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Gold and StockMarket 1
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Posted Feb. 3, 2008 updated May 10, 2008
Earnings, Major Stock Indexes, and Gold Prices: Tentative 2008 and 2009
projections
Few weeks weeks
ago, as a result of a change in composition of the Dow Jones Industrial Index (Latria and Honeywell replaced
by Bank of America and Chevron), analysts' estimates of earnings/share for this Index increased significantly. However,
for price projections in this site, it was considered appropriate to reduce the PEs by half a point (new range: PEs 12.5 to
15.5) pending further observations on the behaviour of the modified Index. Recent market behavior indicates that the modified
PEs range is a bit too conservative; therefore it has been modestly increased to 12.75 to 15.75. This week 2008 earning estimates
were revised slightly downward for the DJIA (see table below) mostly due to lower estimates for financial companies.
For the SP400 (MID) earning estimates for 2008 were revised slightly downward. Preliminary estimates for 2009 have
been added to the table and the chart was updated accordingly. For this Chart, the best representation of projected prices
and PEs is obtained by using the PEs of rolling 12-months earnings. With this method, prices can be seen to fluctuate
narrowly within a well established multi-years channel.
For projections of Gold prices, the average
Dow/Gold ratio applied was reduced to 13.5 based on the most recent behavior of this ratio and the continuing decline of the
US Dollar.
As always, readers should keep in mind that, for all indexes, projections depend crucially on the correctness
of analysts' earning estimates and an absence of unexpected factors that might alter the PE multiples prevalent in recent
years that have been selected for the projections. For instance, if inflation as a result of continuing increases of Oil and
food prices were to rise above 5.0 %, it would become necessary to decrease the estimated PE multiples accordingly.
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INDEXES
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2008
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2009
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Dow Jones Industrial
For PE High of 15.75 For PE Midrange of 14.25 For PE Low of 12.75 |
Earnings $898/Share High 14,144 Midrange 12,797 Low 11,450 |
Earning $1,060/Share
High 16,430 Midrange 14,840 Low 13,250 |
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Dow Jones Transportation
For PE High of 16.0 For PE Midrange of 14.5 For PE Low of 13.0 |
Earning $310/Share
High 4,960 Midrange 4,495 Low 4,30 |
Earning $347.3/Share
High 5,555 Midrange 5,034 Low 4,514 |
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Dow Jones Utilities
For PE High of 18.5 For PE Midrange of 16.5 For PE Low of 14.5 |
Earning $32.3/Share
High 597 Midrange 533 Low 468 |
Earning $37.8/Share
High 699 Midrange 624 Low 548 |
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SP500
For PE High of 17.5 For PE Midrange of 16.25 For PE Low of 15 |
Earning $81/Share
High 1,417 Midrange 1,316 Low 1,215 |
Earning $84/Share
High 1,470 Midrange 1,365 Low 1,260 |
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SP400 (Midcap)
For PE High of 20.5 For PE Midrange of 17.5 For PE Low of 14.5 |
Earning $49.69.0/Share
High 1,018 Midrange 870 Low 720 |
Earning $60/share
High 1,230 Midrange 1,050 Low: 870 |
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GOLD
DOW/Gold Ratio: Average of 13.5 Range 12-15 |
Year Average Price $980 |
Year Average Price $1,095 |
SP 500 and SP400 data courtesy of S&P Equity Research
DOW Indexes data courtesy of Schwab.com
| DJUA, DJTA, and SP500 with earning channel |
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| Chart courtesy of Bigcharts.com - Modified 04/22/08 |
| SP400 (Midcap) with Quarterly Earning Channel |
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| Data courtesy of S&P Equity Research 05/02/08 |
Feb. 3, 2008
Earnings, Major Stock Indexes, and Gold Prices: Tentative 2008 and 2009 projections: Background
In an economic and financial situation as uncertain as seldom has been witnessed in the past, investors are bombarded by a bewildering variety of conflicting opinions as to the direction of the stock market and the price of Gold. In an attempt to see at least the flickering of a dim light in a landscape of utter darkness, an effort was made to compile and tabulate projections for major stock indexes based on the best available analysts’ earning estimates for 2008 and 2009. The table above records the results of this effort.
There is no doubt that earnings are the most important determinants of stock market performance. Unfortunately, while analysts are normally able to provide reliable earning estimates under conditions of financial stability and steady economic expansion, in times of great turmoil as currently experienced , their estimates are much less unreliable and subject to frequent downward revisions. In spite of these caveats, it was felt that the effort was still worthwhile as it could help lift at least partially the veil of dense fog now blocking a clear view of the future.
Of course, it will go without saying that
the projections arrived at in the table can only be considered tentative and should be viewed only as a basis for close monitoring
and frequent revisions in the future. A few notes might also be important to keep in mind. The first is that the earning figures
for the Dow Jones Indexes have been calculated from a compilation of analysts’ consensus earning estimates for the individual
companies that comprise the indexes, In general, the earning estimates are considered more reliable for the Dow Transport
than for the Dow Industrials because of the absence of major financial write-offs by the companies in the Transportation Index..
For the same reason, the earning estimates for the SP400 have been quite reliable and, up to the present
time, remain the most robust of all. For the opposite reason, the so-called "as reported" earnings for the SP500
published by Standard&Poor Equity Research, have been very unstable and were subjected to the most dramatic downward revisions
recently. Therefore, for the purposes of the table, "operating earnings" have been used.
One of the original motivations for attempting to arrive at some projections for the Dow Industrial Index was
the possibility to arrive at some projections of Gold prices as these are notoriously difficult to obtain for want of generally
agreed objective yardsticks. However, given the continuous monitoring of the Dow-Gold ratio and related technical parameters
(i.e. stochastic) practiced in this site, it was felt that any reliable information about the nominator of the ration would
by necessity give some idea of the denominator. For this purpose, only what is believed to be a most conservative approach
was used. As a working hypothesis, it was assumed that the ratio (14 today), would not continue to fall to new lows as observed
in recent months but that it would rally modestly from about13 up to the previous low (now resistance) of 16, averaging 14.5
both in 2008 and 2009. Of course, any further decline of the ratio would project much much higher Gold prices.
The data in the table will be monitored, and revised as needed, at least every two weeks.
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