[Troy70]

We know already that operating earnings are slowing and fairly rapidly from their lofty levels and that could escalate to a vicious pace in 2004, but what I find interesting is what PE is willingly going to be accepted. If estimates at the S&P website for reported earnings are expected to be less in the 1Q04 than 1Q03, higher in 2Q04 than 2Q03, lower in 3Q04 than 3Q03, and same for 4Q04 compared to 4Q03 roughly, then what does this say? Are analysts being too cautious? Analysts were too cautious in 2003, absolutely. With all the excitement from 2003, it would seem to me that analysts are interpolating better results for 2004 than we will end up seeing. But if 2004 expected results are already less than actual 2003 numbers, then won’t the stock market react negatively if those decreases in reported earnings expected end up being even worse than current expectations. I look for the first sign of the equity put/call 21 day moving average ratio to get to about .40-.45 or commercials to roll over again and specialists to reduce their long positions. Therefore this is the play::

My best guess given the inordinate stimulus unmatchable of 2003 (even with the tax refund coming and the 50% capital equipment write off) and debt/gdp of 360% now:

If 1Q03 reported earnings were $12, and expectations right now are $12, then won’t they be $11 or lower?
If 2Q03 reported earnings were $11, and expectations right now are $12, then won’t they be $11 or lower?
If 3Q03 reported earnings were $12.60, and expectations right now are $12, then won’t they be $11 or lower?
If 4Q03 reported earnings were $9.50, and expectations right now are $10.80, then wont they be $10 or lower?

At 1130/$45, the trailing 2003 PE is 25x, definitely high by any measure.
If the trend of reported earnings at best will be $43, then won’t the trailing 2004 PE end up becoming 1195/43=28x by the end of the year?

And therefore it would seem to me that a PE of 28x is about as high as a PE we should see for the next 100 years, so after we get to 1195, may we not head down to a PE of 20x at least sometime in 2005 and 2006, which brings the S&P500 to 20x$43=860.

Short 2 big S&P500 contracts at 1195
Expected profit = (1195-860)x250x2=$167,500.

Better than losing it hoping for the PE ratio to go over 30x only the 3nd time past 200 years (the other 2 times were 1929 and 2000). I think we all know better now that PE’s above 30x are a no no. Never are they justifiable even under the best of circumstances.