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Thoughts on the economic downturn & earnings

2008-07-10

One point in Tuesday’s LAVA meeting that was emphasized by two of the panelists: the current economic downturn hasn’t really hit corporate earnings reports yet. Consider this article from Seeking Alpha: http://seekingalpha.com/article/84461-sector-p-e-ratios. Note that P/E ratios are much higher than they were at the market peak in Oct. 2007.

Why is that? With stock prices down 20% since Oct. 2007, you would expect the ratio of share price to earnings to go down. The simple reason is that corporations are reporting far lower earnings. And when some very knowledgeable private equity fund managers say that the bad economy hasn’t really hit corporate earnings yet, that makes me worry. I think they are expecting a much bigger hit, which means the worst of this downturn is not behind us, it’s ahead of us.

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