A good friend and long term client recently sent his brother my way to create a complicated set of estate and financial plans for his family.
He asked a very basic question in response to my familiar refrain of being a "Scotsman" and seeking value before investing.
How do you know when markets are a bargain?
For almost thirty years I have been a regular reader of the chartist and mathematical observer, Ed Yardeni of Yardeni Research.
His opinion-free charts are the bedrock of my valuation work.
These are the "Money Shot" charts that reflect index pricing vs. projected earnings.
Easy to see the relationship and how the markets price earnings over long periods of time. By knowing what happened in those years, easy to see how markets reacted to history.
The following chart shows IBES Forecast earnings. You will notice if you look closely that they always start out high and slowly reduce the forecast until magically lower than actual earnings.
This trick gives our financial media the right to report "Earnings exceeded analyst estimates" and call it Great News.
I want to draw your attention to two details.
1. That red 2018 forecast jumped from 11 to 18 on the Trump Tax Package.
Will earnings really almost double next year?
2. See that tiny little black line denoting 2019 Earnings?
The IBES Consensus is that earnings will fall back below 2017 levels in 2019.
DO they know something we do not know?
This link will take you to the entire 48 Page Chart Extravaganza