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Strategies & Market Trends : MDA - Market Direction Analysis

SPY 660.08

-0.8%

Nov 18 4:00 PM EST

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To: seminole who wrote (79995)	7/11/2001 2:37:31 PM
From: David W. Taylor	Read Replies (1) of 99985

>> We may get insanely undervalued or may not. >> Exactly as we "needed" to get insanely overvalued, we "need" to get insanely undervalued. Market psychology will force the extremes. No choice here. As far as prices decreasing or earnings increasing, why does it matter? Investors should consider the P/E as a way to value the stock. Any P/E can be turned into a yield by the simple application of a reciprocal. A P/E of 20 becomes 1/20 or 5%, which is a yield of 1% at the current rate of inflation of 4%. Since 10 year Treasuries are yielding the same amount WITH ZERO RISK TO PRINCIPAL, why should an investor invest in a stock with a P/E of 20? P/E's above 20 are too risky, so P/E's of 10 or so represent a yield of 10% - 4% or 6% after inflation. At 6% yield the investor is getting an extra 5% for the RISK OF OWNING THE STOCK. Is it worth it? Possibly. Do the same math for a stock with a P/E of 40, which still common in the Tech sector. Now the yield is 2.5% minus 4% inflation or -1.5%. Now the investor is getting punished with a 1.5% LOSS for taking on the RISK. That to me is the very definition of insanity.

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