TAILIEUCHUNG - The P/E Report: Quarterly Review Of The Price/Earnings Ratio

Standardized option contracts provide orderly, efficient, and liquid option markets. Except under special circumstances, all stock option contracts are for 100 shares of the underlying stock. The strike price of an option is the specified share price at which the shares of stock will be bought or sold if the buyer of an option, or the holder, exercises his option. Strike prices are listed in increments of , 5, or 10 points, depending on the market price of the underlying security, and only strike prices a few levels above and below the current market price are traded. Other than for long-term options, or LEAPS, which are discussed. | c Crestmont Research The p E Report Quarterly review Of The Price Earnings Ratio By Ed Easterling October 2 2012 Update All Rights Reserved AS OF SEP 30 2012 REPORTED ADJUSTED1 CRESTMONT2 P Closing Price S P 500 Index 3 1441 1441 1441 E Current Estimate S P 500 EPS 4 89 67 69 P E Price Earnings Ratio5 Notes 1 adjusted using the methodology popularized by Robert Shiller Yale Irrational Exuberance as modified for quarterly data 2 based upon historical relationship of EPS and GDP as described in chapters 5 7 of Probable Outcomes and chapter 7 of Unexpected Returns useful for predicting future business cycle-adjusted EPS 3 S P 500 Index is the value at the date listed in the table 4 Reported is based upon actual net income for the past year trailing four quarters Adjusted is an inflation-adjusted multi-year average Crestmont see note 2 5 P divided by E Copyright2008-2012 CrestmontResearch CURRENT STATUS Third Quarter 2012 The stock market rallied over the past quarter increasing P E further into the range of fairly-valued. P E has returned to the same level as the end of the first quarter which is the highest P E since mid-2008. By historical standards the higher levels of P E in 2007 25x were near the upper limit of fairly-valued. One implication could be that the current level of P E has room to grow. Yet for investors that now foresee a greater risk of slower economic growth and or a higher inflation rate or deflation in the future the upper bound for P E fair-value would be much lower than historically warranted. Further note that the reported P E increased this quarter not only due to the market rally but also as a result of a decline in earnings. The reported P E remains distorted below the normalized P E due to currently high and unsustainable profit margins. The trend in earnings should be watched closely and investors should remain cognizant of the risks confronting an increasingly vulnerable market. NOTE Crestmont .

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