Bailout

A Bear Case Courtesy of Graham & Dodd

By Admin

The New York Times’ David Leonhard presents the case that the stock market, at current levels, is fairly valued when viewed from the perspective of Graham and Dodd’s classic “security analysis”. Based on a price-to-earnings ratio that uses the last ten years of corporate profits, the S&P index is currently valued at approximately 16 times earnings, roughly equal to it’s average over the last century.

While there have been long periods when the ten year P/E ratio stayed above 16– measuring as high as 27 during last Otober’s market peak– long periods during which the ratio stayed above 20 have always been followed by big declines and at least ten years of poor returns.

Leonhard pays respect to Balestra Capital?s James Melcher, a former Olympic fencer, who called the current market predicament two years ago and whose fund almost doubled last year. More bout Melcher:

• ?Around The World With Balestra?s Melcher?, TheStreet.com, Dec 15, 2005
• ?A Fencer?s Stance on Investing?, Business Week Online, December 8, 2004
• ?On Top of His Game: James Melcher ?61 Feints, Invests?, Columbia College Today, Jan/Feb 2008
• ?Scaling The Heights: The Top 75 Hedge Funds?, Barron’s, April 14, 2008.

Full post as published by Bailout Report on October 29, 2008 (boomark / email).