No. of Recommendations: 20
Just a fun series of numbers.
8 month rate of change of real S&P 500 trailing reported (not estimated) earnings, annualized rate

2010.02   2009.3%
2010-03 1581.3%
2010-04 1275.3%
2010-05 1063.4%
2010-06 325.4%
2010-07 138.7%
2010-08 59.3%
2010-09 50.5%
2010-10 42.7%
2010-11 36.9%
2010-12 35.0%
2011-01 31.2%
2011-02 27.2%
2011-03 24.1%
2011-04 20.9%
2011-05 18.0%
2011-06 15.8%
2011-07 13.6%
2011-08 11.5%
2011-09 11.2%
2011-10 9.6%
2011-11 20.3%
2011-12 19.9%
2012-01 18.9%
2012-02 16.1%
2012-03 13.3%
2012-04 10.5%
2012-05 8.5%
2012-06 8.2%
2012-07 0.4%
2012-08 0.4%
2012-09 -0.4%
2012-10 -0.8%

It rather looks like the earnings cycle is rolling over.

Trailing earnings are around $87.92 at the moment, depending on your data source.
I think the cyclically adjusted on-trend sustainable level is under $70 in 2012 money.
If you're of the "it's different this time" school and project the recent extraordinarily
high post-80s earnings growth trend to continue, it would be a pinch under $80.
That requires the assumption that net earnings as a fraction of US GDP will
rise from its current near-record-breaking level to higher and higher levels.

My guess of where the on-trend earnings lie suggests that fair value
for the S&P would be about 960 based on the average observed level
of valuation since 1937, two full secular bull/bear cycles ago.
The super-optimistic "it's different this time" scenario suggests about 1100 is fair value.
Both figures in end-2012 dollars.

In short:
Don't use trailing P/E ratios as a market valuation tool when earnings are near a record high.
Half the time, including now, they are way above the sustainable trend.
There's always another recession coming.
Nothing (absolutely nothing) other than the price-to-trend earnings
ratio you pay at the moment of purchase determines the central long run
expected return from the broad market for time horizons 5-10+ years.
That ratio is unusually high right now, so forward returns will be unusually low.

If you're in the broad US market, use some technique that has a very
good chance of getting you better than average returns.
Stick with undervalued things, use quant techniques like MI, use timing, or get the heck out now.

Where do you find some value?
Hmmm, HEDJ at $44.27, might look very good near $40-41 on the next sell off.
Just a thought!

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