Are Stocks Cheap? - The True Conundrum

Conundrum: A paradoxical, insoluble, or difficult problem.
- American Heritage Dictionary.

Given what we've witnessed over the past 18 months or so, I would have to say that "conundrum" may be the best word to sum up where we now stand in the equity and credit markets. On the one hand, stocks seem "cheap" (so cheap, in fact, that a famous ex-Wall Street strategist declared stocks the cheapest ever on Friday).

Without acrimony, I've been hearing that stocks are cheap for the past 400 points of the S&P's downward move. Declaring any asset class to be "cheap" during what may be the most devastating financial/economic/credit unwinding in history is a dangerous business, in my view.

Stocks are "cheaper" than they were if all you care about is price. But consider this: What if stocks were historically expensive at the beginning of this decline, considering most any reasonable valuation? But then a nasty thing happened: The global economy began to experience a coordinated de-leveraging, earnings began to fall worldwide, unemployment began to soar, and governments around the globe were all forced to bail out companies, industries and individuals - all at a time when risk aversion was climbing to new heights.

At the expense of missing a potential imminent move upward in the equity market, I ask the question openly, and I'm dying for an answer: If you have no clue how far the unwinding will go -- and have no reasonable expectations of earnings per share -- how can you tell me stocks are cheap? I don’t believe anyone can. Markets can become "oversold" and due for a bounce; as a technician, I respect these bounces.

But don’t forget: Bear markets get oversold and stay oversold.

I will say this simply, though I may be wrong: While stocks may look cheap, relative to what I believe lies ahead for the global economy, there will be better entry points ahead, even despite the 40% bludgeoning stocks have taken so far this year.

I've been told that stocks look cheap on a "trailing-earnings" number; to be frank, they do look cheap, based on the last 12 months - except that that number is as useful as remembering what my golf handicap was in 1981.

Perhaps more importantly, I would like to focus on Wall Street analysts' earnings estimates, because stocks around the globe look very cheap if you believe them - which I most definitely do not.