Jeremy Grantham and David Rosenberg Say Sell Stock Market Overpriced by 20%

New York, NY – Chief Investment Officer at GMO, Jeremy Grantham, says stocks are overpriced and fair value is 20% lower at S&P 500 level of 850.   His quarterly news letter recently stated that the market can expect 7 lean years ahead and that a market drop from recent 1100+ is very probable.

David Rosenberg is still singing the overvalued tune.  Unfortunately for him he didn’t lend any credence to the rally from the beginning.

“We have a market that is highly overvalued,” Rosenberg said today in an interview on Bloomberg Radio. “We have more sellers than buyers. 2010 will be a reversal from what we saw in 2009, when there was overwhelming complacency.”

Rosenberg, the chief economist at Gluskin Sheff & Associates Inc. in Toronto, said investors should shift their focus to producers of consumer staples, health-care companies, utilities and phone companies following the advance by the Standard & Poor’s 500 Index. The stock measure has surged 62 percent since March 9, driving its price-earnings ratio using the past year of profit to as high as 25 last month, the highest level since 2002, according to data compiled by Bloomberg.

“We’re going to have enough economic disappointment this year,” said Rosenberg, the former chief North American economist at New York-based Merrill Lynch & Co., the brokerage bought by Bank of America Corp. a year ago.

Read More: www.businessweek.com/news/2010-01-26/rosenberg-says-u-s-stock-market-highly-overvalued-update1-.html

The problem with Rosenberg is that his analysis quite often cites trailer P/E ratios as a basis for the valuation call.  It is more important to place Probabilities on forward earnings and then applying reasonable P/E’s based on the numerous other factors affecting valuations.

ie – the current estimate for 2010 S&P 500 operating earnings is $78 per Share.  The first question to ask is that a reasonable estimate.  Once you determine that the probabilities are relatively high that the market will achieve that level of earnings then a P/E range can be applied.

Assuming that $78 is accurate then a reasonable historical  FORWARD P/E of 12 to 16 can be applied to get a range of 936 to 1248 for the next 6+ months of trading.

Again, this is based upon an assumption of earnings for 2010.  If actual earnings vary greatly from that estimate the trading range may reflect that change. 

Obviously Grantham and Rosenberg feel that earnings levels will plateau in the next 1 to 3 quarters and then stagnate or drop.  If true, the best advice may be to sell stocks now.