The graphic below, courtesy of Bloomberg LP, shows us the current and forward P/E estimates for many of the world’s major stock indices. What we see are single-digit P/E ratios - again, if you believe the estimates.



Someone has to be wrong here, right? Either I'm too pessimistic about the economy, or the analysts are correct. We can’t both be right.

So I decided to study how often Wall Street analysts and strategists had under-estimated realized earnings versus how many times they'd over-estimated them. As it turns out, strategists and analysts, unsurprisingly, are a very cheery, bullish sort.

As an ex-broker, I can tell you that it's part of Wall Street to be bullish - to encourage folks to buy things. As an investment advisor, I'm only interested in protecting client assets through tough patches so that we can all "live to fight another day," no matter how unpopular the view is at the time.

All that matters to me is GAAP (i.e. generally accepted accounting principles) earnings. The data below is courtesy of Ned Davis Research and is extracted from Standard & Poor’s data.

For 2009, we can expect earnings of approximately $49 per share for the S&P 500. When we use Friday’s close of 868 -- which is a far cry from the high near 1600 last year -- we arrive at a price/earnings ratio of 17.8.

I hate to break the news to you, but 17.8 times earnings aren't cheap. In fact, it's downright expensive. It's tantalizing to buy what's just dropped in price by nearly 50% - but how brave do you feel paying 17.8 times forward earnings?

The problem: What's just dropped in half can sometimes drop in half again. This is otherwise known as a "value trap."



Risk Premium for Equities and Credit Markets

One of the most important investment decisions, whether you're a retail investor, a large institutional investor, or a hedge fund investor, is what asset is most appropriately priced relative to its risk. Academic types like to call this model the "Efficient Frontier" - a study as futile as I have ever seen.