Hi Mike,
Dow 36K, no? If you thought that was ridiculous, check out the "Dow 652,230! No, Really" article in TheStreet.com:
thestreet.com
Anyhow, getting back to the Dow 36,000 article in the WSJ, here's a snippet of an email I wrote last Thursday:
The key part of that article, after it argues that over the long haul stocks are as riskless as bonds, is this:
> Assume Treasuries yield 6%. To equalize that cash flow,
> stocks can yield much less than 6%, because, unlike bonds,
> stocks increase their earnings and dividends each year. In
> inflation-adjusted terms, earnings per share have been rising
> by an average of 3.3% annually since World War II.
>
> Our conservative calculations show that an earnings return
> of about 1%--or a P/E of 100--is adequate to match cash
> returns from bonds over long periods. Since the P/E of the
> Dow is currently about 26, stocks could nearly quadruple
> before becoming overpriced.
Accepting their argument, and the facts they quote in the first
paragraph I have pasted, I still don't see how they figure that stocks
oughta yield 1%.
If I use a discount rate of 6% (which seems appropriate here), and an
average perpetual growth rate of 3.3%, then I figure that they should
value todays' stock earnings at 1/(0.06-.033), i.e., an earnings yield
of 2.7%. This is a P/E of 37, which would imply a Dow of about
37/26*10,000 = about 14,250. This is roughly Nikkei territory, which
somehow seems symbolically relevant.
Perhaps I ought to try contacting the authors and see if they can enlighten me where I made a mistake, and how I too can conservatively arrive at an earnings return of 1%.
Bill Fleckenstein also had some choice words to say about that article, see:
stocksite.com
- Daniel |
