Down goes the Dow

Elite,

I respect Jeremy Siegel's opinion, but he makes the error of using forward estimated earnings. From the article: "stocks in the S&P 500 are selling for about 18 times estimated 2015 earnings." The market (S&P 500) is trading currently at 1942 with Last Twelve Months reported earnings of $96 a share (as of June 2015 Quarter). That actually shows the market trading 20 times reported earnings (1942 / 96 = 20.23). Wall Street likes to use forward earning that are decidedly Bullish and most frequently reduced over the course of a year.

Also from the article: "But there are signs that stability is returning: The rig count has stopped falling, and oil prices have recovered to about $58 a barrel. As a result, the factors that depressed earnings should dissipate later this year." A certainly wrong projections (WTI closed at $44.10 today) and the longer oil and COMMODITIES stay down the more it affects a whole host of other businesses and regions. The reason rig counts are rising is the fracking companies have to produce to cover their fixed costs, even if it is at lower prices. At some point the game ends, and the longer we stay under $60 the sooner that day comes.

S&P earnings are going to head further south in my view.

Igy

Bard,

"In days of old when knights were bold,

and toilets weren't invented.

They laid their load upon the road,

and walked away contented."

...grunt...ahhh...

Igy

Using forward estimated earnings is not an error. It is very common and typically quite accurate. Your calculation suggests as much.

Elite,

Here is how you are wrong:

1) Siegel's article was written before the most recent sell-off and thus his multiple is based on a higher S&P 500.

2) Forward earnings is NOT accurate, current most recently reported last twelve month's S&P earnings (LTM) is $96 a share and Wall Street average forward earnings estimate is around $120. Most years the Wall Street analyst numbers are revised downward over the course of the year-A FACT.

3) Even if we accept Siegel's multiple on face value, it is still 11% below actual LTM earnings multiple. The trend is down and is likely to deteriorate further. Stock prices fall more rapidly in advance of a declining earnings compressing multiples. This action on multiples is the opposite of what we have experienced the past three years. That is, expanding stock prices advancing in front of rising earnings.

Lastly, you ignored the point on the price of oil and othe commodities. Siegel has clearly been wrong on the price of oil which is central to the thesis of his article.

Sorry, everything is not "awesome."

Igy

It is not just oil, demand for products is generally falling. It is not "awesome" in the global economy.

http://www.bloomberg.com/news/articles/2015-09-08/china-s-cotton-imports-seen-slumping-to-13-year-low-amid-glut

Igy

The entire point of that article was based on a lower oil price? Are you seriously suggesting that oil is not down?!

Hi dummy wrote:

Hi K5 wrote:

Awesome job K5! But you might have better luck trying to bait others.

What did you just learn the word bait? You don't seem to understand its meaning but that does not stop you from overusing it, does it?

Awesome!

POTO,

No, I am seriously suggesting that Siegel's view that oil firming and its previous decline would have a minimal affect on the economy. Since the article was written oil has dropped further and the economy has declined further. I was seriously suggesting that Mr. Siegel has been wrong, at least so far.

Igy

If I understand your first sentence correctly, you think Siegel suggests the drop in oil prices has had only a minimal effect on the economy. However, he says the exact opposite in the linked article. He clearly blames lower oil prices for weak earnings growth.

Big,

No, I am saying Siegel's prediction that oil would firm is wrong. I am saying that Siegel's belief the problem of low oil being over is wrong.

From the article: "If oil prices and the dollar stabilize at their current levels, foreign sales will get a boost and earnings from the energy sector should rebound. Future earnings estimates often tend to be overly optimistic, but there’s good reason to believe that analysts’ forecasts of a 12% increase in earnings next year—as a result of moderate economic growth, more stable currency and oil markets, and continued share-buyback programs—are on the mark."

Igy

I see. Indeed oil has gone lower than the point when that article was written. But that actually affirms Siegel's analysis that the market appears overvalued because of weak oil prices. It's the energy sector that is overvalued and making the overall market appear the same.

could someone link to the siegel piece? I can't find the link

Big Dog,

OK. But there are other areas of the market trading at extreme valuations. The largest number of up stocks on the NASDAQ today were biotechnology companies. As an index it is up 19% on the year with a "PE" of -23.23. Case in point the greatest percentage up stock in the NASDAQ today was ZS Pharma, Inc. (ZSPH) up 28%, and up 39% YTD prior to today. The company has -$4.14 in "earnings" per share. I can point to other extremes in the cloud and social media space, as well as the world of story stocks such as TSLA, NFLX, and NOW to name a few. Many of the dividend payers are viewed as safe havens and bond proxies. The market has driven many to valuation extremes. To highlight a few Kellogg (K) and Kimberly Clark (KMB) both have PEs in excess of 60.

I do believe the energy sector will get worse, but there are larger drops in store for many of the most over owned and favorite stocks of the day.

Igy

Your link doesn't seem to work, so this is the real link:http://m.kiplinger.com/article/investing/T052-C019-S002-bursting-the-talk-of-a-stock-market-bubble.htmlAnd here is why you might not want to pay attention to what he says (or maybe anything he says):

His 2008 Outlook was written in December 17, 2007, about two months after I was pointing out on this site that Private Bankers were telling wealthy clients to move money from stocks to bonds. And 3 weeks after he wrote that, I went flat-out short for 18 months. (Do a search for 10/2007 to 2/2008).

And maybe it's not just that he's been flat-out wrong multiple times (but being wrong with integrity):

It's easy to cherry pick winners and losers. But the point of the article is that if you exclude the energy sector, the rest of the market is not over valued. The data seem to support this idea.

Big Dog,

I give you data you chose to ignore.

Good luck.

Igy

I did not ignore it. I just prefer to look at the big picture rather than be myopic.

coach d,

Good post. It is amazing how many medicine men populate the business media. I guess there are plenty of Muppets lined up to buy their hocum. As a professional in the financial services business it makes me puke.

Igy