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Strategies & Market Trends : Value Investing

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To: E.J. Neitz Jr who wrote (15562)	10/4/2002 7:02:37 AM
From: Wyätt Gwyön	Read Replies (1) of 79128

i must take issue with the interviewee's logic and conclusions... The S&P 500 is 46 percent undervalued right now based on what people believe is the Fed's formula for valuing the stock market. the "Fed model" is a joke. it is sloppy data mining at best. it worked for 20 years so people called it a law. but it didn't work at all for many other 20-yr periods, and it hasn't worked for the past year either. this is another example of people being "fooled by randomness". P/Es (price-to-earnings ratios) are still historically high, but the market's average P/E can be higher when interest rates are low. this presupposes a permanent correlation between rates and PEs. there is no such correlation. this is just more data mining. it is really sad to see the warm and uncritical welcome such sloppy thinking gets in today's market. just indicates to me that sentiment is nowhere near bearish enough for a secular bull to begin again. these types of arguments about stocks being cheap because of low interest rates are utterly demolished by Smithers. i summarized some of these ideas and provide links to a couple of his papers here: Message 17888745 basically, low rates are not an argument for high PEs. PEs (or more specicifically the dividend yields which depend on them) are a real return; rates a nominal one. remember that in the last low-rate environment, from the 40s through the 50s, stock dividend yields were higher than bond yields (until 1958). the S&P 500 would need to fall to 410 for today's dividend yield to exceed the 10yr T yield. about a 50% drop. this was pointed out by Fleckenstein yesterday.

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