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Strategies & Market Trends : Zeev's Turnips - No Politics
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To: SOROS who wrote (96694)7/21/2002 3:45:37 PM
From: sylvester80  Read Replies (1) of 99280
 
This is a great link that's worth bookmarking from Yardeni on the FED model:

205.232.165.149

From the link:
"The Fed model was summed up in one paragraph and one chart on page 24 of the 25-
page document (see following table). The chart shows a strong correlation between the
S&P 500 forward earnings yield (FEY)—i.e., the ratio of expected operating earnings (E)
to the price index for the S&P 500 companies (P), using 12- month-ahead consensus
earnings estimates compiled by Thomson Financial First Call.—and the 10-year Treasury
bond yield (TBY). The average spread between the forward earnings yield and the
Treasury yield (i.e., FEY-TBY) is 29 basis points since 1979. This near-zero average
implies that the market is fairly valued when the two are identical:
1) FEY = TBY
Of course, in the investment community, we tend to follow the price-to-earnings ratio
more than the earnings yield. The ratio of the S&P 500 price index to expected earnings
(P/E) is highly correlated with the reciprocal of the 10-year bond yield, and on average
the two have been nearly identical. In other words, the “fair value” price for the S&P 500
(FVP) is equal to expected earnings divided by the bond yield in the Fed’s valuation
model:
2) FVP = E/TBY
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