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Sunday, October 7, 2012

Market Thought... just below normal

Believe it or not, the market has achieved a trailing PE of 14.8. That's 0.2 points below the historical average of 15.

I find this to be fairly remarkable because the 10 yr treasury yield is below 2%, reflecting a below average GDP growth.

Ever since the Financial Collapse the market has been trading below historical norms. The SP500 has been trading between 12-14, discounting EU issues and slower economic growth, even though earnings growth has been fairly solid.

The Q3 SP500 earning's quarter is projected to be down, and below last year's Q3 earnings.

The trailing EPS (from 2011 Q3-to-2012 Q2) is 98.69. With the market near 1460, the trailing PE is 14.8.

Factoring in 2012 Q3, the SP500 eps is 98.34. With the SP500 near 1460, the trailing PE will be near 14.8 if earnings simply meet, let alone beat.

We have a situation where the market is near normal multiples, with a flat-to-declining eps, the treasury yield far too low and a level of complacency (SP500/vix overlay in relation to the current rally) that would merit caution.

The above argument suggests caution here, or a lack of broad upside, in the near term.  But Q4 eps estimates are higher, and would result in a $101 2012 end of year earnings. If the market stays near a 14.8 multiple, the market may very well rally towards 1,530 as the end of the year approaches or into Jan 2013. (Assuming Q4 estimates remain at current levels.)

The few caveats that may bring the SP500 multiple toward the 13-14 range again are:

1. the renewed 'fiscal cliff' debate

2. any issues that may again flare up in the EU

I am not too concerned about #2, given the determination of the ECB. And while the fiscal cliff debate will be annoying to watch, at the end of the day if Romney can act as a liberal to win the presidential debate (and bring the far-right with him), then I have more confidence that the current leaders will not be the assholes that destroy America's standing in the world. (No matter how utterly stupid some of them can be.)

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