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Pastimes : Ask Mohan about the Market

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To: Cynic 2005 who wrote (9436)	11/26/1997 10:55:00 PM
From: Rational	Read Replies (3) of 18056

Mohan: Corporate profits may increase if the demand continues to be high. What I see is a reduction in margin. Companies who can peddle high volumes will survive. Others (like MUEI) will either collapse or cut wages to stay afloat or be acquired. At the end, the set of all surviving firms will get a fair return on capital. For the strongest companies (surviving in the game), a fair return (earnings) of 5% on investment is justified (fair). This gives a P/E of 20. Whenever, the P/E is bigger [smaller] than the reciprocal of the rate of interest, the market will go down [up]. This has been happening historically. After the 1987 crash, the percentage moves have been very small because smart money investors keep watching this relationship between S&P 500 index profitability and interest rate. Sankar

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