Marketimer currently estimates S&P 500 Index operating earnings for 2008 of $97.10... Using our forward price/earnings multiple estimate of 16.5 to 17 times earnings, the S&P 500 Index should be able to achieve a price level into the 1600's range this year.This chart below shows ACTUAL trailing 12-month earnings are less than half what Brinker projected for operating earnings.
In our view, stock market valuation remains reasonable, with the current P/E ratio on the S&P 500 Index at 15.1 based on our 2008 operating earnings estimate.
Operating earnings are not real. Operating earnings are what companies say they would have earned from “normal operations.” I think it is smoke and mirrors!
Real or "GAAP earnings" include options expensing, law suit settlements and other write offs such as the special charges companies take for restructuring or sub prime defaults at the major banks. GAAP stands for “Generally Accepted Accounting Principles.” I like to follow BOTH because some companies make a habit of writing off mistakes and lawsuit settlements as a regular part of their business to make their operating earnings look better.
In my November 2008 newsletter I wrote:
2008 Operating EPS (bottom up) = $75.94
2008 As reported (GAAP) EPS (top Down) = $54.51
2009 Operating EPS (Top Down) = $62.40
2009 GAAP EPS(top down) = $48.52
Operating earnings suggest the market is under valued while GAAP earnings suggest the market is fairly valued to slightly over valued if earnings contraction from a deep recession continues into 2010.
The stock market can recover when earnings recover. Some of the the bad news bears say earnings won't ever recover but that is not my belief.
Using Bob Brinker's 16.5 to 17 times OPERATING earnings and S&P's estimates for 2009 of $62.40, I calculate $1029 to $1060 for the S&P500 "fair value." This "low number" may explain why Brinker is not now pounding the table bullish in the 900s despite being very bullish on the radio at S&P1400 earlier this year when he bashed the Cassandras (See Cassandra Rant) on May 31, 2008.
Not everyone thought we would avoid a recession this year. See my March 2008 article " ECRI Calls it "A Recession of Choice." Given I believe Brinker reads my blog and the comments regularly, it was fun to hear him refer to us as "Cassandras" just days after I published that article that said a recession was unavoidable.
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