The Unknown Ideal

Today's close for the S&P 500 at a six year high of 1393.22 calls loudly for a long overdue update to the Valuation Spreadsheet.

Let's look at price-to-earnings ratios for that index and note that the P/E ratio for 2006 earnings of 16.35 is a bit beyond the average P/E of 15.38 that the index has turned in since 1935. So large-cap stocks seem to be edging toward the pricy side. But if we look at earnings estimates for 2007, a P/E ratio of 15.34 is produced, so large-cap US stocks still seem decently priced.

This simple P/E-comparison method of stock valuation is just that: simple. More sophisticated schemes are used by the likes of the bullish Jeremy Siegel, who compares a variety of earnings metrics to a variety of bond yields and still finds US stocks undervalued. His perennial counterpart on the bearish side, Robert Shiller, uses a "10-year smoothed" trailing P/E and finds shocking overvaluation still baked into the US stock cake.

For the finance dilettante typing this, simpler is better. I think stocks are possibly a little overvalued at this point, after a period of undervaluation, during which it was very good to be on the buying side. And even with stocks a little overvalued, I am comfortable continuing to dollar-cost average into my array of stock index funds for the foreseeable future.

Posted by The Unknown at 3:09 PM | Permalink

CNN reports on the the bond market's joy that some fiscal sanity might return to Washington, what with the anticipated demise of one-party Republican rule:

NEW YORK (CNNMoney.com) -- Treasury bonds rallied Tuesdays as investors bet that a change in control in Congress after the midterm elections could lead to greater fiscal discipline in Washington.

The bond market typically reacts well to more fiscal discipline since a lower budget deficit means the government has to sell fewer bonds to finance the deficit, which in turn helps support bond prices.

Posted by The Unknown at 12:43 PM | Permalink

Will talk with the support people tomorrow.

Until then, know that all archive and other links disappear in Microsoft's latest browser catastrophe.

Update: I add this entry and all the problems disappear.

Posted by The Unknown at 9:57 PM | Permalink

Though I greatly admire his work in finance (I have read two different editions of Stocks for the Long Run cover to cover, and I return time and again to The Future for Investors), I have been critical of Prof. Jeremy Siegel for his implicit (and sometimes explicit) support of the Republicans in Washington.

The dividend tax cut, which Siegel strongly championed, seemed at times to be the only policy consideration in the professor's line of sight. With the rest of the world crumbling around us, largely thanks to the Republicans in Congress and the neo-con-men and kleptocrats in the Bush Administration, hoping for continued rule by this gang of miserable failures solely for the continuation of a lower tax rate for stock dividends struck me as symptomatic of an acute political tunnel vision.

But this week sees the good prof. stepping up on Global Warming in an article for Yahoo finance, briefly excerpted below.

Clearly we must stabilize the levels of carbon dioxide in the atmosphere. Some suggest that it might cost 5% of GDP to do this, but most estimates are much lower, at 1% of GDP, or below. And actions to stabilize CO2 may not require a complete switch into solar, wind, nuclear, or hydrogen-based energy sources. The emissions from coal, the cheapest, dirtiest, and most abundant fossil fuel, can be harnessed by a process called “sequestration,” where emissions from coal plants are captured and stored underground.

I believe that to encourage such technologies, the U.S. and developing nations must take action. The U.S. now emits the most greenhouse emissions, but China and India will soon overtake us. That means that the U.S. must enact its own greenhouse measures (or renegotiate the Kyoto Accords) and use its clout to persuade China and others to participate.

Posted by The Unknown at 12:20 PM | Permalink | Comments (1)