MDA - Market Direction Analysis Message Board

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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: David W. Taylor who wrote (79999)	7/11/2001 10:37:44 PM
From: seminole	Read Replies (1) of 99985

David Your model is wrong, IMO. <<< Since 10 year Treasuries are yielding the same amount WITH ZERO RISK TO PRINCIPAL >>> 10 year treasuries are not risk free investments. The have inflation risk and interest rate risk. When rates or inflation go up their values go down. Return of principal may be little comfort if the principal is worth less because of inflation or if you must endure a lower yield when rates go up. Buying 10 year bonds with increasing inflation would not be good for ones sanity. <<< As far as prices decreasing or earnings increasing, why does it matter? >>> It is the most important matter. If P/E ratio adjust to historical norms by price decreases, you should sell stocks but if P/E ratios adjust by earnings increases, you should buy stocks. (note: it is cash flow not earnings that is important) <<< why should an investor invest in a stock with a P/E of 20? >>> Why I would, because earnings grow and the coupon/interest on bonds does not grow. Your model values only current earnings. Your model assumes no earnings growth. The value of a stock is not determined by P/E ratio or current earnings. The value of a company is determined by the discounted cash flow of ALL current and future earnings. insanity? I own a bio/pharma with no earnings, maybe because I am insane or maybe because I know cancer drugs better than the market.

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