to know is the future.


    : Bad tautology — the idea of this discussion is to discover insight that could help you make decisions with linited informartion.

  14. techy says:

    If i say that “Unemployment will fall to 6-7% by third quarter of 2010″ where do you think the stock market will go?

    I am not sure how such informed people as this blog miss the obvious reasons why stock market goes up.

    1. 75-80% of money flowing in is invested in long only positions (mutual fund, pension funds, 401k automatic monthly inflow)
    2. Governments of every country want markets to go up….since it is a confidence booster for the masses.
    3. right now the yield for 3 year tresaury is barely 1% ….its better to play in the market(not me, i am 100% cash…too scared for any position).
    4. Governments transfer the losses of TBTF companies to its own balance sheet…..making losses disappear….and this was the reason why the market was in the dumps in march 09.

    5. short selling is frowned upon by government…it is seen as sending the economy of the country down…etc…hence rules are made to discourage short selling.

    With all that in mind….for markets to really tank..they have to be hit with cold hard facts of disappearing profits and economic uncertainity……..else they will follow the path of least resisitance…UP.

    BTW i think government of the world are going to win the battle over deflation….and they are going to reflate their way out of this trouble……with the help of QE.

    if left unchecked deflation can destroy 30-50% of the capital(money supply)….so the governments are simply going to print that 50% to fill the gap….(its equivalent to sending cheques to all debtors to keep them afloat).

    It is not easy…and speculation in commodity, geopolitical crisis and trade wars are tje big risks….but i think they have a very good possibility of pulling it off.

    dont be suprised if the bulls send the market to all time high next year(momentum combined with continuous less bad news) …..and maybe that will be the time to bet against it….because it is not based on organic growth but more debt fuelled growth…and it will not have energy to go higher from there.

    once again….i am not taking risk with my capital in any direction….i am bearish on the economy….and i think stock market is fully valued…but due to irrational behavior it has the potential to keep going up….and due to geopolitical risks it can go down hard… for now maybe i will invest in some commodities with some protection of covered calls.

  15. call me ahab says:

    harry wagner-

    you are a parody of a parody :D

    one word-


    but i do prefer indexes as the better alternative

  16. techy says:

    call me ahab: there is one solution to people like harry wagners…whom i have since 2006..who disappear after a while….they are not worth debating with..since all they can say is “mini boom” “less bad is good” etc…

    i wish there was some bull out there who would argue with facts and analysis…not some shallow-hal who sells everything with 3% correction shaking in his boots…and then comes back the next day thumping his chest that he is back on the “Mini Boom”

    i wonder if we just ignore them and they will talk to themselves….i know they will not go away till market proves them wrong…….i wish we had that “ignore this user” thing on this blog…(BARRY please).

    “double your money by buying the dips” … if you invest your capital to begin with where do you get more money to buy the dips?

    if the markets go up another 50%…i am not sure you can double your money unless you use leverage.

  17. WaveCatcher says:

    The Stock Market is currently a voting machine.

    Eventually it will be come a weighing machine.

    Make your decisions accordingly.

  18. Harry Wagner says:

    Capatain Ahab, it seems like someone who has a moniker of an outdated industry, you still know how to make a good catch :)

    @techy don’t be silly, if an “ignore this user” button could be used then pretty soon everyone would be igonoring everyone and they would only be responding to themselves.

    Sure one mini boom will lead to another mini boom and this will lead o a meduim boom and pretty soon we will it will be like boom-booom-Boom-BOom-BOOm-BOOM and it will be like listening to an approching Harley, heck we could nik name this the HOG recovery because of the boom-boom sound it is starting to make in the economy.

    Also FYI $48 to $81 is a whee bit more then 50%

  19. techy says:

    Harry said..****Also FYI $48 to $81 is a whee bit more then 50%****

    you mean we should have bought the dips in the past…using the 20-20 vision??

    i am estimating for the future…starting monday. do you think there is a potential for more than 50% move upwards in the next 12 months??

  20. Harry Wagner says:

    techy, it is written right in front of you, the article clearly states we need to put more values into the stock market before there is no more room to be had, so yes using 20-20 vision is easy peasy $48-$81 in 3 years is not as difficult as it sound, just follow the boom-booms as this HOG economy kicks starts it’s self to life.

    Oh I almost for got to tell you the best part of this formula, keep your eye on the indicies and buy on the 1 to 2% dips.

