From Disciplined Approach to Investing.

Yesterday, we noted that trading in corporate bonds was at the highest levels in two years.  Calculated Risk also noted the same article and published a few nifty graphs showing that credit spreads have improved.

There seems to be unanimity that America's position in the world will be weakened because of the financial crisis.  I have my doubts that this will be the case, though a re-think of the structure of the global financial system will be in order once we get through this.

Here is an article by one author who believes that America will become even stronger relative to the rest of the world because of the crisis.

So while the stock market loses its mind, the corporate bond market is starting to heal.

As we noted a few days ago, a few green shoots are growing in the economic wasteland.  The index of leading economic indicators came in today at +0.4%, surprising economists, who were expecting a print of +0.1%.

From the BBC.

Nobuo Tanaka, the IEA's executive director, warned there could be a "supply crunch"....

"Currently the demand is very low due to the very bad economic situation," Mr Tanaka said.

"But when the economy starts growing, recovery comes again in 2010 and then onward, we may have another serious supply crunch if capital investment is not coming."

From Fund My Mutual Fund

I use $70 as my normalized earnings estimate for the S&P 500.  With the market closing at 789, the market is trading at ~11x my normalized earnings estimate. 

Aggregating bottoms-up operating earnings forecasts for 2009, earnings this year are expected to be $62, and the market is trading at 12.7x earnings.  Operating earnings for 2010 are expected to be $78, meaning that the market is trading at 10x estimates.

I value the market off of normalized profits, which I define as a normalized profit margin multiplied by sales.  The normalized profit margin is the expected profit margin of the market over time.  At times, it has been as high as 10% and as low as 3%.  My assumption is that the normalized profit margin is 7%.  Sales per share of the S&P 500 is $1,000 a share.  Thus, the normalized earnings of the market is $70.