My primary fundamentals are positive and improving as we approach 2011. However, I am
more curious than bullish about the year ahead. My SP 500 Market Tracker -- based on a
long term model that derives a p/e ratio based on inflation -- indicates the market should close
out 2010 around 1370. The "500" closed on Fri. 12/17 at 1244, so even if there is a "Santa
Claus" rally, the market is likely to finish the year well below the indicated fair value. So, for
me, this represents a big miss as I had no argument with the 1370 number at the outset of the
year.
When the model fails, it is often because the earnings expectation is wrong. A failure of this
sort is easy to adjust as a year wears on, because the earnings indicators start suggesting that the
estimate is too high or too low. It is much tougher to analyze a miss well when it is the p/e
ratio implied by the model that goes wrong. Such is what happened in 2010. I used a multiple
of 16.5x, when it looks like 15.0x would have been the better number.
Having too high a p/e in this case did reflect the very weak growth in my broader measure
of financial liquidity as well as an underlying sense of investor caution about the poor
balance the economy showed between business sales growth, which was good, and the
growth of employment which was very lacklustre over the second half of the year. In my
view, the decision by so many companies to max out profit margin in preference to adding
more staff and conducting normal working capital financing may have resulted in
the punched up earnings being accorded a lower multiple as investors were left to wonder
who would buy the higher output if employment is stagnating.
The Market Tracker has the SP 500 going to 1470 by the end of 2011. However, rather
than make a specific projection for 2011, I am going to be content to see how cautious
investors remain next year, and adjust my thinking as the year goes along. Ditto liquidity
growth, which, as of today is only visible through mid 2011 on the strength of the Fed's
current round of quantitative easing.
1 comment:
What I'm wrestling with is the lack of a complete give-up that comes from being beaten up for 10 + years, much like the apathy that was around in the late 1970's.
I'm also concerned that there may not be appropriate discounting of the effects of creative destruction from technology gains that occurs seemingly at random to industries- eg., newsprint and newspapers from the web and Craigslist, Blockbuster's undoing by Netflix. Perhaps businesses are simply worth less due to the impermanence of the earnings stream?
Post a Comment