S&p 500 and DJ indices update

Two weeks ago, I made the following statements in my post: Are we done yet? No Expect a lot more decline:

• The equity markets are still very expensive in historical terms and will decline sharply
• The VIX and VXO volatiliy indices will beat their previous historical records

It appears that I was very lucky on my timing, since both happened exactly when I predicted them. The equity markets declined by about 15% in dollar terms and the volatility indices beat their previous records by as much a 50%-70%.

I would like to provide the following updates, and draw the following conclusions from what happened today:

• The DJ INDU and Russell 2000 still have negative earnings and hence no PER
• The S&P 500 had a big decline in the PER (probably thanks to the rebalancing of the indice, removing several big loosers in the past few weeks, including Fannie, Freddie, Lehman, WaMu, etc.). But, the PER is still at about 20, which is very high historically. Should the S&P PER decline to it's historical mean, it would mean a drop of another 25% to 33% of the value OR an increase of about 25-33% of the corporate profits (or somewhere between the two). What are the odds of a huge increase in corporate profits? Who would bet on major declines in corporate profits in the coming months/quarters? In which case, as during major recessions, should the PER drops to about 7, this would mean another 60-70% decline, provided that corporate profits do not decline! Given the current inflation figures and all the bullishness in the market, I expect the market to rebound at some point, but on the long term, we could see a major decline... (See Fig.1)
• Regarding the market decline, if you look at the DJ and S&P 500 in EUR or Gold terms, you will see that since the USD rallied massively in the past several weeks meaning that the US indices have actually made only a small decline. (Un)fortunately, this is bearish for them, since during the past few years, many companies massively benefited from international sales and the devaluation of the USD. Comparing the INDU30 to the CAC40, the difference is a massive 13%. So it is very likely that the German and French markets would beat the INDU on the mid-term and that a long CAC/DAX short DJ would be a nice strategy - specially since I am very bearish US, given the mess over there...
  

Fig. 1: Historical PER on the S&P 500 (click for bigger image)

Fig. 2: S&P 500 in Gold, EUR, USD and compared to French CAC 40 (click for bigger image)

Fig. 3: DJ INDU in Gold, EUR, USD and compared to French CAC 40 (click for bigger image)