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Q4-11 Estimate(Using S&P Earnings as of 23 January 12)

Combined Fair Market Value

(CFMV)

S&P 500 Fair Value

A Comparison of Professor Robert Shillers

Cyclically Adjusted Price to Earnings (CAPE 10),

Nominal Price to Earnings,

Monthly Price to Earnings,

And YearOverYear Earnings Growth

By Chris Turner

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I. Estimated Earnings for CFMV Q4-11:The estimated earnings (with 47% reported) for 4

thQuarter CY-11 (Oct-Dec 11) Combined Fair Market

Value (CFMV) using data sets from the S&P Website (S&P Website) and Professor Robert Shiller (Shiller

Online Data) are listed below:

**

Note: The addition of the right column shows approximate valuation based on the time

of publication. The S&P 500, currently at 1310, shows how much we are still over (or

under) valued based on each indicator A to C.

A. Nominal period trailing earningsCalculated using Shillers method of current S&P 500 Indexaverage price of monthly closes divided by average earnings over column period earnings.

B. CPI Adjusted (Shiller Method-CAPE)Professor Shiller adjusts current S&P 500 Index price and 4quarter trailing earnings at month close by CPI, then divides CPI-adjusted price by CPI-adjusted

earnings 10 years. The 10 year calculation is the original Shiller Methodthe other periods are

calculated the same method but for differing periods.C. Monthly P/E AveragesCalculated by dividing monthly price by monthly 4 quarter trailing earnings

NOTE: This calculation results in the same number whether using CPI or nominal.

D. Historical Y-O-Y Earnings Growth: Calculated by averaging of entire time period earnings growthyear over year.

E. Combined Fair Market Value - Calculated by averaging Current Price (sentiment), average of allperiods nominal and Monthly P/E, and Y-O-Y earnings growth. This does not include Shillers CAPE

S&P Index = Average of daily closes for month end.
http://www.standardandpoors.com/http://www.standardandpoors.com/http://www.standardandpoors.com/http://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.econ.yale.edu/~shiller/data.htmhttp://www.standardandpoors.com/

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II.Background:A. PROFESSOR SHILLER: Yale Professor of Economics Robert Shiller, (Bio Here), developed a

cyclically adjusted price to earnings ratio (CAPE) that simply uses monthly CPI- adjusted S&P 500

Index and divides that by an average of 10 years worth of CPI adjusted trailing monthly earnings.

Professor Shiller uses this data and creates a long term chart that compares this ratio over time with a

backdrop of long term interest ratesshown below:

NOTE: Shiller Chart as of 23 January 12 (21.14 does not reflect latest earnings for Q4-his chart is not updated)

B. CAPE METHODProfessor Shiller uses the long term average for price to earnings for 10 years(currently 16.42) to arrive at an over or under valued metric based on those earnings. The value 20.49

(correct data) minus 16.42 provides an overvalued metric of roughly 20%. With the S&P Index at 124

(average of daily closes for Dec 11), a 20% percent correction results in the S&P fair value at 996.
http://www.econ.yale.edu/~shiller/bio.htmhttp://www.econ.yale.edu/~shiller/bio.htmhttp://www.econ.yale.edu/~shiller/bio.htmhttp://www.econ.yale.edu/~shiller/bio.htm

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Since Shiller desires to smooth datawhich is understandablethe second question that came to mind

was Why 10 years? Isnt this the same time that the following occurred:

1) Credit expanded feverishly2) Record Mortgage Equity Withdrawal3) Record Securitization4) Negative savings rate5) Peak baby boomer earnings (40-50)

To compare 5, 10, 15, 20, and 30 years goes further to answer the relevancy of the data based on

differing time periods and smoothing the impact of the previous 10 years.

B. Nominal Period Trailing Earnings CalculationThese calculations are the exact same as ShillersCPI adjusted, except these are unadjusted numbers. Last time I checked, no one really trades a cpi-

adjusted Index anyway Additionally, the differences between the nominal and CPI adjustment are

too small. The chart below shows the actual difference between Shillers CAPE data and simply using

the nominal number. Clearly, the differences are subtle and perhaps adjusting for CPI is

unnecessary.

