Aren't stocks cheap? Look at those low P/Es! GE is at $15 a share, Intel below $14, Du Pont at about $27. My goodness, the Dow is down to 8,200. Isn't now a good time to buy stocks?
It is, if you believe the Dow is forming a bottom and/or that the worst of the financial crisis is behind us, and the U.S. economy is set to recover.
However, the alternate viewpoint argues that the Dow has not bottomed, could very well fall another 1,000 points, with panic selling (known as 'capitulation' in Wall Street circles) taking the Dow to levels well below that, at least for a short period of time, possibly longer.
Hence, purchasing shares for the first time now (or adding to existing positions) given the latter scenario would create an immediate 10% loss, or possibly more.
Monitor corporate earnings and job growth
What's a better tack to take concerning when to buy more shares? Monitor U.S. corporate earnings and job growth.
On earnings, evaluate whether corporate profits are increasing or decreasing. Equally significant, check corporate earnings guidance - - what corporations say they expect to earn in the immediate quarters/year ahead. If a company lowers its earnings guidance, that's bearish for the stock; increases earnings guidance, a sign that better days are ahead for the stock.
Concerning U.S. job growth, the U.S. Labor Department's monthly job statistic is widely reported - - almost every major, national news service reports the job data - - usually on the first Friday of every month. As most investors are aware, the U.S. economy recently has been shedding jobs at an alarming rate, with more one million lost since the recession started. If that trend continues, that's bad news for the stock market.
Conversely, when that job loss trend starts to end, for example, if the economy sheds 100,000 jobs in a month, then 70,000, then 20,000, etc. that's a telling sign that better days are ahead for the U.S. economy, median incomes, household formation, and by extension, for the stock market.
Market Analysis: So don't just look at those cheap stock prices. Monitor corporate earnings and U.S. job growth. The whole point of the U.S. economic system as it is currently configured is to increase earnings and to create jobs, and Wall Street is very much aware of that.
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Reader Comments (Page 1 of 1)
11-13-2008 @ 3:50PM
Iridium said...
Wow that stock is only trading at 13X earnings, what a bargain!!!
How about what a joke. Much of what has undone the US and global economy is an overvaluation of companies. The P/E ratio is a perfect example of that. Before the market started to drop you had a few corporations that were trading at insane P/E ratios. Those that would take 100 years of normal stock growth to match the price paid for a share.
The 100 year average P/E is 14 which is why all of these companies trading around that level are considered bargains. However if you remove the past few bubbles from the P/E ratio average you find that it falls much lower than 14.
P/E has lost all relevance in showing the fundamental health of a company. All sorts of accounting tricks have been perfected and put in place to manipulate the ratio in order to manipulate stock price.
No stock should trade past 10x earnings. I even think that 10X is an overvaluation. After all you are paying 10X the actual ammount of earnings. Of course people are not looking to buy stock to hold for prolonged periods anymore. They are looking to buy a stock for $10 and sell it a year later for $50.
As an investment a 10x P/E gives you a 10 year investment return for your initial cash. To some that seems too long. I don't understand how some people think a P/E ratio in the 20s makes somethign a good bargain. False P/E readings only serve to hype stock in order to bring buyers in for short positions to make fast money. The stock market should be about long term investment, not making fast money.
It is this reliance on fast money that has put the global economey into a depression. There is no real way out because th ewrold has not saved and invested in the future, only the next corner. The corner was taken at too high a speed and we are now headed straight for a wall with no brakes left.