Good morning Bachman,
I think that many of those concerns are valid, but I would like to point out some issues with P/E and valuations.
The traditional method of valuing a capital asset (either a stock or a company) is to estimate its disposable cash flow (cash flow that is thrown off by operations that is not needed for sinking funds or for working capital purposes), and to discount those cash flows at a suitable rate. The rate generally has two components: the risk free rate of return, and an adjustment to reflect the riskiness of the estimated cash flows.
This approach is quite sensitive to the current long term interest rate and the prospects for future cash flows over the life of the investment. It is also more sensitive to near-term earnings fluctuations than those that are further out. That means that the model predicts that a year or two of rocky earnings ought to have an impact, but not nearly as great an impact as the current market environment tends to give it for tech stocks. On the other hand, stocks like KO totally baffle me, because, under the best of conditions I don't see all that much growth potential. My conclusion from all of this is that the market has attached a very high risk premium to stocks, and at the same time has created a mirage of absolutely unreasonable cash flow expectations down the road. Perhaps this is all by way of rationalizing the manic nature of the market.
But I, too, am selling covered calls against all of my positions.
TTFN,
CTC |