C. Monthly P/E AveragesWhile researching the data, another metric came to mind. What about thehistorical monthly price divided by earnings? What would those charts look like for 1 year (essentially

the monthly price divided by the earnings which is the 4 quarter trailing earnings), 5 year, etc

D. Historical Y-O-Y Earnings GrowthI also calculated the 1871 to present day average of 1 yearearnings growth to arrive at the long term average. This number shows more of a linear representation

of where the S&P would be based upon the long term average of earnings growth.

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E. Combined Fair Market ValueA number predicated on all calculations using an average ofsentiment (current price), nominal (because we trade nominally), earnings yield, and monthly P/E

values.

F. Geometric VS Arithmetic CalculationsI contacted Andrew Smithers in the UK about usinggeometric vs arithmetic calculations. He uses Geometric for his chart (Click Here) that compares

Tobins Q ratio (Q Ratio Explained) and Shillers CAPE. Geometric is appropriate for Earnings Per

share calculations over time, however Price divided by earnings are snapshots in time and arithmeticaverages work. In fact, the differences in calculations from Geometric and arithmetic are in the

decimals (I calculated both ways) and againwhen talking generically of over and undervalued,

whether the S&P fair value is 899.01 or 899.05 becomes irrelevant.

G. Logarithmic vs ActualMost charts are using Logarithmic due to the long time horizon. Once thetime horizon passes 30 years, using actual index numbers (even CPI adjusted) prevents a true

representation. Comparing Shillers original chart and the logarithmic chart shows the 1929 vs 2000

bubbles in much better context.

IV. Charts:A. CFMV1950 to Present
http://www.smithers.co.uk/page.php?id=34http://www.smithers.co.uk/page.php?id=34http://www.smithers.co.uk/page.php?id=34http://en.wikipedia.org/wiki/Tobin%27s_qhttp://en.wikipedia.org/wiki/Tobin%27s_qhttp://en.wikipedia.org/wiki/Tobin%27s_qhttp://en.wikipedia.org/wiki/Tobin%27s_qhttp://www.smithers.co.uk/page.php?id=34

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B. Original Shiller CAPE1871 to Present (original Shiller data applied to logarithmic scale)

Charts included in Attachment:

1. CAPE 5 year

2. Nominal 5 year

3. CAPE 10 year (Shiller Original data)

4. Nominal 10 year5. CAPE 15 year

6. Nominal 15 year

7. CAPE 20 year

8. Nominal 20 year

9. CAPE 30 year

10. Nominal 30 year11. 5 year Monthly Price divided by Earnings Average12.10 Year Monthly Price divided by Earnings Average13.15 Year Monthly Price divided by Earnings Average14.20 Year Monthly Price divided by Earnings Average15.30 Year Monthly Price divided by Earnings Average16.5 Yr Earnings Yield17.10 Yr Earnings Yield18.15 Yr Earnings Yield19.20 Yr Earnings Yield20.30 Yr Earnings Yield21.TFMV 1871 to present22.TFMV 1950 to present

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V. About the creator:Chris Turner, resides in Kansas, full-time pilot for military with a part-time hobby for economic and

market research. Independent options trader and managing partner for small Investment LLC.

ATTACHMENT 1

1. CAPE 5 year

2. Nominal 5 year

3. CAPE 10 year (Shiller Original data)

4. Nominal 10 year

5. CAPE 15 year

6. Nominal 15 year

7. CAPE 20 year

8. Nominal 20 year

9. CAPE 30 year

10. Nominal 30 year11. 5 year Monthly Price divided by Earnings Average12.10 Year Monthly Price divided by Earnings Average13.15 Year Monthly Price divided by Earnings Average14.20 Year Monthly Price divided by Earnings Average15.30 Year Monthly Price divided by Earnings Average16.5 Yr Earnings Yield17.10 Yr Earnings Yield18.15 Yr Earnings Yield19.

20 Yr Earnings Yield

20.30 Yr Earnings Yield21.CFMV 1871 to present22.CFMV 1950 to present

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CAPE 5 year

Nominal 5 year

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CAPE 10 year (Shiller Original data)

Nominal 10 year

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CAPE 15 year

Nominal 15 year

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CAPE 20 year

Nominal 20 year

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CAPE 30 year

Nominal 30 year

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5 year Monthly Price divided by Earnings Average

10 Year Monthly Price divided by Earnings Average

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5 Yr Earnings Yield

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CFMV 1871 to present

CFMV 1950 to present

cfmv-q4-11-est

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