The New York Times [registration required] reports that if you use the long-term P/E -- based on the earnings over the last decade -- as Warren Buffett's mentors Graham and Dodd recommended, stocks are very expensive.

While Wall Street analysts want to convince you that the S&P 500 is cheap -- trading at a P/E of 16.5 -- Robert Schiller, a Yale economist, doesn't buy it. He calculates that the long-term P/E -- based on the average of the last 10 years' earnings -- is almost 27.

This is not good. In fact, it suggests that stocks are trading higher than they have been at any other point in the last 130 years, save the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off.

All the debt added to the economy may have delayed the adjustment in stock prices. But it could make that adjustment even more severe.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Think the market is cheap? Consider this originally appeared on BloggingStocks on Wed, 15 Aug 2007 09:00:00 EST. Please see our terms for use of feeds.