PE Ratio

by Larry Levin

Just a few days ago I sent you an email titled: "How Much Is Priced In?" In it was said "We realize that the market has to climb a wall of worry and that it will often price in a lot of bad news, but for the first time ever, it has rallied nearly 50% amidst a two-million job slide since March. That is either whistling past the graveyard or at the lows the market was indeed pricing in a full-fledged depression.

"Think about that last comment. Whatever the market was pricing in at the March lows was obviously a pretty bad outcome, but isn't that what we saw in the end? To be sure, the government established a floor under the financials, but when you go back and think about the fresh lows posted in late 2002, it was about earnings and the economy, not about financials."

It was about earnings and the economy...not about the financials. My, how times have changed. It is currently only about the financials; earnings and the economy writ large be damned.

Standard & Poor's valuations show that the green shoots talked about in the media are closer to marijuana than fresh grass (or is that fresh marijuana?). Whatever the case is, the media is smoking something. Please consider the following table from S&P that tabulates the current P/E ratio on REAL/REPORTED earnings, not the usual bull$#!t EBITDA and/or "pro-forma" (read: make it up as you go along) earnings.

Why aren't the actual, as in REAL, earnings ever used to calculate earnings? Oh yeah, that wouldn't be bullish - better to lie, cheat & steal to a higher market I suppose.




As you can see, the REAL P/E ratio is nearly 144. Yes, 144!

SO one wonders; is this P/E ratio high? In a word: YES! In fact, it's more than double its all-time high, which occurred at the top of the Nasdaq bubble. Oh, and that worked out swimmingly - didn't it?

What does this mean? It means that either the Nasdaq bubble was UNDER priced and Pets.com should never have gone out of business, or today's market is NOT under priced as so many folks on TV would have you believe, but it is actually wildly OVERPRICED at S&P 1000.00.



Previous Day's Trading Room Results:

Trade Date: 8/12/09

E-Mini S&P Trades*
(before fees and commissions):

1) PP sell @ 8:40am at 995.25 = b/e (1 lot)

2) Algorithm positions (5)

3) "Reading the Tape" positions (27) ...combined Secret's, Algo, & "Reading the Tape" total...+15.50


Electronic (YM) Mini-Dow:

1) None today



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