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Strategies & Market Trends : Stock Attack II - A Complete Analysis
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To: Lee Lichterman III who wrote (37929)7/14/2002 2:20:51 PM
From: Haim R. Branisteanu   of 52237
 
Lee, thanks for the links. Did not know how to answer you therefore I will answer on SI.

First see my response to Allan Message 17734544

As those variables are today much more interlocked than let say 15 to 20 years ago there must be found a ratio which would reflect all variables in a correct way.

Keep in mind that at 4% unemployment the tax receipts were driving budget deficits down and stock market up not only due to they mass hysteria but for legitimate reasons like contribution to pension funds and more free money interested in gains

Low employment also contributed to lower interest rates due to less need for the government to borrow (actually they were buying back debt and sparket a wave of mortgage refinancings).

This fact combined with low inflation send the stock market to the stratosphere which attracted huge amounts of capital and made the USD quite expensive.

To get a better grasp of true historical relative valuation, I would suggest something like that

Adjusted SPX price equals to =( - (P/E) / (-4 - ( Inflation deviation)))
multiply by (SPX/10Y treasury)
multiply by (1/unemployment) x (GDP - Inflation)

(if possible on a monthly basis. Nominal inflation should be around 3% ......... e.g and deviation calculated like this 4% inflation =( -1) and 2% inflation should be (+1) with below ZERO inflation = +3 )

The secret are the ratio's of each variable. and receive a steady upward sloping line as the economy and the stock market grow at a steady slope more or less.

As an example in the early 1980 this we had high inflation, high unemployment, double digit interest rate and a very low stock market the mirror of today situation.

The graph should cover the last 30 to 40 years as before 1967 and W.W.II the relationship was very different
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