Tuesday, March 10, 2009

It's not the end of the world, but you can see it from here

I've been crunching numbers since last October. In another time and culture it might be throwing the I Ching or divining entrails, but here, it's formulae. Warren Buffet warns against kids with calculators, but I'm old and have a pencil, so maybe this will work.

Personally I think we still haven't seen the bottom of the market for a few reasons. Perhaps the major one being that CNBC is still on the air. Today, Nouriel Roubini opined that the S&P will see 600 by October. After a nine hundred point drop in the past eighteen months, another seventy in seven months seems like child's play. Another ten percent? Bring it on!

Considering how prescient Mr. Roubini has been in this economic debacle finding our projections relatively close seems a comforting confirmation of my own work. Below are my reasons for throwing my dart at 600.

1. I project earnings next year near $50 for the S&P 500. Goldman Sachs suggests $40 so I am not the most pessimistic.

2. Currently inflation is essentially zero.

3. Typically in a deep recession the PE ratio troughs in the high single digits however inflation impacts future earnings present value so I expect the market PE to more likely settle in the area of 12x earnings.

4. 12 times 50 is....600. Voila

It is so critical for the policy makers to get the banking system sorted out. Without that, it will remain difficult to move ahead.

What will be difficult is that bear market rallys will give hope before it is time, then despair when they fail. Buying judiciously now will likely end well over time, but there is no hurry.

John Barnyak