Charting the Uncharted

I have a lot of opinions about Bank of America/Merrill Lynch and most of them are negative. But, like many of these banks and warehouses they have some really great researchers and strategists on board. Savita Subramanian from BofA is one of them. She is extremely bright in my opinion and always has some great insights. Of course her and her company are better off when stocks go up but she still had some interesting thoughts on current PE ratios. Barry Ritholtz shared Savita's thoughts on his blog...

...the “Rule of 21” which suggests that the sum of the PE multiple and CPI inflation should equal 21. Given that the latest inflation data are slightly negative (-0.2%) and the trailing PE ratio of 17.6x, the Rule suggests valuations should jump 3-4 points, or that inflation should be 3-4% (or some meeting in the middle).

Good stuff. I have to remind myself, however, we are in uncharted waters.