A study of P/E ratios strongly suggests an imminent leg down in equity indexes should fund algorithms adjust to the recent and dramatic drop in corporate earnings. When this occurs, expect a major move up in PM's. The central banks are likely aware of this, which provides another reason why London and NY have been so obsessed this week with suppressing gold and silver prices. This just may be the final opportunity to load up on both physical metal and PM shares.

Good luck - VHF

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Reported corporate earnings crash 44% since January

John Xenakis

February 26, 2009

Most likely result: A further substantial stock market plunge.

In mid-January, I wrote "Collapse of corporate earnings portends imminent stock market plunge." At that time, the collapse of corporate earnings was only estimated.

Now the actual reports are out. Since January 1, reported earnings per share have gone from $48 per share to $27 per share. The bulk of that collapse occurred within the last two weeks.

This is an enormous collapse, and it's having a dramatic effect on price/earnings ratios (also called "valuations").

For simplicity, let's assume that the S&P 500 stock index has been at 760 since January 1.

Then, on January 1, the P/E ratio was 760/48 = 15.8.

On February 13, the P/E ratio was 760/27 = 28.1.

To see this graphically, take a look at the following chart. There's a price/earnings ratio chart at the bottom of this web site's home page, and it gets updated automatically every Friday. Here's last Friday's version of the chart:

If you look at the far right side of this chart, where the red circle is, you can see a huge spike in the last week, sending the P/E ratio up to 28.

As I've pointed out many times, P/E ratios held steady at around 18 for the entire years 2006-2007. This happened despite the fact that stock prices (shown on the bottom half of the chart) varied wildly.

The only way that this could have happened is if investors purposely held stock prices at the right levels, and that means that the buy/sell algorithms in their computers made decisions based on whether a stock's price was above or below 18 times earnings. There's no other reasonable explanation for how P/E could have held steady at 18 for over 2 years.

Now those same buy/sell algorithms have to deal with a collapse in reported corporate earnings, and the only way to do that is for the S&P index to fall to below 500 (and the Dow to fall below 5000).

I do not know any other way to interpret this collapse in reported earnings.

It's not surprising that the American economy shows the same signs of collapse that we've been seeing around the world.

Last week, the world's attention was drawn to an East European banking crisis, that threatened to create a domino effect that could bring down other European banks.

On Wednesday, that crisis took another step forward, when Ukraine’s national credit rating was cut two levels by Standard & Poor’s to the lowest in Europe, a day after Latvia was downgraded to junk, as eastern Europe’s most debt-laden economies lurch closer to default.

Worldwide trade and transportation have been grinding to a halt, with China's economy crashing much faster than expected.

In fresh news on Wednesday, Japan announced that its exports had fallen 46% in January. Demand for Japanese cars in particular fell by 69%. This is part of the general collapse of Asian trade.

As I warned last week, this continues to be a time of maximum danger. This rapid fall in reported corporate earnings could certainly trigger a larger panic. As I've discussed many times on this web site, generational theory predicts that there MUST be a generational stock market panic and crash, the first since 1929. It's impossible to predict the exact date, but with economies plunging around the world, the mood may be right for a major panic.