Premarks: Food For Thought

Markets are looking to be slightly lower at the open as Europe again calls our tune.  Here's something to chew on today though.  S&P 500 four quarter earnings estimates on a going forward basis here in the United States are roughly 106 right now.  That equates to the following based on an S&P close of :

- A market that year to date is down on a price basis about 1/2 a percent.  BUT.....

- A market trading with an 11.81 price to earnings ratio AND
- A market with an earnings yield of 8.46% WHEN
- Two year treasuries pay less than 1/4 of 1% AND
- The dividend yield on the S&P 500 is near 2%.

Now folks there are all sorts of issues out there:  Our government is dysfunctional right now.  Europe is all over the map and likely headed into a recession.  Israel may attack Iran.  Unemployment is stuck above 9% here.  I could go on.  But what of these aren't known now.  Absent something stirring which we don't yet see.  THIS IS ONE CHEAP STOCK MARKET.

How cheap?

Assume that 106 EPS number for next year is a good estimate on the S&P 500 then see below for various PE ratios with the S&P at 1251.78 {Price estimates do not include dividends potentially paid}:

-A 10 PE equates to 1,060, a 15% decline from these levels {Markets rarely trade this cheap}.
-An 11 PE equates to 1,166, a 7% decline from these levels.
-A 12 PE equates to 1,272 a gain of about 1.5%  {Lower end of  PE band where stocks usually trade.}
-A 13 PE equates to 1,378, a gain of about 10%.
-A 14 PE equates to 1,484, a gain of about 19%.
-A 15 PE equates to 1,590, a gain of about 27%.
-A 16 PE equates to 1,696, a gain of about 35%. {The higher end of stocks usual PE band.}
-A 17 PE equates to 1,802, a gain of about 44%.~
-An 18 PE equates to 1,908, a gain of about 53%.~ 
        {~17 & 18 PEs are high but could be justified if interest rates stay low next year.}

Now there's no law that says any of these will be hit or that any of these are price targets for next year.  For all I know markets could head straight south over the next 12 months.  But the weight of the evidence suggests that stocks are a bargain.  They are close to as cheap as any time that I've been in the business.  When adding in the TRILLIONS of dollars sitting in money market accounts then you have what seems to me as an extraordinary opportunity going forward as probability suggest great things are possible in the next year or so. 

*Long ETFs related to the S&P 500 in client and personal accounts.