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Commentary

EPS Growth Suspect in the US Also

From John Mauldin’s Frontline Thoughts:

On January 18, 2007 S&P estimated that as-reported earnings for 2007 would be
$89.10 per share. The index was at 1426, which gave a forward P/E (price to earnings) of 16.

And the real number for 2007? It was $71.56, so down about 20% from the
estimates at the beginning of the year, and down 12% from 2006. Not a good year, as it turned out.

Now, S&P came out with an estimate for 2008 on March 30 of last year. They
projected earnings of $92.30 for this year. By the end of the year that was down to
$83.98, which would give a forward P/E of 17.48, which is starting to be pricey.
And what are they currently projecting for 2008? $71.20, which is roughly what
the earnings were for 2007. That also puts us into a rather sporty P/E at current levels of 19.2 on a forward basis.

But wait. It gets worse. They project that for the four quarters ending in June the
earnings will be down to $65.15, which yields a very high P/E of 21 at today’s prices. Do you think the stock market could be at risk if we get into a full-blown recession and P/E ratios are at the top of historical valuations, except for the 2000 bubble valuations?

So this is not an India only situation – the Indian Nifty EPS grew just 13% over last year.

If John is right, this year we will have no EPS growth in the US, slowing EPS growth in India, and both P/Es are close or above 21. Can you say “overvalued”?

It’s over. This should mark the end of the bull run as we have known it. For the short term though, bullishness is in the air – budget, SBI rights issues, some random IPOs, whatever. Still, it’s more efficient to be short as the returns are higher. (Deep out of the money puts or calls may be worth the effort)

For long termers – you can put your money in and forget it but I would wager that this year, you’re not beating inflation if you are invested in the broad market. Some sectors hold promise – Pharma is one, so pick your stocks carefully.

This is a tough time for all investors, even those like me who do futures/options. Don’t run away – this is by far the most interesting times and sometimes you get some unbelievable stocks at fabulous prices. Just don’t anchor them to the old prices you had seen. Get the low PEG stocks – high growth, low P/E.

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