Monday, February 16, 2009
Fair value of SP is 450?
Via the big picture, a collapse of earnings on the SP 500. By putting a 15x multiple on it it gives us a SP at around 450. Now that is truly scary.
Of course Earnings are hit because the assets are going down and it shows up on the balance sheet in mark to market. Cash flow from operations is another measure of health that is not dependent on asset prices and something tells me a lot of people are going to start looking at that in short order since earnings will be bad with a vengeance. There is also this meme to announce all bad news at once because when you are in a horrible market like this one it hurts you less. So yes I want to believe the market will hover above those depths, but fair value is fair value and it demands a lot of luck and suspension of disbelief to avoid fair value in a bear market. Bear markets are notorious in that they revert valuations to fundamentals and unfortunately fundamentals of earnings look very impaired.
The bottom line is that markets are still very expensive on a earnings basis. Are we scared yet?