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Pastimes : Ask Mohan about the Market

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To: studdog who wrote (8014)	11/15/1997 1:51:00 PM
From: Rational	Read Replies (1) of 18056

Karl: The valuation model you have presented is correct if there is no growth in S&P500 earnings. The correct valuation model with non-zero growth is: Value = Earnings/(Cost of Capital - Growth Rate). Thus, the market may not be over-valued if the earnings estimates you present are right and there is a modest growth in earnings. But, it is highly sensitive to the expected COC which changes as the mood in the market shifts. The rumor on Friday that the Japanese Government was planning to sell US Treasuries (tied in their pension plans) to buy Japanese bank preferred stocks, made the market believe that Asian economies would recover and so they bid up the tech stocks towards the end of the day. But, over the week-end, there will be a re-evaluation of COC as the Japanese dump US Treasuries, making the price fall and yield rise. On Friday, the yield did not rise because the Jap Govt did not yet begin dumping -- it was just a report that they would. Sankar

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