P/E RATIOS SET TO RISE IN Q4 THROUGH 2010
By Daniel at 1 August, 2009, 1:29 am
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WARNING: IF YOU CAN’T CONCENTRATE FOR MORE THAN 60 SECONDS, SKIP THIS ENTRY.
The New Normal theory states that the recovery will be long and hard with GDP at 1.5 - 2.0 for possibly a decade.
If true, Earnings will bump along at a similar pace and will not recover to the high Earnings before the recession. So now we have low Earnings.
Why should the Price part of the P/E ratio rise?
Simple. Once investors that have nearly a trillion dollars earning nothing in money market funds come to accept this new low Earnings rate, they will decide to jump into the market because it is the lessor of two evils. This will bid up the price of stocks based simply on greater demand, not greater performance.
So now you have a new LOW Earnings number and a new HIGHER Price number and the new P/E ratios will jump higher than before the recession.
Again, this will not signify a higher expectation of future earnings as in the past, but instead, will reflect the New Normal of low growth, high unemployment and a long drawn out 5 years of debt defaults in credit cards, commercial loans, and housing mortgages which will force the further consolidation of the banking industry.
WHAT THIS MEANS TODAY IS THAT YOU CAN INVEST IN JUST ABOUT ANYTHING AND YOU WILL SEE A GAIN IN YOUR POSITIONS JUST BECAUSE OF THE NEW MONEY POURING BACK INTO THE MARKET.
TOM-NY
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