Due to what I now call the Great Financial CrashWave of 2008-2009, I have lowered my 2009 earnings estimates to reflect the financial system cataclysm. Our current model suggests $52-$55 per share for S&P 500 (SPX) earnings.

What multiple should be applied?

Old schoolers say at the earnings trough you can pay a 15-17 multiple, because when earnings recover, you are really paying a 12-14 multiple.

My problem with this analysis is that it presumes a V-shaped recovery in late 2009-2010. A sharp recovery is simply not possible. Not when 2%-3% of nominal GDP in the United States between 2003 and 2006 came from mortgage equity withdrawals(MEW).

Take a look at the chart at the top of the page, courtesy of the Fed. For the economy to right itself, it needs oxygen to fuel the recovery. Without $500 billion of cash to spend, we will likely see an L-shaped market for a while, not a V-shaped one.