TW: An email from a Hedgie friend who prefers to remain anonymous...and I will say that despite our long friendship I sincerely hope his hedge fund blows up lest his forecast bears fruit...
"Well the S&P at 970 implies likely annualized earnings of $40-$60 for the S&P components at a PE of 16-24 which implies a discount rate of 4-6%. At the final bottom over next 1-2 years (more likely 1), $40 x 16 PE or a 640 S&P would be my highish fundamental scenario.
Earnings in the $30 range are probable, $25-$30 not unlikely, $20-$25 possible. Long-term trend earnings would put us at $50, but swings around trend are amazingly regular and have been increasing in amplitude so that we're now at 50-60% plus/minus around the $50 (can you say leverage?). A big minus number foots with the terrible economics of where we are. I think we will see earnings resetting close to trend or a bit below for the next decade.
I would expect PEs in the 10-20 range. Short-term PE ratios tend to be inversely correlated to earnings (another way of saying stock prices are sticky) ... until they aren't. Good news is I don't think you will see $20 earnings with a 10 PE (implying an S&P at 200). Bad news is I don't think you will see $40 earnings with a 20 PE (implying an S&P at 800). If you catch my drift, the math gives you a 400 S&P. Long-term PE ratios are highly correlated to AAA bond yields. We'll be resetting to lower PE ratios for the next decade soon to give you your 1975-1982 scenario.
So the age of buy and hold for US equity holders is dead. I hope you're rapidly disabusing yourself of that nonsense. It only worked 1982-2000 and 2003-2007 because we were in a positive environment for stocks (the last somewhat artificial)"
1 comment:
Sounds like your hedgey friend is selling his "book".
Where's the $30-$40 earnings coming from? Is he Nassim Taleb or something?
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