whole lot of minus signs

Once upon a time, I subscribed to Business Week with about-to-expire FF miles. The best thing in it was the figures page, now available online for free:

http://www.businessweek.com/pdfs/2008/0842_figs.pdf

Minus signs everywhere, even the best-performing mutual funds in the last month earned negative returns. I’m sorry, but I think it’s funny that almost every number on the page is negative, even when it’s my money

I note that the S&P trailing P/E ratio is 19, hardly cheap by historical standards, and certainly not bear market standards. Forward P/E is supposedly 10, which I find really hard to believe, as that assumes company earnings almost doubling in the next year!

Curiously, trailing P/E was about the same a year ago, which means company earnings must have already fallen a lot in the last year since stocks are a lot lower today. This possibly helps explain why we see long valuation waves. At the top of a peak, earnings have already begun to decline, but the market’s momentum carries it to ever higher P/E ratios. At the bottom, the denominator (earnings) has already begun to recover, but market momentum is still negative, so you get P/Es in the single digits.

Here’s the scary part: even if earnings coming out of the recession are equivalent to today’s earnings, single-digit P/Es imply much lower prices ahead. Assuming anyone cares about fundamentals, that is, which I’m not sure they do

By the way, if you want to see what recedes in a recession, check out the Fed’s economic data at http://research.stlouisfed.org/fred2/. Most charts have the recessions clearly marked.

/dmc