Mom Always Said ‘Don’t Play Ball in The House’
We recall the day’s when missteps were as simple as hearing Bobby telling Peter Brady “mom always said don’t play ball in the house.” Unfortunately for investors we are no longer talking about gluing back together a vase but rather the large task of putting a significantly more fragile Humpty Dumpty (global confidence) back together again. As we think about equity, commodity, and bond market movements over the last week (and this morning) we are beginning to wonder if the world simply is in no mood for Mr. Dumpty ever again.
Long-term technical damage was again leveled yesterday, this time at the US in the form of Mid Cap and Small Cap indices. The Aug 9th lows were breached and closed under. Some might argue that the US is simply catching up to Europe but its tough to understand how that works: 1) because we are in much better (corporate) financial shape and 2) because the alternatives are so massively uninteresting.
We think there is a bit of mis-pricing going on here. Specifically there are over 80% fewer companies whose liabilities are in excess of their assets. This number was flipped in the 2008/09 time period.
Let’s take a quick moment to do some math this morning.
Over the weekend we spent some time looking at current earnings estimates for the major USD index, the S&P 500. Given that the index is sector weighted by market cap the top 100 matter a lot more than the rest. As my friend Andrew Strassman of Gladius Asset Management likes to say an index of stocks not a stock index.
Our current numbers for the 2011 year are below consensus at $94.25. Depending on the multiple you put on those earnings, fair value should be somewhere between 950 and 1225. We called 1225 a fair number for 2011. Obviously we are now significantly below that number.
Forward earnings???
What we see now is that next year’s fall in earnings is being priced into the market. At $88 which is out call for next year, and at the same 13X we see fair value at the 1144 level. So perhaps a touch of light at the end of the tunnel (yes it’s a very dark tunnel).
the Multiplier Effect
Chart(s) of the day
Is it really worse now?
Who loves the spreads??
What we’re watching
- New Maginot Line at 1070 (or maybe 1050?) in S&P 500
- Factory Orders
- Copper bid at 2.75?
- Fear v. Reality
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