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Strategies & Market Trends : MDA - Market Direction Analysis

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To: Les H who wrote (64183)	12/13/2000 9:59:35 AM
From: John Madarasz	Read Replies (2) of 99985

Justified Valuation? You Make The Call The chart below shows the relationship between nonfinancial corporate profitability and the relative market value of these corporations. Profitability is measured here by pre-tax adjusted profits (as published by the Commerce Department) as a percent of book-value net worth. Relative market value is the stock market capitalization of these corporations as a percent of their book-value net worth. Relative market stood at 187.1% in the third quarter of this year - its highest reading since the early 1950s, when the series began. Notice that the prior peak in this relative market-value percentage was 98.1, set back in the first quarter of 1969. Now look at the profitability data. In this just completed third quarter, the rate of return on net worth was 8.0%. This is down from its recent high of 8.6% (1997). How does today's rate of return on net worth compare with early 1969's? Not favorably - by two percentage points. Starting in 1964 continuing through 1968, this rate of return was consistently 10-plus percent. So, let's get this straight. In the second half of the 1960s, the nonfinancial corporate return on net worth was considerably higher than it was in the second half of the 1990s (through 2000), yet the relative market value of corporations was considerably lower. I know, today's stock market value is reflection of tomorrow's expected earnings. But to justify today's valuations, one would have to make some pretty heroic assumptions about tomorrow's earnings in light of today's earnings and even the earnings of the late 1960s. Alan Greenspan said last year that he could not judge whether or not there existed a bubble in the U.S. stock market. Think you could make an "educated" guess? ntrs.com

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