Last week, I mentioned that a fair market value for the S&P 500 was around the 900 level, based on $60 of earnings in 2010 and a price-to-earnings multiple of 15 times. However, I suggested that the multiple of 15 times earnings might be too high, meaning that earnings need to surprise to the upside to drive further significant equity market gains. This week I highlight one of the main reasons that investors may pay a lower multiple on future earnings: government intervention in private markets.
A couple of weeks ago I attended the 6th annual PIMCO Institute for Wealth Managers. The largest fixed income manager in the world with nearly $750 billion under management, PIMCO is known for its in-depth analysis of critical investment issues. The conference was an opportunity to hear from PIMCO portfolio managers on the outlook for the global economy, asset allocation, and risk management in the new world we appear to be moving towards in the wake of the financial crisis.
PIMCO’s co-founder, Bill Gross, has been referring to this new world as one characterized by de-levering, de-globalization, and re-regulation. Given the intense focus lately on government intervention in private markets (while on deck for a CNBC interview this week, I listened as other guests shouted about the “criminalization of capitalism”), I’d like to focus on Gross’ idea of re-regulation. Since this financial crisis began, many have questioned free market capitalism and self-regulation. Government is increasingly gaining control of vital industries, such as banking and the automakers, with huge implications for investors. The recent Chrysler bankruptcy announcement, during which the President sharply criticized a group of bondholders for adhering to their fiduciary duty to their own investors, is but one of many worrying examples of government intervention.
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