25 September 2009

Another drop on the way?

Could be, at least if David Rosenberg is right.

Rosenberg, chief analyst at Glusken Sheff and Associates, thinks the current pricing in the markets is based on the false assumption that corporate profits and gross domestic product have already rebounded.

He basis his opinion, in part, on an analysis of the price to earnings ratio for stocks.

Furthermore, the stock rally is pricing in an employment rebound of 2.1 million and a rise in bank lending of 16.5% on average. But both employment and bank lending continue to decline.

At its current valuation, Mr. Rosenberg said the S&P 500 is priced for US$83 in operating earnings per share, which is nearly double from the most recent fourth quarter trend.

Meanwhile, consensus bottom-up estimates are predicting US$73 in operating earnings per share in 2010, with US$83 not likely until 2012.

Rosenberg’s analysis puts stocks overvalued by 20%.

In a similar way, oil has been over-valued considering the huge drop in American demand and corresponding high inventories. Prices have been dropping both for crude and refined products. NYMEX gasoline fell six cents per gallon and ICE Brent crude fell three dollars a barrel in the past 24 hours.