Quarterly Letter to Clients Part II

Today we are publishing our 2nd installment of our Quarterly letter to clients.  Part I was published yesterday.  Today we begin a discussion on market valuations.  We'll finish this part up tomorrow.

Are stocks cheap? Part 2:   We will argue again that based on what we currently know that stocks are cheap and probability indicates stocks have the potential to be significantly higher at the end of this year.  {For somebody else’s view on this click here for a Bloomberg article on stock valuation.}

We will start by using this chart which we recently posted on line. You can go here and double click on the chart if you would like to see a larger and more readable version of what is included here. The chart shows over a decade's worth of price earnings ratio {PE} comparisons and earnings yield comparisons for the S&P 500. We use the earnings yield when doing basic analysis because it is a quick way to take the earnings of a particular asset, in this case the S&P 500, and tell you what percentage its earnings are yielding in relation to the its price. It is also the inverse of the PE ratio. Since you need a magnifying glass to read the data in the chart, I’ve reproduced it and color coordinated it in the table below:

S&P 500                                                             Earnings

 Period                  Price                     PE             Yield                  Comment

Fall 2000               1517                     28              3.70%

Fall 2002-Spring 03      848                     13              6.90%               Gulf War low.

October, 2007       1549                     19              5.30%

March, 2009           666.79                 10              9.80%           Generational low.

01.01.2012            1257.50                12.5-13       7.7-8.0%       Estimates on year end 2011

01.26.2012           1313                     12-13          7.5-8.2%        Estimates on year end 2012

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