In 1988, I took my daughter to Cozumel to scuba dive. While there, I spent some time on the beach reading a book whose name I no longer recall. What I do recall is its strident insistence that stock analysts pay much more attention to the "P/E Ratio" or Price-earnings ratio. This is a measure of how much investors are willing to pay for a company's earnings on a per-share basis. For example, if a company earns $1.50 per share, and the stock is selling for $15.00 per share, then we can say it has a P/E Ratio of 10 or 10X. When investors are feeling optimistic, they will pay more than $15 for a $1.50 of annual earnings. They might pay $16 or $17 a share or more.
The importance of this metric was originally pointed out by legendary analysts Benjamin Dodd & David Graham back in the 1930's. The author of the forgotten book in Cozumel emphasized it is The Most Important metric. The Media (and therefore everybody else) clearly believe the monthly jobs report is more important.
The P/E Ratio has fallen from 23.1X last September to only 14.9X now. This 35% drop is the sharpest since 2003. What this tells me is that, absent some strong external shock, The Market is currently over-sold, which means it is more likely to go up . . . or even just bump-along . . . than it is to go down.
