We were among a chorus of folks who thought that Jeremy Siegel’s attempt to redefine the S&P’s earnings was, in fact, totally nuts. You all did too. So we thought we’d present a defence of his methodology written by Greg Feirman of Top Gun Financial, to see what you think. Here’s the nut of it:
The point can be made very clearly by constructing a very small index consisting of Citigroup, Walmart and Hewlett Packard. Citigroup has a market cap of about $14 billion and lost $18.7 billlion in 2008. Walmart has a market cap of about $190 billion and made $13.4 billion in 2008. HP has a market cap of about $75 billion and made $8.3 billion in 2008. The total market cap for this index is $279 billion and the total earnings are $3 billion for a trailing multipe of 93. What an expensive index! Who could think stocks are cheap? With a trailing P/E of 93! Perma-bulls!!!!
But, in fact, the overall P/E of the index is a meaningless number. What we have is a large piece of crap (Citigroup) and two attractively valued stocks (WMT (P/E: 14) and HPQ (P/E: 9)). And that, in a nutshell, is what is going on with the entire index.
There’s something to this. See at first glance it looks like the author is saying, well, everything’s fine if you just strip out the financials from the S&P. That would be conveniently simple. But what he’s more saying is that if you take a snapshot right now and ignore the biggest money losers there are a lot of attractively priced stocks in the index, and thus it might be time to buy. This sounds reasonable.
This still doesn’t get Siegel off the hook, because for one thing he’s been bullish all the way down, and for another, he presented his argument completely void of historical context (we’d still like to see a chart of S&P earnings done his way).