Replies

PEs (by themselves) are IMO a decidedly unsatisfactory “buy-hold-sell” signal, for lots of reasons.

First, looking at the overall PE of the SPX is just too crude/broad brush of a measurement technique. I say that because in CNBC-land a PE of 15 is “pretty good”. But, for many years, the automakers had PEs of 7 and paid fat divs. The brokers were high priced at a 10 PE, but somehow became massively more valuable when they figured out how to engineer all manner of garbage paper to sell and originate. Now, this practice is coming back to bite them. For years, the big NYSE drug stocks were considered among the bluest of blue chips; now the market HATES them because they are giant companies with bloated R&D dept’s, with portfolios of expiring blockbuster drugs, targets of multi-year class-action lawsuits....and not fleet enough to develop the quirky drugs now coming to market...and thus likely to have to overpay for smaller, more nimble companies that CAN develop the latest and greatest drugs. Oh, and we can add the negative implications for drug prices going into a quite-possibly socialized medicine environment. Yuck!

Second, PEs are backwards looking in most cases and don’t have a great ability to capture the precise types of (negative) influences we have now: 1: High oil (and chemical) inputs and 2: tightened credit and 3: MASSIVE price increases if their product(s) is/are agriculture-commodity related. And even #3 can be tricky, the best example I know of being Deere (DE). For several years now, DE has been a market darling; first for construction gear, then for the initial part of the agri boom. But of late, the market does not like DE even tho ag remains insanely hot.

Meanwhile POTash is probably going to post the biggest Y-O-Y gain in earnings ever seen in a company of this size, just staggering. I mean, you go to Yahoo financial (and Yahoo is a dirtbag source, but there you go) and POT shows $4.52 in EPS, so its $228 seems ghastly high, but this thing is probably going to put up $17 in earnings this year, computing out to a PE of 13.5 which is cheap. (POT, IMHO goes to 300 easily) See, fertilizer has more than doubled in price, and POT did a deal with the Chinese where last year’s $110 fert sold for $576/ton. What does that do to their earnings?

Likewise with the coal stocks, whose earnings power are absolutely beyond staggering. Here are companies that, for decades, simply sold their coal for a $1, $2, $4, $7 over their production costs, which at this juncture are roughly $50 a ton. Now, high BTU steam coal is selling for $140 a ton and high quality met coal is selling for $250-$350 a ton. It is impossible to imagine coal being in shortage, but it is, and met coal, in particular, an absolutely essential component of steelmaking, is in incredible short supply. So, according to Yahoo, PCX Patriot Coal loses $4.50 a share. Uhhh, OK, PCX produces 24.3 MM tons/year, 1/3rd of which is met, margin = $200/ton * 8 MM , 2/3 of which is steam, let’s say they sell that at cost, profit = ZERO. The profit (NOT the gross, the PURE PROFIT) on 8 MM tons met coal = $1.6 billion divided by 27 MM shs = $59 a share. FIFTY NINE DOLLARS EPS??? That’s 12 times MMM @ $70. That’s 7 times FCX at $120/share. At a PE of FOUR, PCX is worth $240! This is a $400-600 stock!!!

(My brain is absolutely blown on coal stocks, in case it isn’t clear, I do not think I will see a more compelling opportunity in my lifetime)

So....my point is....PEs are really really warped. And I haven’t even mentioned how corrupt most accounting and financial reporting is.