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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Friday, April 15, 2011

S&P Profits & The Market Tracker

S&P Profits
The super powerful quarterly profits recovery surge ran from year end 2008 through mid 2010.
Analysts have been raising estimates over the past six months and we are now looking at 14%
projected annual growth of quarterly profits clear through 2012. This implies 10-12% top
line growth and a modest further improvement in profit margins and is basically straightlining
recent strong yr/yr sales growth out until the completion of 2012. There is no evidence at hand
that this happy expectation will not be fulfilled. But, however you slice it, it is a tall order, and
when you run through the internal dynamics of the economy, it becomes clear that that all points
of potential conflict are resolved positively. Moreover, the projection involves an extension of
the more rapid sales growth seen in the earlier phases of recovery right into a much more mature
phase of an economic expansion.

S&P 500 Market Tracker
Based on realistic 12 month S&P earnings of $87 per share through 4/11, the Tracker has the
SP 500 fairly valued at about 1435, as opposed to today's close of 1320. The Tracker p/e
ratio is 16.5x. The market has consistently rejected so high a p/e since the spring of 2010,
when an economic slowdown invited fear of a "double dip" recession over the May - Aug. interval 
of  2010. The S&P is currently trading at 15.2 x 4/11 net per share as investors continue to
price in a p/e ratio discount for a significant degree of perceived economic uncertainty. Earnings
have progressed well in the recovery, but investors have appeared easily spooked by short run
economic indications that could threaten the rebound in profits. As well, the poor performance
of the stock market over the May - Aug. period of last year happened to coincide with the Fed's
experiment of ending quantitative easing. This anxiety could carry over while the Fed and
market players sort out options for when the next round of quantitative easing ends on 6/30/11.

At a p/e of 15.2, the market remains reasonably priced, but is far from being cheap.

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