Stocks....Still Not Cheap.

I very well thought up write up. I agree on all his points. Really a good piece of thinking in my opinion. He is looking for $49 per share in earnings for the S&P in 2009. One of the more bleaker estimates I have heard.

http://www.minyanville.com/articles/dow-Credit-djia-equities-GNMA-spx/index/a/19711

Welcome to the financial jungle, a place where we have only a vague idea of what can happen. It seems we have now entered a period where survival is key, and we can only hope to emerge with most of our capital intact. Only thereafter can we pounce

.I feel for those who have lost capital while reaching for opportunity, but I continue to believe that losing opportunity is better than losing capital - and I've been positioning client assets accordingly.

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At the expense of missing a potential imminent move upward in the equity market, I ask the question openly, and I'm dying for an answer: If you have no clue how far the unwinding will go -- and have no reasonable expectations of earnings per share -- how can you tell me stocks are cheap? I don’t believe anyone can.

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For 2009, we can expect earnings of approximately $49 per share for the S&P 500. When we use Friday’s close of 868 -- which is a far cry from the high near 1600 last year -- we arrive at a price/earnings ratio of 17.8.

I hate to break the news to you, but 17.8 times earnings aren't cheap. In fact, it's downright expensive. It's tantalizing to buy what's just dropped in price by nearly 50% - but how brave do you feel paying 17.8 times forward earnings?

The problem: What's just dropped in half can sometimes drop in half again. This is otherwise known as a "value trap."

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So where am I going with all of this? The first key to making money is not to lose it. I may have been unpopularly bearish for a while now - and frankly, I'd rather not be. It's much easier to be a blissful perma-bull and just love all things all the time. To be honest, that sounds like fun (if it weren't so damn dangerous).

I've seen the most complex models determine that "stocks were cheap" because they looked good versus risk-less Treasuries as a function of one model or other. But the truth is that I can buy GNMA pools around 6.25%.

So what risk premium would I have to receive to buy stocks with $48 of earnings in the S&P 500? I would need to earn at least 400 basis points more per year of return, which equates to a price/earnings ratio of 10 or so. A P/E of 10 equates to a price level of 500 or so on the S&P 500 - which is precisely the point at which this Great Bull Market began in 1995