Valuations

Recently the estimate for earnings for the S&P 500 was raised to $80 for 2010. This estimate projects earning growth over the year, meaning profits will be better in the second half of 2010 than in the first half.

If you use a P/E ration of 15, this earnings forecast equates to an 1200 level on the S&P. Now 15 is a little low and in effect represents a 5.33 rate of return. If you consider what you can get in short term bonds, this is a significant risk premium. However, be that as it may, it clearly shows that if you accept this earnings forecast, the current S&P levels still have a 10% upside.

Of course, the speed at which the economy grows, either based on domestic demand or export demand and the speed at which the world economy does or does not grow will play a significant role in whether these earnings are on target or not. Still, while there are always those people who argue that "this time is different" and articulately spell out there reasons, it generally turns out that this time is very much like all the other times.

It is a bit odd that some of the same people who argue that the economy is too weak and that unemployment will drag the economy down, also argue that we have great danger of inflation because of the supposed increase in the money supply. However, so much money was effectively eliminated from the system as assets values collapsed that until we see some increase in real estate the money supply is actually not very much increased at all.

Generally, this recovery, like most recoveries that preceded it will start off slowly and have fits and starts until the point that the growth rockets fully ignite. I believe the fuses have been lit and while I don't think we should or will see significant new housing, I believe that existing home values will start to rise and energy efficient renovations will be one of the driving forces for new jobs.