How Cheap is the Dow?

One of the sirens of the Bullish camp is "Stocks are cheap."

I hear that all the time, and while I do not find them to be twerribly expensive, they are not what we traditionally have called cheap. Deep into a bull market, single digit P/Es are cheap. Top of the profit cycle, with lots of room to slip as the economy cools — or even just plataeus — is not exactly the bargain bin.

Nor is the Dow peculiarly inexpensive. RaJa’s Jeff Saut observes that "despite what the talking heads suggest, the DJIA is not particularly cheap." Jeff specifically notes the following about the much watched Dow Jones Industrial Average index:

• The DJIA is trading at nearly 23x trailing 12-month earnings while earnings momentum is slowing;

• The Dow has an earnings yield (4.4%) below the yield of the benchmark bond (4.7%).

• It is changing hands at 3.4x book value, and possesses a paltry dividend yield of 2.2%.

• As the Dow tagged a new all-time high last Wednesday the average price of its 30 components was down more than 30%.

• While the Dow exceeded its January 14, 2000 high (11,722) last week,
only 10 of the 30 stocks in the index are higher now than they were
back then.

Jeff adds:  "My problem with this whole rosy scenario is that I just don’t trust it.
It feels a lot like last May to me when everybody was focusing on the
DJIA as it tracked-out to fresh five-year highs amid numerous
non-confirmations from various other indices."



Jeffrey Saut
Raymond James Investment Strategy, October 9, 2006

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