Are stocks cheap?

CNN seems to think stocks are cheap right now.  Really.  A story this morning is headlined New lessons from the crash and the lead in says  Finally, stocks are cheap. Really. So it may be time to break the rules – just a little – to take advantage of this opportunity.

The story goes on to say that the P/E ratio is now really low, in fact, they say the market crash has made stocks genuinely cheap. In fact, the price/earnings ratio on the Standard & Poor’s 500 has sunk below its historical average of 16 for the first time since 1991, which just so happened to mark the start of one of the greatest bulls ever.

To which I say – WTF are you smoking at CNN?  Right now, it doesn’t matter what the “P” is, because there is no “E”!

As I documented this weekend, earnings for the S&P 500 are – well, there aren’t any.  Only losses.

If you bought one share in each of the S&P 500 companies and added up all the per share earnings, you end up with a negative number – otherwise known as losses.  That number currently stands at -$10.44 per share.  That’s $10.44 of losses when you add up the earnings of 500 of the largest companies in the US.

To be fair, CNN is using a 10 year average for their earnings number, and yes, if you look at it that way, stocks are cheap. But look at it this way – Bear Stearns, Wachovia, and Lehman Brothers all had great 10 year earnings averages last year at this time – would they have been a good buy?  No, they simply provided a fast way to say goodbye to your money.

Hmmm…. Gonna have to use that as the title to a story sometime “Good buy or goodbye?”  Kinda catchy….

But when you use a forward estimated earnings figure (what’s in the past is history and doesn’t matter if the company goes broke next month) stocks are very expensive – as in a P/E ratio of about 30.

As I said in the previous post, I think either earnings need to double (one year trailing earnings) or the price of stocks needs to drop by at least 30% to 40% to get back to a decent ratio.  And this is all meaningless if earnings are still negative next quarter.  In that case, prices are dropping big time.

That’s what I think is happening.


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