  21. Harry Wagner says:

    Now that we have the very first sitting President too also be a Nobel Prize winner, I wonder if he would be willing to nominate Ben Bearnakie for the Nobel Prize in economics. Just think Bearnakie brought not just our economy, but the economies of all worlds back to life, and started this series of little booms.

    And if he can finally get the American people to understand how wonderful universal health care will be, maybe one of his other Cabinet Members can win the Noble Prize for Medicine. How cool would it be to have not only our president, but his cabinet members be Noble Prize winners too

    Just think how wonderful that would do for increased stock values.

  22. techy says:

    is it possible that the market can go up 100% by 2012….yes but we will need inflation for that.(not hyperinflation and not stagflation)

    it will be transfer of wealth from people in cash to investors…to debtors.

    and it will also be transfer of wealth from savers to debtors.

  23. rootless_cosmopolitan says:

    Harry Wagner,

    Why should I believe that the economy is going to boom and the stock market is going to go up from here, significantly? For the last decades economic growth in the expansion phases of the business cycles has been fueled by an exponentially growing load of debt, mostly private debt. Private debt has had to about double over every decade for this. Where is the economic boom that is predicted by you this time coming from?


  24. techy says:


    wrong question…please do not ask rigorous analysis from harry..

    he only knows how to type “boom boom….followed by some blah blah..

  25. Harry Wagner says:

    Rootless, Debt allows people to consume at rate they normally wouldn’t. Why get a 1300 sq ft house for $130,000, when you can borrow $170,000 and get a 1500 sqft house, then you need to buy new appliances and new carpet and new curtains and a new sofa, the only way for most people to afford these kinds of expenses is to borrow the money, the borrowed money then goes into the manufature of these goods and services and increase the mini boom, of course there will be the 1-2% pull back every so often and that my friend is when you want to buy-buy-buy and make this HOG economy go boom-boom-boom

    Iit will work like that for a long time as long as we pay attention to the inducies….. errrrr, Indexes.

  26. call me ahab says:

    “just follow the boom-booms as this HOG economy kicks starts it’s self to life”

    :D dude- LMFAO

    speaking of Hogs-

    Redskins- woeful- Carolina wins

    -Ahab the Greek

  27. Harry Wagner says:

    Ahab, you are a better fisher man then I suspected, who cares if Carolina wins, it is not the war that must be one, but the individual battles.

    Now get on your Harley and ride these mini booms, and on your way out be sure to stop at the inducies to buy something.

  28. Harry Wagner says:

    Techy, there is nothing rigorous about it, 2-5% dip buy, buy, buy, these purschases make the company stronger and they will produce more, more, more as they produce more, the economy will (mini as first) go boom-boom-boom and that techy is the sound of a Harley kick starting it’s self to life and that is why the next 10 years or so, will be known as the HOG economy,

    Why is it so hard for you to see that? Buy the dips and watch the inducies…..errrrr, indexes.

  29. nemo says:

    I believe Harry Wagner is a parody version of Harry Wanger (notice the “gn” vs. “ng”), but the original Wanger is so absurdly over-the-top bullish it’s hard to distinguish him from his silly parody version Wagner.

  30. call me ahab says:


    you sir- win the chicken dinner-

    please see my 11:45 post-

    and you are right- very difficult to tell them apart- can’t decide which is the more outrageous- akin to some one becoming a parody of Stephen Colbert- who himself is a parody-


  31. rootless_cosmopolitan says:


    I believe you are right about this. I have been suspecting this too. His last replies barely leave any doubt that Harry Wagner is a Harry impostor! They are so over the top.


  32. oyz79 says:

    I agree, and posted something similarly earlier this week based largely on Rosenberg’s assessment

  33. toddie.g says:

    Could it be that Rosenberg sharply underestimates the earnings power of SP500 companies given the cost cutting combined with the big money they will earn on international operations, particularly in surging emerging market economies?

    Bloomberg TV had a report this week about the market multiple and threw numbers out suggesting that SP500 earnings would amount to as high as $75 in 2010 and $92 in 2011, and it would be the highest percentage growth in back-to-back years in the history of the SP500. This contrasts sharply with Rosenberg’s numbers and essentially submits the following: Rosenberg’s view is entirely dependent on the assumption that SP500 earnings will be much punker than they may actually be.

    I note that my key indicator, the junk bond market (I follow COY in particular) broke out yet again this week. This has me bullish here on the market here until I see some deterioration in that credit market niche.