Forecasting Consumer Guide Part IV: Ed Keon
In a CNBC interview this morning and in yesterday’s USA Today summary of forecasts Ed Keon laid out an extremely bullish market forecast for 2006. His prediction of a year-end S&P 500 close of 1530 would be a new all-time high and a gain of 20% for the year. His reasoning has three steps:
- There are five asset classes–stocks, bonds, cash, private business, and real estate. Over a long period of time, the differences in the expected return from these asset classes has been zero.
- Right now, home values have a price/rental ratio of 20, bonds return a P/E of 22.5 and stocks are either a P/E of 15.5 using forward earnings or 18 looking backward.
- He expects money to move into stocks as the Fed cycle ends, particularly as individual investors return to the market.
Considering the limitations of time in the interview, his explanation was very clear. If you think about his reasoning and conclusions, you see that his target of 1530 does not actually fill the valuation gap if one uses forward earnings.
Ed Keon’s approach is strong on two fronts. First, he understands that since money seeks the best return, valuation can not be done in a vacuum. He looks at other classes, unlike those who cite the "average market P/E since the Taft administration. The causation for his model is clear and exhibits intellectual rigor. Second, he forecasts a return to a long-standing normal relationship and offers some catalysts. In short, he combines quantitative empirical research with a good causal model.
We are bullish at "A Dash," but we do not just like Ed Keon because he is bullish also. We are consumers of good research. Our bullish outlook is a conclusion, reached by analyzing research. It is not our starting point.