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IF YOU WATCH OR READ OR LISTEN TO BUSINESS NEWS, you must be getting very confused about whether the stock market is undervalued or overvalued. The bulls who appear on the financial shows assert that the stock market is inexpensive: "This market is as cheap as it has been for the past two decades -- or the past 18 years." They also may state that the price-earnings ratio, at 13 to 16 estimated earnings for 2008 or 2009, is below the long-term norm.

Their statements are correct.

At other times during the same day, you may hear a bearish market maven try to convince the interviewer that the market is substantially overvalued and has a long way to go on the downside before it gets to fair valuation. The bearish interviewee will either discuss why the P/E ratio at over 21 times 2008 earnings estimates or 24 times the latest 12-months earnings is closer to valuations found near market tops, rather than market bottoms.

Stuart Goldenberg

These analysts are also correct.

Interviewers seldom if ever question the disparities in the various market analysts' approaches to valuation. But we will try to clear it up.

Few stock-market research organizations are equipped to estimate the earnings of every company in the Standard and Poor's 500. It would require having analysts in every sector to study each individual stock and come up with the best guess possible. Virtually no institution or money-management firm does this. We generally rely on organizations such as Standard & Poor's to do the work for us.

Standard & Poor's has done more than enough work. Visit its Website and you will find a myriad of different earnings estimates from which you can choose. S&P shows reported earnings, operating earnings, core earnings, earnings with pension-interest adjustment, and other formats.

There are two main earnings numbers that Wall Street uses when discussing valuations -- "reported earnings" or "operating earnings." Typically, the bulls use "operating earnings," and the bears use "reported earnings" because operating earnings are higher and reported earnings are lower. Also, it makes sense for the bears to use the past 12 months of earnings because they are usually lower, and for the bulls to use forward operating earnings to help make their case. Using the last 12 months is much more consistent, since it avoids dependence on estimates of earnings.

Operating earnings exclude write-offs, while reported earnings include write-offs. That is the only difference, but it's a difference that is getting much more important. As recently as the early 1990s, operating and reported earnings were virtually the same. But then we entered the greatest financial mania of all time, and the earnings numbers diverged.

There were so many write-offs by companies making unwise investments and then undoing them that operating earnings grew much faster than reported earnings. The write-offs that had been sporadic and unusual became common for many companies.

Using operating earnings is now like playing in a golf tournament that doesn't count any penalty strokes for hitting the ball into a water hazard or out of bounds.

Look at the numbers. Reported earnings for the S&P 500 for 2007 were just over $66. The operating earnings for 2007 were $84.54. The estimated numbers for 2008 are about $69 for reported earnings and about $90 for operating earnings.

By the way, these reported numbers have just recently been revised downward drastically, due to the slowdown in the U.S. economy.

Now you can see why there is such discrepancy in the market mavens' points of view. If you are a bull, you will say that the market is trading at a very reasonable 16 multiple on the $89.44 of earnings in 2008 and 13 times the 2009 estimate of $110.44. On the other hand, if you are a bear or just a reasonable person you can see the market is trading at 24 times trailing earnings and about 21 times the estimate of 2008 reported earnings.

Unless you believe that we will be trading at a "permanent plateau," as did the noted economist Irving Fisher in 1929, you might want to consider some more distant peak and trough multiples.

Over the past 75 years, most market peaks topped at around 20 times reported earnings, and the troughs occurred at around 10 times earnings. The financial mania of the late 1990s pushed P/Es to over 40 times reported earnings, and the following bust never brought P/Es below 18 times reported earnings.

There's more we can do to make sense of earnings: The best way to measure present earnings and future earnings is to smooth them out over long periods. Earnings can grow at only approximately 6% a year over the long term. The trend is limited by the growth in real GDP plus inflation. And long term, real GDP cannot grow faster than the increase in the labor force plus the increase in productivity.

If you don't accept this, look at a long-term chart and draw a 6% growth line through the earnings. It is clear that earnings sometimes rise above the line and sometimes fall below it, but earnings always revert to the 6% mean.

Going back to 1950, every instance where actual earnings rose above trend-line earnings was followed by a period where actual earnings went well below trend-line earnings.

Comstock Partners believes that we have entered such a period now, and that the market is trading at such a high multiple of trend-line earnings that it will be difficult to make money.

You could even lose a lot of money.

CHARLIE MINTER and MARTY WEINER are the chairman and president of Comstock Partners, investment managers in Yardley, Pa. Website: www.comstockfunds.com