Timothy, even if you will compare interest rates to earnings yield, we are way way above any historical precedent.
Buying stock for dividends died about 8 to 10 years ago. Now they buy stocks for their DOT.COM, just listen to the advertisements on the radio.
Several years ago, with the long term bond around 8% a P/E of 18 was acceptable and 22 was expensive, then they inched up a bit.
Now we are around 15% lower in interest rates but almost twice in acceptable P/E ratio. So we had a discrepency of 400% as the average acceptable P/E is 37 or 60% higher instead of the 15%.
Further, the stocks who represent most of the capitalization in the market actually are at an average P/E of 60, which is 120% higher or a gain of 800% to 1000% above the norm.
All this would be already stratosferic valuation by any reasonable investment yardstick, but as most Tech companies compensate their employees with stock option which represent any were between 20% to 40% of their actual salary, those profits actually evaporate in thin air.
The reason behind this is very simple in the "Old Economy" wages were around 20% to 25% of product cost with pretax profits around 7% to 8% of revenue. In the "New Economy" wages are around 30% to 40% of with pre-tax reported profits of 10% to 12% revenue. Adding the option pay to wage cost will increase employee compensation by at least 10% which will actually wipe out any real pretax profits.
So most High Tech Companies such as CSCO or MSFT or many others do not earn any pretax income as all income is first distributed to their own employees and mostly to management.
Therefore speaking of P/E is just ridiculos and the shareholders equity of those companies is almost non-existant, as most of it is vested in stock options, similar to US budget surplus or Social Security surplus ... it is there until you want to receive the money <GG>
To make the issue more realistic, how about buying a apartment building who cost 10 million to build with rental income of $2 million but with upkeep and maintenance cost of $1,6 million.
Wonder who will give the $8 million mortgage at 8.5% interest rate and how fast will your $2 million down payment evaporate. ($700K in interest service and about $250K in principal first year will generate a deficit of $600K a year) Oh yea you hope to hike rents and make up for it .....guess wath no bank or finance company will give a mortgage for your hopes <GGG>
BWDIK
Haim |
