The blogosphere and Jeremy Siegel

Jeremy Siegel’s Wall Street Journal article brought about much rancor and ridicule in the Blogosphere, along with a counter-attack. While Siegel’s math may be dodgy there is a more pertinent point: why should equity holders of an index such as the S&P 500 worry about vast losses from such small constituents? There doesn’t seem to be any reason for index holders to worry about such losses, any capital re-building by banks is unlikely to be a major drag on the S&P now.

So the mental abstraction of saying the S&P 500 is 94% in real companies and 6% in zombie banks and crushed autos which give ‘option value’ seems valid. There is some cherry picking going on here however. Defenders of Siegel have largely ignored the bullish outliers, i.e. the energy companies, who have not yet seen the drop in oil price vanquish their low historic P/Es.

To show how screwed up using a composite P/E is right now – here is a comparison between P/E and Robert Shiller’s P/E10:

The recent inversion between P/E and 10-year P/E is unprecedented!


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