Dan Greenhaus is at the Equity Strategy Group at Miller Tabak + Co. where he covers markets and portfolio theory. He has contributed several chapters to Investing From the Top Down: A Macro Approach to Capital Markets (by Anthony Crescenzi).
This is his most recent commentary:
I don’t have much to add this morning but I will say that the thesis concerning equity fragility as February progresses is coming to pass. I hate to sound like a broken record but it’s clear that equities simply are not pricing in the type of economic contraction that is increasing in probability with each passing day. Doubt lingers regarding the stimulus plan and how it is implemented is going to be crucial to whether the government can play a role in jumpstarting aggregate demand.
Some would say that simply isn’t the case (economic theory which I wont get into) and others simply say there is no evidence for a Keynesian based stimulus plan having worked. That may be the case but we’re going to find out. The stimulus bill is going to be a drag on longer term growth thanks to, among other things, higher interest rates from the high debt levels that is the new reality but of course the hope is that in the short term, we can arrest the economic decline that seems to be gaining strength rather than abating.
With all that said, let’s get to equities. $65 earnings, which I have maintained since October, no longer seems likely and while I don’t have a firm grasp on what that number should be (who does?) we can do some basic math to see where we’re at. To repeat, historically equities have found a bottom anywhere from 11x-13x earnings. I have used 12x earnings in the past for my price targets but seeing as how this recession and contraction is longer and more violent than normal, let’s take it down a step and slap an 11x multiple on various price targets. Below is a quick little chart on where the S&P should trade based on an 11x multiple of earnings at various points. Following the price target is the percentage the S&P would need to fall from last night’s closing level of 778.94 in order to get to “Fair Value” assuming the multiple and price target hold.
$60 x 11x = 660 15.27%
$55 x 11x = 605 22.33%
$50 x 11x = 550 29.39%
$45 x 11x = 495 36.45%
$40 x 11x = 440 43.51%
I am in no way endorsing any of those price targets at this time but again, its clear that $65 isn’t going to happen. I continue to believe that buying certain stocks at their current levels and the S&P as a whole in the 700 range remains attractive but one must be ready to bear further losses in the short term as we ride out the equity decline.
Protective puts and covered calls continue to reward investors and I beg anyone who is *not* using these options to run their P&L WITH the options. The difference is going to be striking.