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Strategies & Market Trends : MDA - Market Direction Analysis

SPY 672.04

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Nov 13 4:00 PM EST

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To: Stephen M. DeMoss who wrote (69404)	2/17/2001 3:02:05 PM
From: Sweet Ol	Read Replies (1) of 99985

The thing that has helped me get my mind around these market evaluation problems is to think about "what if I could buy the whole company and had to live off of its earnings". Keep that thought in mind when you are evaluating some of these companies with huge market caps relative to earnings or sales. For example, compare some "hot" company like JDSU with a company like Ford with a similar market cap (Approx. $50B). You have to compare the possibility that in the future the "hot" company with throw off as much cash as Ford (who is pretty predictable over a long time period). Using todays numbers, F earns $6B/yr and there is a pretty good likelihood that it will average that for 9 more years and pay out the $52B investment and continue to give you a tidy income for the rest of your life. JDSU is losing nearly $4B/yr. What is the probability that it will earn enough to pay out the $47B investment in the next 9 years? Or 20 years? Which one is most likely to take care of you in your old age? As more and more people begin to think like owners (e.g. Buffet) then you can see why some more of these great companies like the ones you mention are more likely to come down than to go up. Also, even Cisco had to face up to the law of diminishing returns. The bigger you are the harder it is to grow at a high percentage rate. It is one thing to grow a billion dollar company at 25-50% per year. But, how many trillion dollar markets are created each year to fuel a Cisco forever? This line of reasoning makes me think that eventually we are going to have major PE contractions in many companies. Now the question we all ask ourselves is, When will the market sentiment cause this to happen? When will the majority think that way versus just looking for continual price expansion? I don't know the answer to that question, but it seems to me that more people are starting to come to a similar conclusion. BWTHDIK Best to all, John

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