To OTC Journal Members: 
 

More Earnings Factoids

What a difference a day makes. Wow- the DOW and the S&P both rally nearly 12% in one day- the biggest one day rally in 76 years. There are years when we don't see this kind of movement. Absolutely astonishing. The Bond market will be open tomorrow, and lower short term interest rates could foster a continued rebound in the markets.

I wouldn't be opening the champagne just yet- I'm not prepared to buy into today's rally as the ulitmate turning point. It could turn out that way, but it could also be a short covering rally. Here's one thought I have- which ever way we go tomorrow when the market opens, don't trust it. A big gap up should be sold. A big gap down should be bought. A down market early would likely be bullish.

I was able to ferret out a bit more information on the current valuations relative to earnings. There's a reason I'm interested in exploring this value issue- Volatility promotes fear, and fear promotes poor decision making. Once we get past this environment of forced liquidations, the market should return to some semblance of a value driven entity, and you should know just how oversold we are relative to historical values. And, speaking of forced liquidations- I was reading today that the CEO's of Chesapeake Energy, XTO Energy, and Boston Scientific were all slammed with margin calls and forced liquidations last week. That's what's going on.

Here's the earnings picture I got from Adam Olensis of the The Agile Trader. Check out www.theagiletrader.com. Adam provides some rare insights into both the technical side of the market and the fundamental backdrop. It costs me about $30 a month, and worth every penny.

The chart shows the price of the S&P 500 plotted against a number of earnings measurements- This chart looks at the trailing 52 week earnings estimates two different ways, and the Forward 52 estimates one way.

I covered this in the weekend edition- there's a major disconnect between earnings, earnings estimates, and S&P 500 price performance. Past Bear Markets have always started from stretched valuations, but this time has been different. Here are the facts:

The PE Ratio on the Forward looking earnings for the S&P 500 (as of Friday's close) was 9.1- so it's back over 10 today. At the 2002 low of the last Bear Market, the foward looking PE made a low of 14.5. There's lots of upside relative to those valuations.

Note that all the earnings metrics are well above the 2002 lows, while the price of the S&P 500 is just barely above the 2002 low- until today's big rally.

This chart suggests the following to me- for starters, the S&P 500 earnings estimates are going to come down. In conjunction with earnings contraction, we are going to have some price appreciation as everything reverts to the mean.

If short term Libor interest rates come down tomorrow when the bond market opens again, we could see continuation of today's rally. Over the longer term and far more important are the efforts to "reliquify" the system. 

If we are successful at the reliquification process, we should have a few strong years in the markets once the efforts of the Central Banks start to take hold into 2009.

Home Page : www.otcjournal.com
Email Questions or Comments To: editor@otcjournal.com