Tony, I do expect a small [<5%] Y2K correction in the
market. But I don't plan to do anything about it. Yardeni's
exaggerated alarmism may have helped to bully some into compliance.
The Fed model: Yardeni has an interesting paper on his site
defending the model. You can calculate valuation of the market yourself here yardeni.com
Your input is an estimate of corporate earnings growth
and the 10-year bond yield.
The paper on the model [Adobe Acrobat] is here...
yardeni.com
excerpt...
RISK IN FED?S VALUATION MODEL
A Na‹ve Model? My favorite stock valuation model is under attack. The bulls don?t
like it at all because it shows that the stock market is grossly overvalued. The
model?s critics say it is too simple, even na‹ve. Most of them acknowledge that the
market may be somewhat overvalued, but they expect that higher earnings will fix
the problem. So they see little risk in owning stocks. I see a great deal of risk since
the model currently shows that stocks are 45% overvalued.
For my part, I will acknowledge that my stock valuation model is simple. That?s just
one reason why I like it. You don?t need a computer. You can play with it using a
calculator, at work, on the train, at home, or on the beach.
The model isn?t uniquely my own, of course. I borrowed it from Fed Chairman Alan
Greenspan, who borrowed it from other sources including Forbes magazine. On
December 5, 1996, Mr. Greenspan worried out loud for the first time about ?irrational
exuberance? in the stock market. He did it again on February 25, 1997. He probably
instructed his staff to devise a stock market valuation model to help him evaluate the
extent of this irrational exuberance. Apparently, they did so and it was made public,
though buried, in the Fed?s Monetary Policy Report to the Congress, which accompanied
Mr. Greenspan?s Humphrey-Hawkins testimony on July 22, 1997.
The Fed?s Stock Valuation Model was summed up in one paragraph and one chart on
page 24 of the 25-page document. The Report?s chart shows a strong inverse correlation
between the earnings yield of the S&P 500 and the 10-year Treasury yield (Exhibit 1 on
page 3). The earnings yield is simply S&P 500 expected operating earnings?using 12-
month-ahead consensus earnings estimates compiled by I/B/E/S International Inc?
divided by the S&P 500 stock price index.
Gottfried |
