Wind River going up, up, up! Message Board

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Technology Stocks : Wind River going up, up, up!

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To: Allen Benn who wrote (9381)	3/27/2001 2:35:53 PM
From: Richard Habib	Read Replies (1) of 10309

Allen, Re your post on valuation. You spent significant time with an identity that boils down to a simple, well understood market axiom - market valuation changes with two variables, PE inflation/deflation and actual earnings increase/decrease. Actual earnings increase/decrease is normally self-evident. Changes in historical PE can are based on sensitivity to future earnings growth, increased demand for a limited universe of equity, and with inefficiency in the market. It's self evident that actual earnings did not support the increase in market valuation. PE inflation occurred which of course would not have occurred if valuation was supported by earnings. (A side note is that from 96-00, earnings for tech bellweathers like INTC have decreased in quality with the addition of their investment in equities being included in the PE calculation. While investment income is certainly income, it was not used to in PE calculations by the industry prior to 99. It is to a large extent self-referencing and therefore dangerous if treated the same as op income.) Looking at PEs in the last 4 or 5 years of big cap tech bellweathers like INTC, no argument can be made that future earnings growth potential changed significantly from 96-2000, yet historical PEs were completely discarded. Demand for equities may have increased somewhat from 96-00 but doesn't come close to accounting for PEs that altered from 17-21 into the high 40's (Using INTC as an example and that includes investment income). This leaves only market sentiment (inefficiency) that changed. The market was certainly overvalued in comparison to the market even 4 years ago. Your final assertion that somehow the government is responsible is unbecoming of an intelligent person. Rich

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