Credit for the chart below goes to Mike Susak of La Jolla Trading, Inc. (West Coast Options Fund, L.P.)(Any errors and omissions are mine)
How to read the chart below?
Premise: $100 yielding 5% in Bonds=$5, and $100 invested in a Company with a P/E (Price/Earnings)of 20=$5 - is the same thing.
Example: On 10/21/02 the Dow's 52 week earnings = $389 & 10 Year T-Note = 4.13% Based on the chart below, the DJIA should be trading between 9262 and 9725. Why are we are trading at 8323? These are "trailing" earnings - and the future for Dow earnings is always uncertain (RISK & FEAR premium).Ten Year T-Notes are guaranteed.
The current numbers as of Sep. 28, 2012 are $909.97 in Earnings and Ten Year Notes have a yield of 1.66%
After rounding things up and down a bit - the Dow should be trading at $54,817