• Posted by Ivanhoff
• on May 22nd, 2009

$D" src="http://ivanhoff.com/wp-content/uploads/2009/05/sp-500-vs-ud.gif" alt="s&P 500 vs U$D" width="450" height="209" />If you take into account the recent weakness in the Dollar, S&P 500 is actually flat for the last 6 months. I have mentioned before that for the FED to be able to sell enough treasuries, they have to scare the money out of the stock market into the bond market by igniting deflationary concerns. If that happens, we should see the Dollar higher and S&P 500 lower in the following year or two. So far, the FED have been choosing the other alternative – printing, which will ultimatelly lead to higher prices, initial commodities boom, followed by retail slump. I am not sure which one will be less evil for the peope – an inflation and assets run ala Island or a long-term deflation ala Japan. I would choose the latter, but that’s me.

You can see how the current plunge in earnings has affected the current P/E ratio of S&P 500. I am not a believer in P/E as an equity selection tool, but by any means the chart clearly shows that stocks are not cheap based on current earnings. Certainly the market is a discounting mechanism that always look 6 months ahead and this is not taken into account in the chart.

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